Bookkeeping Basics · Edmonton
Inventory and cost of goods sold, made clear.
Stock you buy isn't an expense until you sell it. Here's how inventory and COGS work, with the formula, the journal entries and the year-end count that ties it all together.
By the Plum team- Updated Oct 2026
- 10 min read
- Stock you buy to resell is an asset (inventory) until it's sold.
- When it sells, its cost moves to cost of goods sold, an expense.
- COGS = opening inventory + purchases − closing inventory.
- Count your stock at year end. That number drives your COGS and your tax.
If you sell physical products, whether it's a boutique on 124 Street, an Etsy shop or a contractor's materials stock, inventory and cost of goods sold are the two numbers that decide whether your profit is real. Get them wrong and your books can show a loss in a great year or a profit in a bad one.
This guide explains how inventory and COGS relate, works through both ways of tracking them with real numbers, covers the CRA rules for Canadian businesses, and shows how QuickBooks Online handles it.
1The big idea: costs follow the sale
Accrual bookkeeping matches costs to the revenue they help earn. When you buy 50 handbags, you haven't spent that money on anything that's earned revenue yet; you've swapped cash for stock. So the purchase goes on your balance sheet as inventory, an asset.
When you sell a handbag, two things happen: you record the sale, and the cost of that one bag moves from inventory to cost of goods sold on your profit and loss statement. Sales minus COGS is your gross profit, the money left over to pay rent, wages and yourself. Our guide on how to read a profit and loss statement shows where it sits.
2Method 1: periodic inventory (the year-end count)
Many small businesses don't track every item as it sells. They record purchases through the year and count what's left at the end. COGS is then worked out with one formula.
Say you run a small home goods shop in Sherwood Park. Here's one year:
| Line | Amount |
|---|---|
| Opening inventory (last year's closing count) | $8,000 |
| Plus: purchases of stock during the year | $22,000 |
| Plus: freight and duties to bring stock in | $1,000 |
| Equals: goods available for sale | $31,000 |
| Less: closing inventory (this year's count) | ($9,500) |
| Cost of goods sold | $21,500 |
| Sales (before GST) | $48,000 |
| Gross profit | $26,500 (about 55%) |
Look at what the count does. If you'd lazily skipped it and assumed closing inventory equalled opening ($8,000), COGS would be $23,000 and profit $1,500 lower. If you'd overcounted at $12,000, profit would be $2,500 too high. The count is not a formality.
The year-end adjusting entry
If purchases are booked to an inventory account during the year, a year-end entry moves the used-up amount to COGS. With $31,000 of goods available and $9,500 counted, the entry is:
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $21,500.00 | |
| Inventory (asset) | $21,500.00 | |
| Total | $21,500.00 | $21,500.00 |
That leaves the inventory account at exactly $9,500, matching the count. Entries like this are covered in more depth in our guide to adjusting journal entries.
3Method 2: perpetual inventory (tracked as you go)
With perpetual tracking, your software records the cost of each item as it sells. Say the same shop is GST-registered and buys 50 handbags at $40 each.
Buying the stock
| Account | Debit | Credit |
|---|---|---|
| Inventory (asset) | $2,000.00 | |
| GST/HST payable (input tax credit) | $100.00 | |
| Accounts payable | $2,100.00 | |
| Total | $2,100.00 | $2,100.00 |
Note that you claim the GST on inventory purchases when you buy, not when you sell. See our accounts payable process for how bills like this flow.
Selling 10 bags at $95 each
| Account | Debit | Credit |
|---|---|---|
| Bank | $997.50 | |
| Cost of goods sold | $400.00 | |
| Sales | $950.00 | |
| GST/HST payable | $47.50 | |
| Inventory (asset) | $400.00 | |
| Total | $1,397.50 | $1,397.50 |
Inventory now holds 40 bags at $1,600. Gross profit on the sale is $950 minus $400, or $550. You still count at year end; the count just confirms (or corrects) what the software thinks you have. Any difference is shrinkage: theft, damage, samples or miscounts.
4What goes into inventory cost
- In: the purchase price of goods, freight and duties to get them to you, and for makers, the raw materials that go into finished products.
- Not in: GST you can claim back, shipping to customers (a selling expense), marketplace and payment fees, office and cleaning supplies, and rent.
