Shopify shows you sales and payouts beautifully, but it does not work out your cost of goods sold or value the stock sitting in your storeroom on your year-end date. That number is yours to produce, and it drives both your profit and your tax bill.
This guide walks you through how to value Shopify stock at year-end under UK GAAP, how to calculate cost of goods sold (COGS) from it, and how to apply the two rules HMRC and the accounting standards actually require: the FIFO cost basis and the "lower of cost and net realisable value" test.
It is written for UK Shopify sellers running through a limited company or as a sole trader on traditional (accruals) accounting. If you sell physical products and you carry stock, this is the section of your accounts that gets the closest look at year-end.
We will keep it practical, with a fully worked illustrative example, the journals, and a quick decision walkthrough at the end.
What is COGS for a Shopify store, and why does year-end stock matter?
COGS is the cost of the goods you actually sold in the year. You get it by adding what you bought to your opening stock, then taking off the stock still unsold at year-end. So your closing stock figure directly sets your COGS, your gross profit and your taxable profit.
Under traditional accounting you cannot simply deduct everything you bought. You match the cost of stock to the period in which it is sold, and you carry unsold stock forward as an asset. The closing stock valuation is the hinge the whole calculation turns on.
The core formula is simple:
| Line | What it means |
|---|---|
| Opening stock | Value of unsold stock brought forward from last year |
| Plus: Purchases | Cost of stock bought in the year (landed cost, see below) |
| Less: Closing stock | Value of unsold stock on your year-end date |
| Equals: COGS | Cost of the goods you actually sold |
Get the closing stock wrong and every figure below it is wrong too. Overstate it and you overpay tax now; understate it and you understate profit this year and overpay next year.
What is the correct basis to value Shopify stock under UK GAAP?
Under UK GAAP you value stock at the lower of cost and net realisable value (NRV). That is the rule in FRS 102 Section 13 and FRS 105 Section 10, and HMRC applies the same principle for tax.
UK GAAP for most small companies is FRS 102, and for micro-entities it is FRS 105. Both require inventories to be measured at the lower of cost and estimated selling price less costs to complete and sell, which is what "net realisable value" means in plain terms. HMRC's Business Income Manual sets out the same "lower of cost and net realisable value" basis for trading stock.
So you value each line of stock at whichever is lower: what it cost you, or what you could realistically sell it for after selling costs. You do this line by line, not across the whole stockroom, so a write-down on a slow line cannot be hidden by a profit on a fast one.
What counts as "cost" for Shopify stock?
Cost is more than the supplier's invoice price. HMRC defines it as "all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition". That is your landed cost.
For a typical Shopify seller buying finished goods, landed cost usually includes:
- The purchase price from your supplier
- Inbound freight and shipping to get the goods to you
- Import duty (this is a real cost of the goods, so it goes into stock value)
- Any irrecoverable taxes and inbound handling
Two things that do not go into stock cost for most sellers: recoverable import VAT (you reclaim that, so it is not a cost), and your selling and distribution costs such as Shopify fees, outbound postage and marketing. Those are period expenses, not part of stock value.
What is net realisable value (NRV)?
NRV is the expected selling price of the stock in its normal market, less the costs you would incur to sell it. HMRC describes it as "estimated selling price less costs to complete and sell".
You write stock down to NRV when there is no reasonable expectation that future revenue will cover the cost already incurred, typically because of deterioration, obsolescence, or a drop in demand. Think end-of-line seasonal stock, damaged returns, or a product you are about to discount below cost to clear.
Which cost flow method should a Shopify seller use: FIFO or weighted average?
Use FIFO (first in, first out) or weighted average cost. Do not use LIFO (last in, first out), which is not acceptable for UK tax.
When you buy the same product at different prices over the year, you need a rule for which cost attaches to the units still on the shelf. FIFO assumes you sell your oldest stock first, so your closing stock is valued at the cost of your most recent purchases. Weighted average blends all purchase costs into a single average unit cost.
HMRC does not accept LIFO. Its Business Income Manual relies on the Anaconda case, which held that LIFO does not truly reflect profit for tax, because there is "no room for theories as to flow of costs" when the actual stock can be ascertained. FIFO, by contrast, reflects the physical reality and is accepted.
In practice most Shopify sellers use FIFO, because it matches how perishable and fashion-led stock actually moves and it sits naturally with how inventory apps track batches. Pick one method, document it, and apply it consistently year to year.
