Inventory Accounting for eCommerce: FIFO, Landed Cost & 3PL Stock
By the I&S Accounting teamReviewed by a licensed U.S. CPA
Inventory Is Where eCommerce Books Go Wrong First
Service businesses get to skip this chapter. Product sellers don't: inventory is usually the biggest number on the balance sheet, and mishandling it distorts everything downstream — margins, taxes, and every "can we afford this?" decision.
The rule is simple to state and endlessly violated: inventory is an asset when you buy it, and an expense (COGS) only when it sells. Expense your purchase orders as they land and your books will scream loss in buying months and print fake profit in selling months.
Pick a Costing Method — Deliberately
When you've bought the same SKU at five different prices, which cost leaves the books when one unit sells?
- FIFO (first-in, first-out) — the oldest cost goes first. Matches how physical goods actually move, and what most inventory tools assume.
- Weighted average — every unit carries the running average cost. Smooths out supplier price swings.
Either works. What doesn't work is neither — or silently switching between them. The method affects your taxable income, so changing it later isn't a bookkeeping tweak; it's a tax event. Pick once, apply consistently, and let your COGS mean something.
Landed Cost: the Margin You Forgot to Count
The supplier invoice is not what the unit cost you. By the time it's sellable, that unit has absorbed:
- Freight — ocean, air, and the last mile to your warehouse
- Duties and tariffs — which have a habit of changing mid-year
- Inbound handling — prep, inspection, labeling
That total is landed cost, and it's what belongs in inventory. A seller pricing off the supplier invoice alone thinks they run a 55% margin while the books quietly bleed at 40%. Tariff changes make this a live issue: if your landed cost moved this year and your pricing didn't, your margin did.
Stock You Can't See: FBA and 3PLs
Inventory at Amazon FBA or a 3PL is still your asset — it just sleeps somewhere else. Two disciplines keep it honest:
- Reconcile monthly — your books' unit counts against the warehouse's inventory reports. They drift; find out why.
- Write off shrinkage — lost inbound shipments, damaged units, unsellable returns. Amazon reimburses some of it (claim it); the rest is a real expense that belongs in this month, not in a giant "correction" at year-end.
A balance sheet carrying phantom inventory overstates your assets and understates your costs — right up until the cleanup, when a year of shrinkage lands in one ugly entry. (More on the FBA side specifically in our Amazon FBA accounting guide.)
The Cash Truth
Inventory is also why profitable stores run out of cash: every dollar sitting on a shelf is a dollar that already left your bank but hasn't reached your P&L. Books that track inventory properly are what let you see that gap before it bites.
The Bottom Line
Costing method, landed cost, off-site stock, shrinkage — four decisions that decide whether your margins are numbers or guesses. We keep them current monthly for the eCommerce businesses we serve, CPA-reviewed, so the balance sheet describes stock that exists at costs that are real.
Frequently asked questions
No — it's an asset until it sells. The cost moves to cost of goods sold only when the unit ships. Expensing purchases as they happen makes heavy-buying months look like losses and sell-through months look like windfalls, and neither is true.
Both are legitimate; what matters is picking one and applying it consistently. FIFO tracks the actual flow of most physical goods and is what most sellers' tools support best; weighted average smooths out purchase-price swings. Changing methods later has tax implications, so it's a decision worth making deliberately.
Landed cost is everything it took to get a unit to your shelf: the unit price plus freight, duties, tariffs, and inbound handling. If you only book the supplier invoice, your COGS is understated and your margins look better than they are — until the cash says otherwise.
It's still your asset, on your books, until it sells — wherever it physically sits. The discipline is reconciling your inventory records to the warehouse's reports monthly, and writing off shrinkage — lost, damaged, unsellable returns — so the asset on the balance sheet is stock that actually exists.