Accounting Archives | JD Scott and Co

Inventory is one of the largest and most important numbers in Australian Ecommerce business’s financials — and it’s also one of the easiest to get wrong.

If you sell physical products online (Shopify, Amazon, eBay, WooCommerce, Etsy, etc.), the way you account for inventory affects:

Profit (gross margin accuracy)

GST and income tax

Cash flow and purchasing decisions

Financing / investor readiness

Your true business performance month-to-month

Below is a practical, Australia-focused guide to accounting for inventory correctly across your Balance Sheet and Profit & Loss (Income Statement), including common traps we see in Ecommerce.

Prefer to talk through your numbers with someone? An accountant specialising in Ecommerce businesses will be across the technical details of Inventory accounting.

Important note: This is general information only and isn’t personal tax advice. Inventory treatment can vary depending on your structure, turnover, and accounting method.

What is Inventory in Accounting Terms?

Inventory is an asset, not an expense until you sell it. That means:

When you buy stock, it is recorded on your Balance Sheet as a Current Asset (Inventory)
When you sell stock, the cost of that stock moves to your Profit & Loss as Cost of Goods Sold (COGS) This is the foundation of good inventory accounting.

2) Where Inventory Appears on Financial Statements

Inventory on the Balance Sheet

Inventory sits under Current Assets as:

Inventory

Stock on Hand

Finished Goods

Merchandise Inventory

It should represent the cost value of stock you own that is:

in your warehouse

held by a 3PL

stored in Amazon FBA

in transit (if ownership has transferred under your shipping terms)

If inventory is overstated or understated, it impacts both your balance sheet and profit.

Inventory on the Profit & Loss Statement

Inventory itself doesn’t appear as a line item on the P&L. Instead, it impacts:

Cost of Goods Sold (COGS)

COGS is the cost of the items you sold in that period. Accurate COGS = accurate gross profit.

The Core Inventory Formula You Need

This is the standard formula for calculating Cost of Goods Sold (COGS):

COGS = Opening Inventory + Purchases − Closing Inventory

Example:

Opening inventory: $30,000
Purchases during the month: $20,000
Closing inventory: $35,000

Cost of Goods Sold = 30,000 + 20,000 − 35,000 = $15,000

That $15,000 belongs on the profit and loss statement as COGS.

Common Ecommerce Mistake: Treating Stock Purchases as an Expense

A common mistake is treating inventory purchases as an expense as soon as you buy them.

The problem is:
Buying stock isn’t an expense yet — it becomes an expense when it’s sold.

What should happen instead?

When you buy stock, it should sit as an asset on your Balance Sheet (because you still own it)

When you sell stock, that cost moves to your Profit & Loss (Income Statement) as COGS

Why this matters

If stock purchases are expensed immediately, it often causes:

inconsistent or misleading profit figures

reporting you can’t trust

a higher chance of tax and reporting issues

✅ The goal is to make sure your reports show the real cost of what you sold, not just what you purchased.

This is also where many ecommerce businesses run into trouble operationally — not because they don’t understand the rule, but because their Shopify data isn’t flowing cleanly into your accounting software.

Sales, refunds, fees, and timing differences can easily distort COGS if they’re not summarised and reconciled properly. That’s why we often recommend tools like A2X to create clean payout summaries and support accurate inventory and COGS reporting.

What Should Be Included in “Inventory Cost” in Australia?

Under Australian accounting principles, inventory should be recorded at cost (or net realisable value if lower). For ecommerce businesses, “cost” usually means landed cost — not just the supplier invoice.

Typically included in landed cost

• Supplier product cost
• International freight
• Customs duty (where applicable)
• Customs clearance fees
• Domestic freight to bring stock to your warehouse or 3PL
• Packaging that forms part of the product (where appropriate)

What usually isn’t included

• Advertising and marketing
• Shopify fees and payment processing fees
• General administration costs
• Storage fees (unless directly attributable in specific circumstances)

GST Considerations for Ecommerce

GST around inventory is one of the most confusing areas for online sellers, so here’s the clear version.

Buying stock from Australian suppliers

If you purchase inventory from an Australian supplier, the invoice usually includes GST.

