Inventory accounting tracks the cost of stock you own, the cost of products sold and the value left at the end of the period. For an ecommerce business, it must connect sales channels, warehouses, stock in transit and landed costs with the accounts. Buying stock uses cash. It does not mean the whole purchase belongs in that month’s cost of sales. That distinction is essential to understanding your margin.
If your accountant gives you only one year-end stock adjustment, what are you using to make buying decisions during the year? Growing sales tell you little when you cannot trust the margin or see the next stock payment coming.
Stock accounting should help you decide what to buy, what to stop buying and how much cash the next order needs.
Revenue and return on advertising spend do not answer those questions on their own. You need product costs, channel costs and a view of the cash tied up in stock.
What is inventory accounting?
It records stock as an asset while you hold it and recognises its cost as an expense when the related sale is recognised. It also captures losses in value, such as damaged or obsolete products.
Your stock system answers which units are available. Your accounts need a reliable value for the stock you own, including goods outside your own warehouse. The two need to reconcile.
For a business using FRS 102, stock is valued at the lower of cost and expected selling proceeds after completion and selling costs. FIFO or weighted average applies to interchangeable stock; LIFO is not permitted. Your accountant should confirm the framework and policy that apply to your business. See FRS 102, Section 13.
A worked example: purchases are not cost of sales
This is an illustration, not a client case. Figures exclude recoverable VAT.
| Stock movement for the month | Amount |
|---|---|
| Opening stock at cost | €40,000 |
| Purchases, including landed costs | €60,000 |
| Cost of products sold | −€45,000 |
| Closing stock before write-down | €55,000 |
| Write-down of damaged or slow-moving stock | −€2,000 |
| Closing stock in the accounts | €53,000 |
With €100,000 of sales, gross profit before the write-down is €55,000. After charging the €2,000 write-down within cost of sales in this example, it is €53,000. There are still fulfilment, marketing, staff and other costs to cover.
If you expense all €60,000 of purchases and make no stock adjustment, you report only €40,000 of gross profit. You miss the €13,000 increase in stock value after the write-down.
The basic formula is opening stock + purchases − closing stock = cost charged for the period. Here, €40,000 + €60,000 − €53,000 gives €47,000, including the €2,000 write-down. Keep that write-down visible so it does not disappear inside the total.
You may have paid the whole €60,000 to suppliers. That cash payment is still different from the €47,000 stock-related charge in the accounts. Both belong in your decision, but they answer different questions.
Landed cost: what did the product actually cost?
For bought-in goods, start with the supplier price after discounts. Add import duty, inward freight and directly attributable handling costs. Exclude recoverable VAT. Selling and advertising costs are separate expenses. FRS 102 explains the cost rules.
Allocate shared freight and duty across products on a reasonable, consistent basis. A flat amount per unit may be unsuitable when a shipment combines very different sizes or values.
Then look beyond gross margin. Payment processing, marketplace fees, fulfilment, returns and advertising can change what a product contributes through each channel. A product can have an attractive buying margin and still contribute too little after those costs.
FIFO versus weighted average cost
Both methods need accurate quantities and costs. Neither can repair missing purchase invoices or unreliable stock movements.
| Method | How it works | Simple example |
|---|---|---|
| FIFO | The earliest costs are assigned to units sold first | Buy 100 units at €10, then 100 at €12. Sell 100 after both purchases: cost of sales is €1,000 and closing stock is €1,200. |
| Weighted average | Costs are averaged across the units available | The same 200 units cost €2,200, or €11 each. Sell 100: cost of sales and closing stock are €1,100 each. |
These examples assume no other movements. Weighted averaging may be calculated periodically or as stock arrives, depending on the system. The costing assumption does not dictate which physical box the warehouse ships.
Agree a consistent policy with your accountant. Do not switch methods from month to month to make the margin look better.
Stock in transit and dropshipping
Physical location alone does not decide whether stock belongs in your accounts. Review the contract and when control transfers. Goods do not have to reach your warehouse before they count.
In the worked example, the €53,000 closing value might consist of €43,000 held in warehouses and €10,000 of goods in transit that the business already controls. Omitting the transit stock would understate assets and overstate the stock-related expense by €10,000.
Keep supplier invoices, shipment records, contractual terms and warehouse confirmations together at month end. Delivery terms help establish responsibilities, but are not a substitute for reviewing the actual arrangement.
Dropshipping needs the same care. Never handling a product does not automatically mean you never control it. Your accountant needs to assess the arrangement, including whether you act as principal or agent and how revenue, supplier costs and prepayments should be recorded. Do not post every supplier payment straight to cost of sales just because it relates to a dropshipped order.
