Inventory Accounting Explained: A Simple Guide for Ecommerce

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.