What this means:

You can usually claim the GST back (as a GST credit) in your BAS

Your inventory is recorded excluding GST in your accounting system

The GST component is tracked separately for BAS reporting

Importing stock into Australia

When you import stock, you may pay:

GST at the border

customs duty (depending on the product)

freight + broker/clearance fees

What this means:

Import GST is often claimable (if you’re GST-registered and importing for business use)

Your inventory cost should include the total landed cost (product + freight + duty + clearance costs)

Methods to Record Inventory

Periodic inventory (basic method)

Under a periodic inventory system, purchases are recorded during the year and inventory is
only adjusted after a stocktake.

Purchases recorded during the year
Stocktakes done monthly, quarterly, or at year end
Inventory and COGS adjusted after the fact

This approach can work in the very early stages, but it becomes unreliable as order volume,
SKUs, and sales channels increase.

Perpetual inventory (recommended for ecommerce)

With perpetual inventory, your system updates inventory and COGS automatically as sales occur.

Inventory levels update in real time
Inventory value updates automatically
COGS is recorded as each sale happens

This is typically achieved through:

Shopify and inventory app integrations
Amazon settlement and inventory systems
Inventory platforms (Cin7 Core, DEAR, Unleashed)
Clean integration into Xero or QuickBooks

Stock Adjustments: Damaged Stock, Shrinkage, Write-Offs

Your inventory system will never match perfectly. Common causes include:

warehouse losses

damaged stock

shrinkage

stock unsellable

Best practice:

Record these separately rather than hiding them inside COGS.

Use accounts like:

Inventory Write-Off

Stock Adjustments

Damaged Stock

Shrinkage / Stock Variance

This keeps gross margins clean and makes your operational losses visible.

Year-End Stocktake

In Australia, your inventory position at 30 June affects your taxable income because it flows directly into Cost of Goods Sold (COGS). Put simply: opening stock + purchases − closing stock = COGS. If closing inventory is overstated, COGS is understated and profit (and tax) can be higher than it should be. If it’s understated, profit can be artificially low.

To keep the year-end position clean, focus on:

A stocktake or reliable inventory valuation at 30 June (it must be supportable)
Reconciling stock across Shopify/marketplaces, FBA/3PL/warehouse reports, and the accounting ledger
Recording write-offs and adjustments clearly (damaged, lost, obsolete stock)
Confirming inventory is valued at cost, or net realisable value if lower (common for clearance/slow movers)

Getting this right keeps your accounts compliant and your margins and GST outcomes far more reliable.

Stock in Transit, FBA, and 3PL Inventory

For eCommerce, inventory isn’t always in your warehouse.

Stock held at a 3PL or Amazon FBA

If you own it, it’s still your asset — it stays on your balance sheet.

Stock in transit

Depending on shipping terms and when ownership transfers, inventory may be included once it’s technically yours (even if not yet received).

This becomes critical for month-end reporting and year-end inventory values.

Ecommerce Inventory Accounting Checklist

Use this checklist when setting up or reviewing your ecommerce inventory accounting:

✅ Record inventory purchases as Inventory (asset), not straight to COGS
✅ Choose an inventory valuation method (FIFO or Weighted Average)
✅ Track full landed cost (freight, duty, clearance, customs)
✅ Separate GST correctly in Xero or QuickBooks for BAS reporting
✅ Reconcile inventory regularly across:
- Shopify and other marketplaces
- Warehouse or 3PL reports
- Your accounting ledger
✅ Perform regular cycle counts or stocktakes
✅ Record write-offs and adjustments clearly and consistently
✅ Review gross margin monthly and investigate anomalies early

For Australian ecommerce businesses, inventory accounting is the bridge between what you see in your ecommerce platform and what the ATO will accept in your tax reporting.

If you’re looking for a helpful tool for Ecommerce inventory accounting, check out our review of A2X here.

Getting this right gives you:

Clean P&L reporting
Dependable gross margins
Accurate GST and tax outcomes
Better cash flow decisions
Confidence to scale

Watch our Inventory Accounting Explainer

I recently read a post by Joanna Perry about some non-negotiables graduates should seek to have in their career in accounting. Honestly, they’re not just helpful—they’re essential for anyone looking to build a strong foundation and go far in this field. Here’s my take on them:

1. Be Proactive in Problem-Solving

Everyone wants a solution, not a problem. Spot potential problems early, think critically, and offer solutions. This shows initiative – you’re paid to use your brain, so use it.

2. Attention to Detail is Your Superpower

Details matter. Even small things, like typos or misaligned figures, can shake confidence in your work. Master the art of precision—it speaks volumes about your professionalism.

