For inventory-based companies, having a well-structured chart of accounts is one of the most basic ways to maintain financial clarity, track profitability, and make informed business decisions. This is a foundational aspect of good accounting practices, which is why we ensure new Accountfully clients have a clean, consistent chart of accounts as part of our onboarding process.
If you struggle with the best way to organize complex inventory expenses and revenue into your chart of accounts, this quick-tip guide is for you. Here, we break down the components of an inventory-focused chart of accounts and why each section matters for accurate financial reporting.
If Chart of Accounts are not your forte, start with this refresher course.
At the top of the income statement, you’ll see Gross Revenue, which is the total sales amount calculated as the number of units sold multiplied by the sales price.
▶ Gross Revenue = Total Units Sold × Price per Unit
However, businesses don’t keep all of that as actual income.
To get Net Revenue, several deductions need to be accounted for, including:
• Discounts
• Returns
• Trade spend
• Slotting fees
• Other adjustments that reduce the final sale price
By properly categorizing these deductions, businesses can ensure a more accurate view of their actual revenue, which is the foundation for profitability analysis.
COGS represents all the costs incurred to get a product ready to sell. Accounting for your cost of goods sold comes with its own set of finite challenges, so make sure you are well-aware of what is involved from an accounting end of things.
This includes:
• Freight-in (shipping costs to bring inventory in)
• Duties(tariffs) and taxes
• Packaging
• Labor costs
• Co-manufacturing costs
Since inventory values may fluctuate, businesses should also account for inventory adjustments to reflect accurate stock levels.
▶ Gross Profit is calculated as: Net Revenue – COGS = Gross Profit
This metric directly reflects how much money a business makes after covering the costs of producing and preparing goods for sale. This is why we consider it to be at the top of the list of metrics to monitor.
Once a product is sold, additional costs are incurred to deliver it to the customer. These expenses fall under Logistics and Fulfillment, which include:
• Freight-out (shipping costs to customers)
• Merchant account fees (e.g., Shopify, Amazon payment processing fees)
• Warehousing and storage
• Pick, pack, and ship fees
▶ Gross Profit – Logistics & Fulfillment Expenses = Contribution Margin
By subtracting these costs from Gross Profit, businesses arrive at their Contribution Margin, which helps assess the true profitability of selling a product, factoring in the costs to fulfill and deliver it.
Unlike direct product costs, Advertising and Marketing expenses are investments made to drive sales. This category includes:
• Digital ads
• Influencer marketing
• Paid social media campaigns
• Sampling programs
A common mistake many businesses make is categorizing product samples under COGS. Instead, samples should be classified under marketing expenses to accurately assess their return on investment (ROI).
This category includes costs associated with sales efforts, such as:
• Broker fees
• Sales commissions
Unlike marketing expenses that generate demand, selling expenses are more directly tied to closing deals and maintaining retailer relationships.
G&A expenses cover the operational costs of running a business, including salaries, office expenses, and software subscriptions.
Research and Development (R&D) costs, on the other hand, include one-time expenses for product innovation, formulation changes, or packaging redesigns. Keeping these costs separate helps businesses track investments in future growth. Knowing your specific R&D activities and their associated costs will help you take advantage of any R&D-related tax breaks too!
At the bottom of the financial statement is Net Operating Income (NOI), which reflects the company’s overall profitability after accounting for all expenses.
This metric is key for understanding how efficiently a business is being run, and whether operational costs are in line with revenue.
For businesses selling through multiple platforms—such as Amazon, Shopify, Faire, and wholesale accounts—it’s a must to track financials by channel. By assigning revenue, COGS, logistics, and advertising expenses to specific sales channels, businesses can analyze the profitability of each one separately.
For example, Amazon-related expenses (such as fulfillment fees, advertising spend, and storage fees) should be categorized under the Amazon sales channel, allowing for an accurate calculation of Amazon-specific profit margins. Maybe this one is not as profitable, but makes sense because of the exposure it offers your business. Maybe another channel is just not worth the associated expense.
Knowing the reality behind each sales channel's performance is a great first step toward maximizing your profitability.
A well-structured chart of accounts provides inventory-based businesses with deeper financial insight, helping them make informed pricing, marketing, and operational decisions. By clearly segmenting revenue, costs, and expenses, businesses can improve profitability tracking and identify areas for improvement.
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If your company needs help optimizing its financial structure for better reporting and decision-making, consider working with an accounting firm that specializes in inventory-based businesses.
