Ten terms decide whether an ecommerce founder can read their own books: gross versus net sales, cost of goods sold, landed cost, contribution margin, settlement reconciliation, accrual versus cash basis, inventory turnover, marketplace facilitator tax, Form 1099-K, and the chart of accounts. Each one below comes with a definition, a number, and the mistake that usually accompanies it.
1. Gross sales versus net sales
Gross sales is what customers paid before anything came off. Net sales is gross minus refunds, returns, discounts and allowances. Marketplace fees are not part of that subtraction; they are expenses that sit below net sales on the P&L.
The mistake: booking the marketplace deposit as sales. A seller with $18,400 in gross sales, $1,120 in refunds and $5,252 in fees who records a $12,028 deposit as revenue has understated sales by a third and hidden every fee. Revenue is $18,400. Net sales is $17,280. The rest is cost.
2. Cost of goods sold (COGS)
COGS is the cost of the units you sold in the period, not the cost of the units you bought. The two are equal only in a business that buys and sells the same quantity every month, which is no business. The IRS explains in Publication 538 that when inventory is necessary to account for income, purchases and sales generally have to be tracked on an accrual basis, so that cost lines up with the sale it belongs to.
The number to know: COGS as a percentage of sales is the inverse of gross margin. Aswath Damodaran’s January 2026 dataset of US public companies puts COGS/Sales at 43.12 percent for apparel and 69.72 percent for furniture and home furnishings. Your category sets the range; your sourcing sets where you land in it.
3. Landed cost
Landed cost is what a unit costs by the time it is sitting in a warehouse ready to sell: factory price plus freight, duties, insurance, inbound handling, and any prep or labeling. A $6.00 unit with $1.10 in ocean freight, $0.45 in duty and $0.30 in prep has a landed cost of $7.85, and $7.85 is the number that belongs in COGS.
The mistake: using the supplier invoice as unit cost and expensing freight and duty separately in the month they were paid. Margin per SKU is then overstated all year, and the true cost only shows up as an unexplained expense line.
4. Contribution margin
Contribution margin is what a unit contributes after every variable cost tied to selling it: landed cost, referral fee, fulfillment fee, payment processing, per-unit advertising, and the expected cost of returns. It is the number that tells you whether selling one more unit helps or hurts.
A $24 product with $7.85 landed cost, a $3.60 referral fee, $4.46 fulfillment, $0.60 in per-unit ad spend and $0.40 in expected returns contributes $7.09. Gross margin on the same product is $16.15. The gap between those two figures is why “we have 67 percent margins” and “we lost money this quarter” can both be true.
5. Settlement reconciliation
A settlement is a marketplace’s periodic payout statement: every sale, refund, fee and adjustment for the cycle, netted to a deposit. Reconciling it means proving that gross sales less all of those items equals the cash that arrived. Amazon, Walmart, eBay, TikTok Shop and Shopify Payments each produce one on their own schedule, in their own format, with their own fee names.
This is the step most sellers skip and the one most accountants insist on, because an unreconciled settlement is an unverified revenue figure. Software built for the job, ConnectBooks among them, reads each marketplace’s settlement file and posts sales, fees, refunds and COGS to QuickBooks or Xero as separate lines so the deposit ties by construction. Whether you use a tool or a spreadsheet, the test is the same: does the cash movement equal the report?
6. Accrual versus cash basis
Cash basis records income when money arrives and expenses when money leaves. Accrual records income when it is earned and expenses when they are incurred, matching cost to the sale it produced. For an inventory business the difference is not academic: a $60,000 inventory purchase in October looks like a $60,000 loss on cash basis and like an asset on accrual.
Publication 538 also describes a small business taxpayer exception, currently tied to average annual gross receipts of $26 million or less over the prior three years (indexed for inflation), that permits simpler methods for tax purposes. Many sellers under that threshold still keep accrual management books because the cash-basis version cannot answer the margin question. Ask a tax professional which method to file on; keep accrual books to run the business.
7. Inventory turnover
Inventory turnover is COGS divided by average inventory at cost. A seller with $600,000 in annual COGS and $100,000 of average inventory turns six times, or roughly every 61 days. Turn twice a year and you have six months of cash sitting on shelves; turn eight times and it is six weeks.
The mistake: computing it from sales instead of COGS, which mixes a retail figure with a cost figure and inflates the ratio, or leaving out inventory at a 3PL or in transit, which understates the denominator.
8. Marketplace facilitator tax
Most US states now require marketplaces to collect and remit sales tax on third-party sales, which is why a settlement report shows tax collected and tax remitted as offsetting lines. The seller’s books should record neither as revenue nor as expense; it is a pass-through.
What facilitator rules do not do is eliminate the seller’s own obligations. Sales through your own site, sales into states where you have physical presence, and registration requirements vary by state. This is not tax advice. Check the department of revenue in each state where you sell, and get a professional to confirm.
9. Form 1099-K
Form 1099-K is the information return marketplaces and payment processors send to sellers and to the IRS reporting gross payment volume. The IRS page on understanding your Form 1099-K stresses two things: the form reports gross amounts, before fees and refunds, and all income is reportable whether or not a form arrives.
If your books carry gross sales in a sales account and fees in their own accounts (see term 1), the 1099-K ties to the sales account and tax prep takes an afternoon. If they carry net deposits, January becomes a reconstruction project.
10. Chart of accounts
The chart of accounts is the list of every account the ledger can post to. A generic small-business chart has one “Sales” account and one “Merchant fees” account. An ecommerce chart needs sales by channel, refunds by channel, referral fees, fulfillment fees, storage fees, advertising by channel, payment processing, inventory as an asset, COGS, and clearing accounts for each marketplace’s undeposited balance.
The number of accounts is less important than the principle: if you will ever want to compare two things, they need to be in separate accounts from day one. Splitting a year of blended fees after the fact is possible but miserable.
Why these ten
Together they answer the four questions a product business has to be able to answer at any moment: what did we sell, what did it cost us, what did we keep, and can we prove it. Terms 1 through 4 cover the first three. Terms 5, 9 and 10 cover proof. Terms 6, 7 and 8 cover the places where timing and tax rules distort the picture if you let them. A founder who can define all ten without looking can read a P&L and tell whether it is lying.