How do I value inventory and work out cost of goods sold for an online store?

For a store that holds stock, profit depends on how much stock you still have at the end of the year.

Formula: opening stock + purchases (including freight-in and import costs) - closing stock = cost of goods sold. Example: opening stock HK$10,000 + purchases HK$50,000 - closing stock HK$15,000 = cost of goods sold HK$45,000.

Valuation: accounting standards generally require inventory to be measured at the lower of cost and net realisable value (the expected selling price minus selling costs). Slow-moving, damaged or expired items may need to be written down to what they can realistically sell for. The IRD expects accounts prepared under generally accepted accounting principles, so a consistent method should be used year to year.

Stock on consignment, dropshipped goods and goods in transit: include goods that you own, wherever they are (a warehouse, a fulfilment centre, a courier). Do not count goods held for others or goods you never take title to.

Take a physical stock count at the year end, sign it and keep it with the accounts, as these form part of the records to be retained for seven years. Wholesale buyers or an auditor may also check the count.