How do you do a year-end stock count for a Shopify store?
You count or confirm the physical quantity of every product on your year-end date, value each line at the lower of cost and NRV, then total it. That total is your closing stock figure.
A clean count is the difference between accounts you can defend and a guess. Here is the process we use with clients.
- Pick your cut-off date. Stock is valued on your accounting year-end date. Count on that date, or reconcile your system quantity back to it if you count slightly before or after.
- Get the physical quantities right. Do a full physical count, or trust your inventory system only if you have recently verified it against a count. Include stock in transit that you legally own, and stock held at a third-party fulfilment centre.
- Apply your cost basis. Value each line at landed cost using FIFO (or weighted average).
- Apply the NRV test, line by line. For any line you expect to sell below cost after selling costs, write it down to NRV.
- Exclude what you do not own. Goods sold but not yet shipped at year-end are no longer your stock. Consignment stock you hold but do not own is not yours either.
- Document it. Keep the count sheets, the cost workings and the NRV judgements. This is the evidence that supports the figure in your statutory accounts.
Worked example: calculating Shopify COGS and closing stock with FIFO and NRV
Illustrative example. Maya runs a Shopify candle business through a limited company with a 31 March 2026 year-end. She uses FIFO. Her opening stock at 1 April 2025 was 200 units valued at £4.00 landed cost each, so £800.
During the year she made three purchases of her bestselling candle:
| Purchase | Units | Landed cost per unit | Total |
|---|---|---|---|
| May 2025 | 600 | £4.20 | £2,520 |
| Sept 2025 | 800 | £4.50 | £3,600 |
| Feb 2026 | 500 | £5.00 | £2,500 |
| Total purchases | 1,900 | £8,620 |
She sold 1,900 units during the year. So units available were 200 opening plus 1,900 bought, which is 2,100. Closing stock is 2,100 less 1,900 sold, which is 200 units.
Under FIFO, the 200 units left are the most recent ones, from the February 2026 batch at £5.00 each. So closing stock at cost is 200 x £5.00 = £1,000.
Now the NRV test. Maya is about to clear this line in a sale at £4.50, and packing and postage to shift them costs about £0.70 a unit. So NRV is £4.50 less £0.70 = £3.80 per unit, which is £760 for the 200 units.
NRV of £760 is lower than cost of £1,000, so she values closing stock at £760. The £240 difference is a write-down she takes this year.
Here is the COGS calculation with the NRV-adjusted closing stock:
| Line | Amount |
|---|---|
| Opening stock (1 Apr 2025) | £800 |
| Plus: Purchases | £8,620 |
| Less: Closing stock (lower of cost £1,000 and NRV £760) | (£760) |
| COGS for the year | £8,660 |
Check: opening £800 plus purchases £8,620 is £9,420 of stock to account for. Take off £760 still on hand, and £8,660 has gone to COGS. The maths ties.
If Maya had used the cost figure of £1,000 instead of NRV, her closing stock would be higher, her COGS lower at £8,420, and her profit overstated by £240. The NRV write-down is what keeps the accounts true and, in this case, slightly reduces this year's taxable profit.
What journals record COGS and the year-end stock movement?
If you expense purchases to cost of sales as you buy (the common small-business approach), you make one closing-stock journal at year-end to recognise the stock asset and pull that cost back out of COGS.
Using Maya's NRV-adjusted closing stock of £760:
| Account | Debit | Credit |
|---|---|---|
| Stock (balance sheet, current asset) | £760 | |
| Closing stock (cost of sales, P&L) | £760 |
This debit builds the asset on your balance sheet and the credit reduces cost of sales, so only the £8,660 of stock you actually sold stays in COGS. At the start of the next year you reverse it, which becomes your opening stock. The NRV write-down is already baked into the £760, so it lands in this year's profit and loss, which is exactly where it should fall.
If your bookkeeping instead capitalises stock as you buy it (a perpetual system), the year-end entry is just the adjustment to bring the carrying value to the lower of cost and NRV, rather than the full closing-stock journal above.
Getting these year-end adjustments right is the difference between a clean set of statutory accounts and a return that invites questions. If you would rather hand the count and the journals to someone who does this every day, that is exactly the kind of work our team handles for Shopify sellers.
How do import costs and VAT affect Shopify stock cost?
Import duty is part of stock cost, but import VAT is not, because you reclaim it. If you import using Postponed VAT Accounting, the VAT never touches your stock value at all.
