For most e-commerce businesses, inventory is the single largest line on the balance sheet and the single largest ingredient in cost of goods sold. Get it wrong and the consequences compound: gross margin is misstated, Corporation Tax is wrong, product-level pricing decisions are based on bad data, and the year-end accounts fail a cursory review.
The core principle: match cost to revenue
UK accounting standards require the cost of a unit of stock to sit on the balance sheet as an asset until that unit is sold. Only then does it move to the profit and loss account as cost of goods sold (COGS). This is the matching principle in its simplest form: revenue and the cost of earning it belong in the same period.
In practice, e-commerce sellers break this in two common ways:
- Expensing purchases on the bank date. A £40,000 stock order paid in March shows as a £40,000 expense in March, even if most units won't sell until July. March profit is wrecked; July profit is inflated.
- Relying on the marketplace's "cost of goods" field. Amazon's Seller Central cost field is a planning aid, not an accounting record. It doesn't flow into Xero or QuickBooks, and it is almost never the true landed cost.
Landed cost: what goes into COGS
Landed cost is the true cost of getting a saleable unit onto your warehouse shelf. For a UK importer it typically includes:
| Component | Treatment |
|---|---|
| Supplier invoice (ex-works) | Include in landed cost. Use the GBP value on the date of supply. |
| Freight & shipping to UK | Include. Allocate across the shipment by unit volume or weight. |
| Import duty | Include. This is not reclaimable. |
| Import VAT (C79 / PVA) | Exclude if VAT-registered and reclaiming. Include only if VAT is a true cost. |
| Inbound inspection / QC | Include if directly attributable to the shipment. |
| FBA inbound shipping | Include if you are paying to get stock to the FBA warehouse before sale. |
| Ongoing FBA storage fees | Exclude from landed cost, expense as sales fulfilment cost in the period charged. |
For most UK importers, the uplift from ex-factory cost to landed cost is 15-25%. Pricing off the ex-factory figure is the single most common reason an e-commerce seller believes they are profitable while the accounts say otherwise.
Perpetual vs periodic inventory
There are two ways to measure how much stock you sold in a period.
Periodic: Count at Year-End
Book purchases to an expense account all year. At year-end, physically count stock, value it at landed cost, and post a single journal: DR Stock (asset) CR Cost of Sales. Simple, cheap, and fine for small sellers with homogeneous SKUs. Weakness: you have no idea what your gross margin is until 14 days after year-end.
Perpetual: Update on Every Movement
Every inbound receipt increases the stock asset; every sale reduces it at the cost of the unit sold, with the counterpart going to COGS. Tools like A2X, Link My Books, Cin7 and Unleashed automate this against Amazon, Shopify and eBay feeds. You get current gross margin, per-SKU profitability, and clean month-end reporting. This is the right model once the sales volume justifies the extra setup, often above roughly £250,000 of annual marketplace sales.
Worked example: £10,000 shipment, 500 units
| Line | Amount |
|---|---|
| Supplier invoice, 500 units @ £20 | £10,000 |
| Sea freight to Felixstowe | £1,400 |
| Import duty @ 6.5% | £650 |
| UK inbound to FBA warehouse | £450 |
| Total landed cost | £12,500 |
| Landed cost per unit | £25.00 |
If this seller had recorded Cost of Goods Sold at the £20 supplier invoice price, each unit sold at £45 would appear to earn £25 of gross margin. In reality the gross margin is £20, a 20% overstatement, before Amazon fees have even been applied. See the full breakdown of marketplace fees in our true profit guide.
Year-End Write-Downs
FRS 102 requires stock to be held at the lower of cost and net realisable value. For e-commerce sellers this bites in three specific places:
- Obsolete stock: Slow-moving SKUs that will only clear at a discount should be written down to the expected net sale price less selling costs.
- Damaged returns: FBA "unsellable" units are not inventory at cost, they are either a write-off or a reduced-price sale via Amazon Warehouse Deals.
- Seasonal leftovers: Christmas stock at the end of January is not worth the same as Christmas stock at the end of November. Apply a commercially realistic discount.
A defensible year-end stock valuation is a standing agenda item in any HMRC enquiry into an e-commerce business. Keep the workings.
FAQs
Can I just expense stock when I buy it?
No. UK accounting standards require inventory to be recognised as an asset until it is sold. Expensing on purchase misstates both gross profit and Corporation Tax.
What is landed cost and why does it matter?
Landed cost is the true cost of getting a unit to your warehouse, supplier invoice, freight, duty, inbound shipping. For most UK importers this is 15-25% above the ex-factory price. Omitting it inflates gross margin and corrupts pricing decisions.
What costing method should I use?
FRS 102 allows FIFO and weighted average. LIFO is not permitted under UK GAAP. FIFO is the default in most accounting and inventory software and matches the physical flow of e-commerce stock well.
How do I handle Amazon FBA stock held overseas?
FBA stock anywhere in the world is still your asset until it sells. EU-warehoused stock also needs tracking because it can trigger local VAT registration obligations, see our OSS/IOSS guide.