Cost of Goods Sold for e-commerce – Explained

The business model of e-commerce

The business that is done with the help of the internet is called e-commerce. Ecommerce is everything in business and involves buying, selling, and making transactions online. The “e” in “eCommerce” is just like the “e” in “email and this means commerce done in electronic platforms such as software applications or websites.

E-commerce transactions are performed through specialized websites that can take payment for products. The customers buy and sell products online and everything here is geared around transactions.

In an offline store, the customer simply takes their new jeans to the checkout, hand over some cash, and leave the store with a purchase in a bag. This is how a transaction is done in an offline store. It works in a similar way if a customer is buying online, but there’s one important difference. In e-commerce business transactions, the customer never actually gets to handle the goods until they arrive at their home sometime later.

Cost of goods sold by e-commerce

The cost of goods sold is an accounting principle where the cost of a product has to be matched with the sale of that product. This gives an accurate picture of true revenues, gross margins, and profitability. When accounting for COGS is done, it gives a better idea to manage inventory on assets on books till the product is sold.

At the time of the sale, the cost of the product is deducted from the value of the asset and applied against the revenue from the sale to calculate your gross profit. The costs of goods sold include the cost of the product and may include all the costs of getting a product to market. Cost of goods sold could include:

  • Inventory storage fees and costs
  • Procurement costs
  • Listing fees
  • Production costs
  • Taxes and duties
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The accountant shall handle all the product costs carefully if additional costs are being incurred to bring the product to market. Such costs include freight and duty.

Inclusion in COGS

To compute what’s included in COGS, the accountant shall deeply understand the meaning. COGS is the value of the goods or inventory. COGS and inventory value should include purchase price paid plus related ordering costs as handling fees to the warehouse.

Simply putting, it includes all the costs that the business incurs in order to get inventory in their hands. When inventory is sold, the cost of inventory shall be added to the cost of goods sold.

Exclusion from COGS

Ecommerce incur numerous costs like shipping to customers, payment processing fees, and traditional costs such as employee salaries, electricity bills, and rent for warehouse. The expenses reduce taxable income. However, the above costs are not included in the cost of goods sold because they do not relate to the cost of acquisition of the goods sold.

Statement of Cost of Goods sold

Ecommerce Company

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies and freight inward)X 
-Purchases returnsX 
+ Direct labor (salary of staffs in inward works)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of goods sold XX