Cost of goods sold is an accounting item reported on the income statement that details the total costs of the products or merchandise sold by a business and considered an expense during a reporting period. COGS is important for any business to track for one main reason: it is used to calculate gross profit. Gross profit is the business’ profit before operating expenses, taxes, or interest payments.The basic formula for calculating COGS is: COGS = beginning inventory costs + cost of inventory purchased during the year – ending inventoryFor example, if beginning inventory was $25,000, purchases were $10,000, and ending inventory was $18,000, then the COGS calculation is:COGS = $25,000 + $10,000 – $18,000 = $17,000E-commerce businesses want to make sure correct COGS numbers are recorded since they are critical to accurate accounting. Many online e-commerce service providers, such as Shopify and WooCommerce, do not provide COGS information to business owners. If you own an e-commerce business, it’s important to do this calculation yourself. E-commerce businesses need to keep their gross margins high just like any other business, but they can’t calculate these figures if only revenue data is available. Knowing your COGS can also have a big impact on business strategy, such as maintaining your pricing strategy or taking actions to reduce inventory costs.Tips for tracking COGS include confirming that receipts for every single purchase order are received, logged, and backed up on various systems. Any warehousing costs that exist should be accurately tracked and allocated to the correct products. Business owners should also confirm the time tracking software used for all employees is current and everyone understands how to use it correctly so precise labour costs can be added to COGS.Having redundant tracking systems and spreadsheets in place, and reconciling them regularly, ensures all cost data is properly accounted for each accounting period.