Your store is generating sales. Orders are coming in. Money is hitting your bank account.
But when you look at your Profit & Loss statement, you’re not entirely sure what it’s telling you.
One of the biggest reasons ecommerce financial reports become difficult to trust is that everything gets lumped together as “expenses.” Product costs, shipping, software subscriptions, advertising, merchant fees, and office supplies all end up in the same bucket.
When product costs and operating expenses are mixed, your gross profit and gross margin no longer reflect the true cost of selling your products.
Gross profit shows how much money remains after paying for the products you sell. Gross margin shows that same amount as a percentage of your sales. Ecommerce brands rely on these figures to answer questions like:
- Are our products still profitable?
- Can we afford to spend more on advertising?
- How much did our latest supplier price increase hurt our margins?
- Do we need to raise prices?
If your Cost of Goods Sold isn’t accurate, those questions become much harder to answer with confidence.
For example, imagine your supplier raises prices by 8%. If those costs are buried in operating expenses instead of Cost of Goods Sold, your gross margin won’t accurately reflect that change. All you’ll see is that profits are lower, without a clear explanation why.
The good news is that the fix is straightforward: separate Cost of Goods Sold (COGS) from operating expenses. Once those two categories are correctly organized, your financial reports tell a much clearer story, giving you the information you need to make better business decisions.
In this guide, we’ll cover:
- ·What belongs in Cost of Goods Sold (COGS)
- What belongs in operating expenses (OpEx)
- How these figures appear on your P&L statement
- A simple rule of thumb for classifying expenses correctly
What Belongs in COGS
Cost of Goods Sold (COGS) is the direct costs of selling a product.
A simple way to think about it is this: If the cost only exists because you made a sale, it’s probably COGS.
For most ecommerce brands, that includes:
- Product or manufacturing costs
- Inbound freight and shipping from your supplier
- Customs duties and import fees
- Other costs directly attributable to acquiring or producing inventory
For example, if you sell custom T-shirts, the cost of the shirts, printing, labels, and freight from your manufacturer all belong in COGS because they’re part of producing inventory for sale.
The goal isn’t to memorize accounting rules. It’s simply to know the true cost of the products you sell.
What Belongs in Operating Expenses (OpEx)
Operating expenses are the costs of running your business that aren’t directly tied to the products you sell.
A simple way to think about it is this: If you’d still incur the cost even if you didn’t make a sale today, it’s probably an operating expense.
For most ecommerce brands that includes:
- Your ecommerce platform fee and app subscriptions
- Advertising and marketing
- Salaries and contractor payments
- Rent for your warehouse or office
- Bookkeeping and accounting fees
For example, you pay for your Shopify subscription, Klaviyo subscription and Facebook ads whether you sold 5 orders or 500. These are all operating expenses.
The goal of lumping operating expenses together is to show what it costs to run and grow your business beyond the products themselves. Keeping these costs separate from COGS gives you a clearer picture of both your gross margin and the overall cost of operating your business.
How This Appears on Your Profit & Loss Statement
A properly organized Profit & Loss statement follows a simple structure:
Each level answers a different question:
- Revenue tells you how much you sold.
- Gross Profit tells you how much is left after paying for the products themselves.
- Net Profit tells you what’s left after paying for everything it takes to run the business.
For ecommerce brands, accurate visibility into these numbers is essential. It helps you understand whether changes in profitability are being driven by product costs, pricing, or the cost of running your business.
A well-organized chart of accounts in QuickBooks Online helps separate these costs automatically, making your Profit & Loss much easier to understand month after month.
A Quick Rule of Thumb for Founders
Not sure which bucket the cost belongs in? Ask one question:
Would I still owe this cost if I sold zero units this month?
Yes → it’s an operating expense.
No → it’s COGS.
That’s it. It won’t cover every edge case, but it’ll get you the right answer nine times out of ten.
Putting It All Together
Understanding the difference between Cost of Goods Sold (COGS) and operating expenses isn’t about learning accounting rules, it’s about making your financial reports more useful.
When these costs are categorized correctly, your Profit & Loss statement tells a much clearer story. You’ll have an accurate gross margin, better visibility into what’s driving profitability, and greater confidence when making pricing and purchasing decisions.
If you’re not sure your books are separating COGS and operating expenses correctly, I’d be happy to take a look.
Book a free 30-minute discovery call and we’ll review your current bookkeeping setup, answer your questions, and discuss how to make your financial reports more reliable. No obligation, just helpful guidance.