What is Cost of Goods Sold?
Cost of Goods Sold is a feature in A2X that will calculate the total cost of the products you sell via your Shopify store for each payout and send the transaction to your accounting system so that you can correctly record the changes in inventory and cost of sales. This will give you an accurate view of your gross profitability and margins directly in your financial reports.
Why should you care about Cost of Goods Sold?
In a very simplistic cash-based accounting system you might expense your stock purchases when they happen. So if you buy 100 T-shirts from your factory and they cost you $5 each, then in the month you buy them, you incur a $500 expense called 'purchases'.
If you sell 20 T-shirts per month for $10 each, then you would have revenue of $200 in that month, and a $500 expense, uh-oh, you lost money this month, or did you?
The next month would be much more profitable though, no stock purchases and $200 of revenue, all pure profit, or is it?
This uneven view of your margin and profit is exactly why you will want to account for your stock on an accrual basis, matching the cost of the goods to the sales of those goods.
In our scenario above, this new approach would mean in the month you purchase the stock, you record a $500 asset in your accounts called inventory. Then as you sell the stock, you expense the cost of just the product you sold.
So if you sold 20 T-shirts for $10 each, and they cost you $5 each, then your sales are $200 and your cost of goods sold are $100. Your gross margin is $100, which is a more realistic view of your profitability.
How to access Cost of Goods Sold features? The cost of goods sold feature is available as a standard offering on the A2X for Shopify Premium plan.
Getting Started/Setup of costs and COGS accounts
In order to use Cost of Goods Sold features you will need to provide A2X with two things:
- Cost price data for your Shopify products
- The asset and expense accounts from your chart of accounts to use for the transaction
Both of these are configured in A2X under the Costs tab.
Cost Price Data
There are two ways you can provide A2X with your cost price data.
The first method is the manage costs tab within A2X.
Click Costs as shown below:
On the Manage costs tab A2X may have already found a number of SKUs from your account. If you don't see any or all of your products listed you can initiate a refresh by clicking 'Refresh SKUs'.
This will search recent payout data for SKU's.
Once you see each of your SKU's listed, you can manually type in the cost price for each, as shown below:
Once you have entered all cost prices, click Save Costs:
The second method for providing cost prices is a manual .csv file upload.
On the Advanced Costs tab you will see a link to download either the 'current cost template' or an example template. The current cost template is great to use if you have refreshed the SKU's in your A2X account. A2X will provide you with a template of all the SKU's we see in your account so all you need to do is enter the cost prices.
Once you have populated your template with the cost prices it is now time to upload it to A2X.
Inventory Asset and Cost of Goods sold Expense accounts
In your accounting system's chart of accounts you will need an Inventory Current Asset account and a Cost of Goods Sold Expense account.
You can create these in your accounting system as shown below. For further information on the creation of Inventory and Cost of Goods sold accounts please click here:
How to create an Inventory Asset account and Cost of Goods Sold account in XERO
How to create an Inventory Asset account and Cost of Goods Sold account in QuickBooks Online
Turn on "Enable Cost of Goods Sold". Set your accounts to map to your accounting software here in Costs.
Pro tip: There is a delay after creating accounts in your accounting system to when they appear in A2X, you can force the cache to refresh under Settings > Connections in A2X.
Once you have saved your Settings here, head on over to your Payouts list and click review on a payout to review the Cost of Goods Sold entry. Expand the Cost Of Goods Sold entry and you will see that the number and cost of items sold now show:
If you do not see any cost information in your payout when you review it, click the 'refresh' link for that payout, this will force A2X to apply the newly uploaded costs and settings to this payout.
Reviewing and Sending COGS invoices to your accounting system
After you enable COGS in the A2X settings, upload your costs and configure your asset and expense accounts, you will need to refresh any old payout periods that you wish to calculate the COGS data for. You can do this on a single payout by clicking the Refresh link, or use the bulk tools (click the little Actions menu) to refresh multiple payout periods at once.
When the payout has been refreshed you can click Review to see the details of the COGS for that period, and send the data to your accounting system. The COGS invoices will appear below the usual Sales and Fees invoices, you will see one or two invoices depending on whether the payout period spans more than one month.
As each Payout is processed, the quantity of product sold is calculated and the cost value of the product is totaled into invoices in the same way as the sales and fees.
You can upload different cost data and refresh a Payout to have A2X re-calculate the new cost of goods sold values by clicking Refresh.
When all SKUs have a cost associated with them, you can send the invoices to your accounting system by pressing the 'Send Invoices' button.
The COGS invoices in your accounting system: Xero
When you send the COGS invoices to Xero they will always total to zero and be considered 'Bills'. The invoices reflect a non-cash movement of inventory asset value to cost of goods sold expense. The accounts chosen in A2X settings will be used on the invoice.
You can view the specific details on the invoice including the source of the cost data used for the calculation, A2X aggregates the totals in the invoice.
The COGS invoices in your accounting system: QuickBooks Online
When you send the COGS data to QuickBooks, it will be a Journal Entry, one for each month and attached to the journal will be the source data. The journal will be a non-cash journal as it debits the expense account and credits the asset account for the same amount.
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