3. Ethics are Non-Negotiable

Integrity is the foundation of trust. The world is a small place. People remember, even decades later.

4. Communication is Crucial

Learn to explain complex things simply, no matter your audience.

5. Accuracy Matters

Close enough isn’t good enough in accounting. Double-check your work for errors or inconsistencies—it’ll save you time and stress in the long run.

6. Embrace Technology

Being proficient in technology is given. Don’t let some 50 year old Gen X show you how its done (even if we did build the internet from scratch and have been using Excel since time immemorial).

7. Time Management is Essential

Balancing deadlines and setting client expectations requires strong time management skills. You can have a work-life balance – you work, then you have a life.

8. Understand the Business

Understand your clients’ businesses. Learn to speak the lingo. Knowing how industries typically operate and their common pain points. This should be the most interesting part of your job.

9. Networking is Key to Your Growth

Build strong relationships with colleagues, mentors, and industry professionals. Networking and a strong reputation will help you in your professional journey. It pays you back 100x in years to come.

10. Develop Strong Analytical Skills

Numbers are more than data—they tell a story. Learn the language of accounting and learn to speak to fluently. You will be light years ahead of everyone else.

11. Seek Certifications

Earning credentials like CA or CPA can significantly boost your career prospects and credibility. Set professional development goals and elevate your accounting skillset.

12. Always Aim for Continuous Improvement

Accounting is constantly evolving, and so should you. Stay curious, actively seek feedback, and never stop learning. Growth is a career-long commitment.

These 12 non-negotiables aren’t just tips, they’re a guide to help you succeed. The effort you put in now will set you up for a challenging and rewarding career in accounting.

Source: Joanna Perry on LinkedIn, November 2024.

There are many forms of business structure available, from companies to sole traders. Each type of business structure has its pros and cons, which we explain in detail in our business structure guide. One of the more popular of structures, especially when it comes to holding investment assets, are discretionary trusts.

What is a ‘family trust’?

A ‘family trust’ (FT) for tax purposes is one whose trustee has made a valid family trust election (FTE). It is not sufficient to simply include the words ‘family trust’ in the trust’s name.

A valid FTE can only be made if the family control test is satisfied. This test means that only a trust that is not widely held and is effectively controlled by a specific family can make a valid FTE.

An FTE must be in writing in the approved form. Once the election has been made, it cannot be varied or revoked except in limited circumstances.

The ATO has listed on its website the 5 main reasons to become a family trust.

Five reasons to become a family trust

1. Trust loss measures

A FT only has to satisfy one test (the income injection test) to utilise tax losses or debt deductions, and it becomes easier to pass the income injection test. Trusts that have

not made an FTE have to satisfy additional tests and it is more difficult to satisfy the income injection test.

2. Company loss tracing concession

Broadly, if a company has a non-fixed trust as a shareholder and the trust is a FT, a single notional entity that is a person will be taken to own the interests. This means that there is no need to trace past the FT. This makes it easier for the company to recoup its tax losses.

3. Access to franking credits

A concession makes it easier for franking credits to pass through to beneficiaries of a family trust where the trust has received franked distributions from a company or another trust.

4. Trustee beneficiary reporting rules

Generally, these rules require the trustee of a closely held trust to advise the ATO of certain details about each beneficiary of the trust that is also the trustee of another trust (a trustee beneficiary). Family trusts are excluded from having to comply with the rules (although trustee beneficiary non-disclosure tax may be payable in certain circumstances).

5. Small business restructure roll-over

Small business entities can restructure their business by moving active assets into, or out of, a trust, company, partnership, or a combination, without adverse capital gains tax (CGT) consequences. This is called CGT roll-over relief. One of the requirements to be met to access the CGT roll-over relief is that there is no material change in the ultimate economic ownership of an asset. Special rules apply in this context to family trusts.

What are the pitfalls of a family trust?

· Family Trust distribution tax (FTDT) is imposed when distributions are made outside the family group. The rate is 47%. The meaning of ‘distribution’ for this purpose is very broad and includes the transfer of property, the use of an asset and debt forgiveness.

· The trustee of a family trust will be liable to pay trustee beneficiary non-disclosure tax if it makes what is called a ‘circular trust distribution’. The rate is 47%.

For a more comprehensive analysis of family trust elections read our article.

Tip! We can help you decide if a FT is right for you.