Cost of goods sold: how a BC shop or online store works it out
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Gross profit is sales less the cost of what you sold, not less everything you bought. The difference is the stock still on your shelves.
Short answer: cost of goods sold is your opening inventory, plus the stock you bought during the year, including the freight to bring it in, plus any other direct costs, less your closing inventory. Gross profit is your sales less that figure. The closing inventory comes from a count at year end, valued at fair market value or item by item at the lower of cost and fair market value, and it becomes next year’s opening inventory.
The formula, line by line
| Line | What goes in it |
|---|---|
| 8300 Opening inventory | Last year’s closing inventory; nothing in your first year |
| 8320 Purchases | Stock bought in the year, less returns, allowances and discounts, including delivery, freight and express charges |
| 8340 Direct wage costs | Pay for employees who make the goods; not your own drawings |
| 8360 Subcontracts | Outside help for tasks related to the goods you sell |
| 8450 Other costs | Other direct costs of the goods |
| 8500 Closing inventory | The stock on hand at year end, from the count |
| 8518 Cost of goods sold | Opening inventory plus lines 8320 to 8450, less closing inventory |
| 8519 Gross profit | Gross business income less cost of goods sold |
A fictional example: opening inventory of CAD 8,000, purchases of CAD 40,000 and closing inventory of CAD 12,000 give a cost of goods sold of CAD 36,000. On sales of CAD 90,000, gross profit is CAD 54,000. The figures are invented.
What counts as the cost of stock
- The price paid, less returns, allowances and discounts
- Delivery, freight and express charges to bring the goods to your business
- Any other cost of getting the item to your business location
- Not the cost of goods you, your family or partners took for personal use: subtract it from purchases
Counting and valuing stock
The CRA asks for an actual stock count at the end of each fiscal period, unless you use a perpetual inventory system. Value the stock at fair market value for all of it, or item by item at the lower of cost and fair market value, and use the same method every year.
A perpetual system is one that tracks every unit in and out, such as the inventory in Shopify, QuickBooks Online or a point-of-sale system. It only replaces the count if it is kept accurate, so compare it with a physical count of at least some lines before you rely on it.
How it applies to different businesses
- Online stores: stock held in a third-party fulfilment warehouse, such as Amazon FBA, is still yours until it sells, so it belongs in the closing count
- Shops: stock in the back room and on display counts the same; damaged or obsolete stock may be worth less than cost
- Restaurants and cafés: food, drink and packaging on hand at year end form the closing inventory, and the food-cost percentage comes from the same formula
- Makers and small manufacturers: raw materials, goods in process and finished goods all count
What the books need
Questions people ask
How do I calculate cost of goods sold?
Opening inventory, plus purchases of stock in the year, plus direct costs, less closing inventory. Sales less cost of goods sold is gross profit.
Does shipping go into cost of goods sold?
The cost of bringing stock to your business, such as delivery, freight and express charges on purchases, is part of the cost of the goods.
Do I count stock in an Amazon or third-party warehouse?
Yes. You still own it until it sells, so it belongs in your closing inventory.
Do I have to do a physical stock count?
At the end of each fiscal period, unless you use a perpetual inventory system that tracks every unit in and out.
What if I take stock for personal use?
Subtract its cost from your purchases for the year. The cost of goods you or your family used is not a business cost.
The sole proprietor year-end checklist →
The corporate year-end checklist →
Reconciling Shopify and Stripe payouts →
Importing goods: GST and PST →
Want this handled for you
This is the work we do for clients every month. Tell us what you sell and where your books stand, and a written plan and a fixed monthly price follow within one business day.
Year-end books and T1 and T2 returns, done for you →
info@orbisaccounting.ca