Cost of goods sold is what you paid for the items you sold this period, not everything you bought. Buying inventory swaps cash for stock. The cost becomes an expense when each item sells, and anything still unsold at year end is inventory, not an expense yet.
When you buy a lot for one price, spread that price across the items in it. A common approach is to split it by what each item is likely to sell for. Write down how you did it, and use those per-item costs from then on. Below, one estate-sale box is followed from the day you buy it, through a month of sales, to year end, and the numbers are checked against the IRS formula.
Why isn't the stuff I bought a write-off right away?
Because on the day you buy it, you haven't lost anything. You had $60 in cash and now you have $60 of jackets, lamps and books. Your business is worth the same. The cost shows up as an expense when the item leaves, which is when it sells, so it lands in the same month as the sale it produced. That matching is what makes a month's profit mean something. Why buying inventory is not an expense explains this in more depth, and what counts as cost of goods sold covers what does and doesn't belong in it.
How do I work out what one item cost when I bought a whole lot?
You bought one estate-sale box for $60.00. Inside: a leather jacket, a lamp and ten paperback books. The receipt says $60.00, not what each thing cost, so you have to decide.
Splitting by expected resale value means the item likely to sell for more carries more of the cost:
| Item | Expected to sell for | Share of total value | Allocated cost |
|---|---|---|---|
| Leather jacket | $80.00 | $80 ÷ $200 = 40% | $24.00 |
| Lamp | $40.00 | $40 ÷ $200 = 20% | $12.00 |
| 10 books at $8.00 each | $80.00 | $80 ÷ $200 = 40% | $24.00 ($2.40 each) |
| Total | $200.00 | 100% | $60.00 |
For a lot of similar things, such as twenty pairs of jeans, an equal split per item is the simple alternative. This is a common, reasonable approach, not an IRS-prescribed one. What matters is that you pick a method, write it on the receipt or in a note, and use it the same way each time. If you ever need to explain a number, "I split the box by expected resale value, here's my note" is a far better answer than a guess made months later.
What does a month of sales look like?
In October, the jacket sells for $75.00 and four of the books sell for $9.00 each. The lamp and six books are still on the shelf.
| Amount | |
|---|---|
| Sales | $75.00 + (4 × $9.00 = $36.00) = $111.00 |
| Cost of goods sold | $24.00 + (4 × $2.40 = $9.60) = $33.60 |
| Gross profit (before eBay fees and shipping) | $77.40 |
| Still in inventory | $12.00 + (6 × $2.40 = $14.40) = $26.40 |
Check: $33.60 sold + $26.40 unsold = $60.00, the price of the box. Nothing is lost or counted twice.
In your books, that's two kinds of entry:
- When you buy the box: debit Inventory $60.00, credit Checking $60.00. No expense yet.
- When each item sells: debit Cost of Goods Sold, credit Inventory, for that item's cost. For the jacket that's $24.00. For each book it's $2.40.
eBay's fees and shipping labels come off after gross profit, but they aren't cost of goods sold. They're selling expenses; see where marketplace fees belong.
The wrong way, for contrast. Suppose you expense the whole $60.00 in October because that's when you paid for it. October's profit reads $111.00 − $60.00 = $51.00 instead of $77.40, understated by $26.40. Then in the month the lamp and the rest of the books sell, there's no cost left to match against them, and that month's profit is overstated by the same $26.40. Over the life of the box the total comes out the same, but every month in between is wrong, and you can't tell a good month from a bad one.
What about the items I haven't sold?
They're inventory: an asset on your balance sheet, at what they cost you. At the end of October this box contributes $26.40 of inventory. It's not on your income statement at all until something sells.
At year end, count what's actually on the shelf and add up its cost using the same per-item figures. This matters more than it sounds for resellers. Items get damaged, donated or taken for personal use. A count is how your records find out.
How does this match the cost of goods sold section on Schedule C?
Part III of Schedule C doesn't add up items one by one. It works cost of goods sold out the other way round, from inventory and purchases, as described in the IRS Schedule C instructions and Publication 334:
| Schedule C line | What goes there |
|---|---|
| 35 | Inventory at beginning of year |
| 36 | Purchases, less the cost of items withdrawn for personal use |
| 37 to 39 | Cost of labor, materials and supplies, other costs |
| 41 | Inventory at end of year |
| 42 | Cost of goods sold |
Suppose this box was your only purchase of the year, you started with no inventory, and nothing else sold after October. Then: beginning inventory $0.00 + purchases $60.00 − ending inventory $26.40 = cost of goods sold $33.60.
That's the same $33.60 you got by adding up the cost of each item as it sold. Tracking cost per item as things sell and counting what's left at year end are two routes to the same figure. When they don't agree, the gap is something that left your shelf without being sold: a broken lamp, a book you kept, a count you got wrong. That's worth knowing before you file.
Line 36 is also where the personal-use point lives. If you pull something out of your resale stock to keep for yourself, its cost comes out of purchases.
Small businesses may also qualify for an exception to the usual inventory rules, which the Schedule C instructions describe as treating inventory as non-incidental materials and supplies. When that lets you deduct the cost of goods you resell is exactly the kind of question to ask a professional rather than a blog. This is general information, not tax advice. Check with your accountant.
What happens to cost of goods sold when an item is returned?
Say the jacket buyer returns it for a full refund, and the jacket is fine and goes back on the shelf. Two things reverse. The sale is undone by the $75.00 refund, recorded as a refund against sales. And the jacket's $24.00 cost moves back from Cost of Goods Sold to Inventory: debit Inventory $24.00, credit Cost of Goods Sold $24.00. October's cost of goods sold drops to $9.60, and your inventory is back to $50.40. If the item comes back damaged and can't be resold, it stays out of inventory.
How SalesImporter handles this
SalesImporter connects to eBay today. Products you sell on eBay are added to your Items list automatically, matched by SKU or, where there isn't one, by listing title. You fill in what each item cost you. SalesImporter doesn't split a lot for you, so that part is your note from above. When an eBay sale syncs, it posts that item's cost from Inventory to Cost of Goods Sold, using the cost in effect on the date of the sale, so changing a cost later doesn't re-price old sales. An item with no cost entered posts no cost of goods sold, which will make your profit look better than it is, so fill costs in. On a full refund of an eBay order, the item's cost moves back to Inventory. A partial refund doesn't reverse cost, and you can correct an order's cost of goods sold on its journal entry. How to add an item covers setting costs, and reading your income statement shows where cost of goods sold and gross profit appear.