For product-based and ecommerce businesses, inventory is typically the single largest asset on the balance sheet. Yet many growing businesses treat stock accounting as an afterthought, expensing inventory purchases immediately upon arrival or relying on outdated inventory valuations.
When Cost of Goods Sold (COGS) is miscalculated, gross margins become fictional, making it impossible to evaluate product pricing or determine genuine gross profit.
The Fundamental Inventory Equation
Accurate inventory accounting follows a universal mathematical relationship:
Beginning Inventory + Inventory Purchases – Ending Inventory = Cost of Goods Sold
Inventory purchases are held on the balance sheet as an asset until the goods are sold. When an item ships to a customer, its cost basis moves from the inventory asset account to COGS on the P&L.
Three Controls for Dependable Inventory Ledgers
1. Monthly Inventory Sub-Ledger Tie-Out. If you use inventory software (Cin7, Katana, Dear/Cin7 Core, or Shopify Inventory), its valuation summary must tie out to the general ledger balance each month.
2. Landed Cost Allocations. Freight, customs duties, and import tariffs should be capitalised into inventory unit costs rather than dumped into general freight expense. This ensures true product margins.
3. Shrinkage and Write-Down Protocols. Damaged, obsolete, or lost stock discovered during cycle counts must be written down via formal adjustment journals to reflect realistic lower of cost or net realisable value.
Product Business Bookkeeping With Bahulya Fintech
Bahulya Fintech helps ecommerce and retail businesses maintain accurate inventory asset ledgers, reconcile multi-channel merchant settlements, and post monthly COGS adjustments. We keep your inventory numbers transparent and review-ready.