The monthly stock-to-accounts check
Agree one cut-off date and one person responsible for explaining differences.
| Check | What to reconcile |
|---|---|
| Quantities and locations | Your stock system, warehouse or 3PL reports, and physical or cycle counts |
| Ownership and cut-off | Goods in transit, supplier-held goods, consignment stock and sales around month end |
| Costs | Purchase invoices, freight, duty, discounts and other relevant landed costs |
| Returns and losses | Returned units, damage, missing stock and reductions in recoverable value |
| Accounting entries | Opening stock, purchases, cost of sales, write-downs and closing stock |
| Owner decisions | Slow movers, stock cover, reorder commitments and cash required |
For returns, establish the condition and recoverable value of the product before restoring it as saleable stock. A customer refund, the returned unit and the stock adjustment need to connect. Expected returns may also require adjustments before goods physically come back.
If an integration already posts cost of sales, do not add the same cost again through a separate monthly stock journal. Reconcile what the system posted before adjusting it.
Reorder points need a cash check
The basic reorder formula is lead time × expected daily sales + safety stock.
With a 14-day lead time, expected sales of 20 units a day and 200 units of safety stock, the reorder point is 480 units. Those are illustrative assumptions, not recommended stock levels.
Review seasonality, promotions, supplier reliability and minimum order quantities. Also account for stock already ordered and demand already committed; a warehouse quantity alone can produce the wrong buying signal.
Before approving the order, put the deposit, balance payment, freight, duty and any VAT cash requirement into the cash forecast. Stock can be profitable to sell and still unaffordable to buy at that moment.
Software: stock control and sales reconciliation do different jobs
A controlled spreadsheet can support a simple monthly valuation. As locations, product variants and sales channels grow, consider a dedicated stock system. Choose it for the process you need to run. Connecting apps does not make every stock movement correct.
Cin7 Core, formerly DEAR, is an option to assess for connected inventory operations. Test your own stock movements, landed costs, returns, locations and accounting entries before committing to a system.
If you sell through Shopify alongside other stores or marketplaces, keep sales and settlement reconciliation separate from stock control. Dext Commerce and A2X address the sales and settlement side; they do not replace a warehouse stock system. VAT complexity, transaction volume and the number of stores or channels determine whether an integrator is worthwhile. Our accounting software guide explains these roles in more detail.
Whichever system you use, someone still needs to investigate the difference between its stock value and the balance in the accounts.
VAT and stock held abroad
VAT recovery is separate from recognising the cost of goods sold. You do not generally need to sell eligible stock before recovering purchase VAT, but taxable use, documentation and the relevant VAT rules matter. Revenue explains the recovery conditions.
Import VAT is not always a cash payment at customs. Eligible VAT-registered traders can use postponed accounting.
Moving stock to another country is a tax decision as well as a warehousing decision. Before you compare picking and storage rates, establish who owns the goods, where they move, where they are sold and what registrations or reporting may follow. An Irish company or Irish bank account does not settle those questions.
Do the VAT review before the first shipment, particularly when a marketplace or fulfilment provider can move stock between countries. A sales-reconciliation app does not decide your registration obligations for you.
What your stock reporting should help you decide
Which products deserve another order? Which need clearing? How much cash is committed before those orders turn into sales?
Your monthly review should connect the stock value, margin and cash required for the next order. Establish who explains differences and who acts on them before another purchase is approved.
We connect stock, margin and cash planning through our ecommerce accounting service, with the work and reporting agreed for your business.
If you run an Irish ecommerce business turning over €250,000 or more and need clearer numbers before your next buying decision, Book a Finance Fit Call.
FAQs
What’s the best inventory accounting method for ecommerce?
For interchangeable stock under FRS 102, FIFO and weighted average are permitted; LIFO is not. Choose a consistent policy that suits the stock and systems, with your accountant. Accurate quantities and landed costs matter whichever method you use.
How do you handle stock in transit for bookkeeping?
Assess the contract and when control transfers, rather than using warehouse arrival as the only test. Include goods the business controls at the reporting date, with the appropriate costs, and reconcile supplier and shipment records.
Can you claim VAT on inventory not yet sold?
Eligible purchase VAT may be reclaimed before stock is sold. Recovery depends on taxable use, required documentation and the applicable VAT rules. Import VAT can involve postponed accounting. Registration alone does not make every claim valid.
Should dropshipping inventory be included in financials?
It depends on the arrangement. Lack of physical possession does not prove that you never control the goods. Review principal or agent status, transfer of control, supplier obligations and prepayments with your accountant.
What’s the best software for ecommerce inventory management?
Assess the product against your stock movements, locations, costing, returns and accounting process. Cin7 Core is one option. Sales-reconciliation tools such as Dext Commerce and A2X serve a different role. Test the workflow before buying.
How do you calculate reorder points for ecommerce inventory?
Multiply lead time by expected daily sales, then add safety stock. Review orders already placed, demand already committed and seasonal changes. Check the payment schedule against your cash forecast before approving the purchase.
