What is Cost of Goods Sold?
Cost of Goods Sold is a feature in A2X that calculates the total cost of the products you sell on Amazon for each settlement period, and sends the transaction to your accounting system, so that you can correctly record the changes in inventory and cost of sales. It provides you with an accurate view of your gross profitability and margins directly in your financial reports.
Why should I care about Cost of Goods Sold?
In a very simplistic cash-based accounting system, you might be expensing your stock purchases when they happen. This means that, if you buy 100 T-shirts from your factory and they cost you $5 each, then you incur a $500 expense called 'purchases' in the month you buy them.
If you sell 20 T-shirts each month for $10 each, then you would have revenue of $200 and a $500 expense in that first month, uh-oh, feels like you lost money, 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 the reason why you would 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 you will record a $500 asset to your Inventory asset accounts in the month you purchase the stock. Then, as you sell the stock, you will expense the cost of 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 is $100. Your gross margin is $100, which is a much more realistic view of your profitability.
How to access Cost of Goods Sold features in A2X?
The cost of goods sold feature is available as a standard offering on the Starter, Standard and Premium plans.
To use the Cost of Goods Sold feature, you will need to provide A2X with two things:
A/ Cost price data for your Amazon products (Costs > Manage Costs tab)
B/ The asset and expense accounts from your chart of accounts (Settings > Cost of Goods Sold)
A/ Cost Price Data
There are two ways you can provide A2X with your cost price data.
Add costs via Costs > Manage Costs tab
Click on Costs in the header menu as shown below:
A2X may have already found a number of SKUs from your account on the Manage costs tab. If you don't see any or all of your products listed here, you can initiate their fetch by clicking 'Refresh SKUs'.
This will search your recent settlements, and recent inventory (if you have FBA).
Once your SKU's are listed, you can manually type in the cost price for each, as shown below:
After you have entered all cost prices, click Save:
Add costs via Costs > Advanced Costs (.csv file upload)
On the Advanced Costs tab you will see a link to either 'download your cost data' or 'download blank template'. The first option 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 you only need to add the cost prices.
Once you have populated your template with the cost prices, upload it to A2X.
B/ Inventory Current Asset and Cost of Goods Sold Expense accounts
In your accounting system's chart of account, you will need to create an Inventory Current Asset account and a Cost of Goods Sold Expense account.
If you need help with the creation of these accounts, please check these articles:
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
When you have these two accounts set up in your accounting system, go back to A2X Settings > Cost of Goods Sold and enable the feature. Then, map your COGS expense account and Inventory asset account as shown below.
Pro tip: There is a delay after creating accounts in your accounting system to when they appear in A2X, however you can force the cache to refresh under Settings > Connections in A2X.
There are several advanced options for mapping COGS transactions. COGS can be split by FBA, Merchant Fulfilled, and non-Amazon. Click on the + sign on the right to expand the account mapping options.
This means you can account for COGS on one level or expand to other levels, if your business requires such level of tracking.
Examples of accounts mapped are shown below:
Once you have saved your Cost of Goods Sold settings, go to the Settlements page and click on the 'Review' link next to any of your settlements to review a Cost Of Goods Sold invoice that was generated:
If you do not see any cost information in your settlement when you review it, go back and click the 'Refresh' link next to that settlement on the Settlements page, which will force A2X to apply the newly uploaded costs to it.
Reviewing and sending COGS invoices to your accounting system
After you enable COGS in the A2X settings, and upload your costs and configure your asset and expense accounts, you will need to refresh any old settlement periods that you wish to recalculate the COGS data for. You can do this on a single settlement by clicking the Refresh link, or use the Bulk Actions to refresh multiple settlement periods at once.
When the settlement 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 settlement period spans more than one month.
Each Amazon settlement is processed, the quantity of product sold is calculated and the cost value of the product is consolidated into invoices in the same way as the sales and fees.
You can upload different cost data and have A2X re-calculate the new cost of goods sold values by clicking 'Refresh' link next to any settlement on Settlement .
When all SKUs have a cost associated with them, you can send the invoices to your accounting system by pressing the 'Send to Xero (Quickbooks)' button.
The COGS invoices in your accounting system: Xero
When you send the COGS invoices to Xero they will always total to zero and they can be found in Draft Bills. The invoices reflect a non-cash movement of inventory asset value to cost of goods sold expense.
To commit the changes to the COGS and inventory accounts, you need to approve the bill, even though it is zero.
You can view the specific details on the invoice including the source of the cost data used for the calculation.
Each COGS invoice sent to Xero will have supporting data attached so that the calculations that were used can be recreated should they be required during audit or review.
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.
Each COGS invoice sent to Quickbooks Online will have supporting data attached so that the calculations that were used can be recreated should they be required during audit or review.
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