Many Shopify sellers import stock from outside the UK, and there are a few moving parts to keep straight at year-end.
Duty goes into cost. Customs duty is a genuine cost of getting the goods to you, so it forms part of landed cost and sits in stock value until the goods are sold.
Import VAT does not. Import VAT is recoverable if you are VAT registered, so it is not a cost of the stock. You reclaim it and leave it out of the stock valuation.
Postponed VAT Accounting (PVA). If you use PVA, you account for import VAT on your VAT return rather than paying it at the border. You declare the VAT due in Box 1, reclaim the same amount in Box 4, and include the value of the imported goods in Box 7. The net VAT effect is usually nil, and again nothing hits stock cost. You support the figures with your monthly postponed import VAT statement.
The £135 consignment rule. For goods imported into Great Britain in consignments not exceeding £135, VAT is collected at the point of sale rather than at import. Where those goods are sold through an online marketplace, the marketplace must charge and account for the VAT, unless it is a B2B sale and the customer has given a UK VAT number. This matters for how revenue and VAT are recorded, but it does not change how you value the stock you hold.
Can a Shopify seller avoid stock valuation by using the cash basis?
Sometimes, if you are a sole trader. The cash basis is now the standard method for sole traders and ignores stock adjustments. But limited companies cannot use it, so most Shopify sellers trading through a company still have to value stock.
The cash basis is the standard way to record income and expenses if you are a sole trader or a partnership without corporate partners. Under it, you work out profit on money in and money out, and you do not make year-end adjustments for opening or closing stock. The cost of buying stock is simply an allowable expense when you pay for it.
That can be simpler for a small sole-trader Shopify shop. But it is not always better, and HMRC notes that businesses with high stock levels may prefer traditional accounting. If you carry a lot of stock across the year-end, the cash basis can give a lumpy, misleading profit.
Crucially, limited companies cannot use the cash basis. So if you run your Shopify store through a company, this whole guide applies and you must value stock under UK GAAP. It is worth getting tax advice on which basis suits you before you decide, because switching has knock-on effects.
Frequently asked questions
Does Shopify calculate my COGS for me?
No. Shopify can store a cost per item and report on it, but it does not produce a UK GAAP closing stock valuation or a COGS figure for your statutory accounts. You still need to do a year-end count, apply the lower of cost and NRV rule, and book the closing-stock journal.
Can I use LIFO to value my Shopify stock?
No. LIFO is not acceptable for UK tax. HMRC relies on the Anaconda case to reject it. Use FIFO or weighted average cost, pick one, and apply it consistently year to year.
What costs go into the value of my Shopify stock?
Landed cost: the purchase price plus inbound freight, import duty and any irrecoverable taxes needed to bring the goods to their location and condition. Leave out recoverable import VAT and your selling costs like Shopify fees, outbound postage and ads, which are period expenses.
When should I write Shopify stock down to NRV?
When you expect to sell it for less than cost after selling costs, usually because it is damaged, obsolete or out of season. You compare each line's cost with its net realisable value (expected selling price less costs to sell) and use the lower figure. The write-down reduces this year's profit.
Do I value stock held at a third-party fulfilment centre?
Yes. Stock you own is yours to value wherever it sits, including at a 3PL or fulfilment centre, and including goods in transit you legally own at year-end. Exclude goods you have already sold but not yet shipped, and any consignment stock you hold but do not own.
Do limited company Shopify sellers have to value stock?
Yes. Limited companies cannot use the cash basis, so they prepare accounts on the accruals basis under UK GAAP. That means valuing closing stock at the lower of cost and NRV every year-end and reflecting it in the company accounts and Corporation Tax computation.
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Key takeaways
- Closing stock at year-end sets your COGS, your gross profit and your taxable profit. Get it right.
- Value stock at the lower of cost and net realisable value, line by line, under FRS 102 or FRS 105.
- Cost means landed cost: purchase price plus inbound freight and duty. Use FIFO, not LIFO.
- Import duty goes into stock cost; recoverable import VAT and PVA do not.
- Sole traders can use the cash basis and skip stock adjustments, but limited companies cannot.
Talk to a Shopify-savvy accountant
Want your Shopify year-end stock and COGS done properly, with journals and write-downs that stand up to scrutiny? Book a free 20-minute call with a Zmartly accountant and we will sort your statutory accounts end to end.