- Makers: if you make what you sell, track raw materials, work in progress and finished goods. A sole proprietor's own time isn't a cost you add to inventory. Our guide to Etsy seller taxes has maker-specific tips.
5Canadian rules for inventory
- Valuation. CRA generally lets you value inventory at the lower of cost and fair market value, or at fair market value, and you have to be consistent year to year. Damaged or obsolete stock can often be written down; ask your accountant how.
- Sole proprietors report opening inventory, purchases and closing inventory in the cost of goods sold section of the T2125. Corporations report it on the T2 financial statements.
- Closing inventory carries forward. This year's closing count becomes next year's opening inventory. Get it wrong once and both years are off.
- Hold on to the count sheets. CRA expects records that support your closing inventory, kept for six years from the end of the tax year they relate to.
- Personal use. Stock you take home for yourself isn't a cost of the business. Remove it at cost.
6Gross margin: the number to watch
Once inventory and COGS are right, you can trust your gross margin: gross profit divided by sales. In the periodic example, $26,500 ÷ $48,000 is about 55%. That means every $100 of sales leaves about $55 to cover rent, wages, marketing and profit.
Track it monthly or quarterly. A falling margin usually means one of a few things:
- Supplier prices went up and your prices didn't.
- You're discounting more than you realize.
- Shrinkage: stock is being damaged, stolen or given away.
- A bookkeeping problem, like purchases going to COGS that should be inventory, or a missed count adjustment.
The last one is more common than people expect. If margin jumps around wildly from month to month with no change in your business, check the bookkeeping before you change your prices.
7Inventory in QuickBooks Online
- Plan level: quantity tracking is available in QuickBooks Online Plus and Advanced. Simple Start and Essentials can record purchases and COGS, but not stock levels.
- Turn it on: in Account and settings, under Sales, switch on tracking inventory quantity on hand.
- Set up products: in your Products and services list, create each product as an Inventory item with its starting quantity, an as-of date, the inventory asset account, income account and expense (COGS) account.
- Buying and selling: bills and purchase orders add stock; invoices and sales receipts reduce it and post COGS automatically, using first in, first out (FIFO).
- After your count: record differences with an inventory quantity adjustment (from + New), so QuickBooks matches the shelf.
If you sell through Shopify, Square or Etsy, decide which system is the source of truth for stock. Tracking quantities in two places that don't talk to each other usually means both are wrong.
8Common inventory mistakes
1. Expensing every purchase as COGS
Easy, but it only works if inventory levels never change. A growing business that expenses everything understates profit one year and overstates it later.
2. Skipping the year-end count
Without a count, closing inventory is a guess, and so is your profit.
3. Opening balance that doesn't match last year
If last year's tax return says closing inventory was $8,000, this year's opening must be $8,000.
4. Mixing supplies with stock
Cleaning products for the shop are supplies. Products you resell are inventory. Track them in separate accounts.
9Year-end count checklist
Plum tracks inventory and COGS for retailers, makers and online sellers in Edmonton, Sherwood Park, St. Albert and Spruce Grove. If your gross margin looks off, book a call and we'll find out why.
10Questions people ask
What is cost of goods sold?
Cost of goods sold (COGS) is what the products you actually sold during a period cost you to buy or make. It's calculated as opening inventory plus purchases minus closing inventory, and it's subtracted from sales to get your gross profit.
Is inventory an expense?
Not when you buy it. Inventory you haven't sold yet is an asset on your balance sheet. It becomes an expense, cost of goods sold, when you sell it. That's why buying a lot of stock in December doesn't reduce that year's profit.
Do I need to count inventory at year end in Canada?
If inventory is a meaningful part of your business, yes. CRA expects you to report your closing inventory, and a physical count is the most reliable way to get it. Store your count sheets with your records.
How does CRA want inventory valued?
Generally, you can value inventory at the lower of cost and fair market value, or at fair market value, and you have to use the same method consistently from year to year. Ask your accountant which method suits your business.
Does QuickBooks Online track inventory?
QuickBooks Online Plus and Advanced can track inventory quantities and calculate cost of goods sold automatically using first in, first out (FIFO). Simple Start and Essentials don't track inventory quantities.
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Book a free 15-min callThis article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.