The first step is knowing what actually belongs in COGS. It’s not just what you paid for the product. COGS includes the purchase price, inbound shipping and freight, customs duties if you’re importing, and packaging materials that go out with the order. If you’re only tracking the wholesale cost of the item, you’re understating your true cost and overstating your margins.

Pick an inventory costing method and stick with it. For most e-commerce businesses, FIFO (first in, first out) or weighted average cost works well. FIFO assumes you sell your oldest inventory first, which makes sense for most products and keeps your COGS aligned with actual purchase history. Weighted average is simpler if you reorder the same products frequently at slightly different prices. It smooths out cost fluctuations without requiring you to track individual purchase lots.

In QuickBooks Online, turn on inventory tracking and create inventory items with accurate cost fields. Every time you receive new inventory, enter a purchase order or bill that records the quantity and the cost per unit. When a sale happens, the software should reduce your inventory quantity and move the cost to COGS automatically. If you’re selling on Shopify, Amazon, or both, use an integration tool to sync sales into QuickBooks so you aren’t entering orders manually.

Where most online store owners lose track is with returns, damaged goods, and write-offs. A customer returns a product and you restock it. That needs to reverse the COGS entry and add the item back to inventory. If the item is damaged and can’t be resold, it stays in COGS but the inventory count needs to be adjusted. Ignoring these transactions creates a gap between your physical inventory and your books that grows over time.

Do a physical inventory count at least quarterly. Compare what you actually have on shelves to what your system says you have. Discrepancies happen from theft, damage, miscounts during receiving, or sync errors between platforms. Adjusting for these differences keeps your COGS accurate and your balance sheet honest.

Marketplace fees from Amazon, Etsy, or Shopify Payments are not COGS. Those are selling expenses and should be categorized separately. Mixing them into COGS inflates your cost of goods and hides your true gross margin, which makes it harder to evaluate product profitability or make pricing decisions.

Getting COGS right matters beyond just clean books. Your gross margin tells you whether your products are actually profitable before overhead. It also directly affects your small business tax returns because COGS reduces your taxable income. If you’re tracking it loosely or inconsistently, you could be overpaying on taxes or making business decisions based on margin numbers that aren’t real.

If your inventory is growing or you sell across multiple channels, the tracking gets complex fast. Setting up the system correctly from the start saves you from a painful cleanup later. The goal is a process where every product received, sold, returned, or written off flows through your books consistently so your numbers actually mean something.