All orders that drop ship directly from suppliers via StorePorter Drop Ship integrations create sales transactions in the back office system using a single generic drop ship product. This allows for the sale of products that are not tracked in inventory in the back office. The generic product is created as a 'non-stock' or 'non-inventory' product type in the back office system when drop shipping is configured. This approach creates an accounting flow that differs from traditional retail accounting in the following ways:
- The product is not tracked in inventory, and never affects inventory value. This is actually what happens in the real world...the merchant never takes ownership of the product, and should not account for having done so.
- The initial order books as 100% profit, less sales tax liability. Again, at that moment in time, this is accurate...the merchant is paid by the customer for the sale but has not purchased the product that will be fulfilled: at this time there is no cost.
- When the invoice for the transaction is received from the supplier, the cost for the drop shipped product is posted immediately to the the Cost of Goods Sold account. Again, this is what is happening at that moment in time...the merchant is paying for a product that has already been purchased by a customer, shipped and will not be booked into inventory...COGS is all that remains to post.
We've prepared the following comparative charts to show some differences between typical retail accounting flow (purchase for inventory, sell from inventory) and drop ship accounting flow (sell to customer, pay supplier for fulfillment after shipment).
Drop Ship Accounting Flow
Here's a simple drop ship flow example. Yours may differ slightly...for instance, you may roll freight costs into cost of goods sold...but this is fairly common.
Typical Retail Accounting Flow
Here's a simple example of how a typical retail purchase/sales cycle might occur. Again, you may choose slightly different accounting.