Before You Start

This guide assumes you have your product list and sales data ready, along with administrator access to your accounting software (QuickBooks/Xero) and any third-party inventory management system (e.g., Dear Systems, Katana).

Overview

60 min
Setup Time
Advanced
Difficulty
Monthly
Maintenance

What You’ll Learn

  • How to integrate external inventory management software
  • Calculating and tracking Cost of Goods Sold (COGS) accurately
  • Understanding and applying inventory valuation methods (FIFO, LIFO)
  • Reconciling inventory variance and adjustments
  • Best practices for accurate inventory reporting for tax purposes

1. Preparation Steps

Before integrating, ensure these accounts are correctly set up in your accounting system (QuickBooks/Xero):

Required Accounts

  • Inventory Asset (Other Current Asset)
  • Cost of Goods Sold (Cost of Sales)
  • Inventory Adjustments (Expense)
  • Sales Income (Income)

Optional (but recommended)

  • Inventory Variance (Expense)
  • Goods in Transit (Other Current Asset)
  • Obsolete Inventory (Expense)

2. Choosing Your Inventory Valuation Method

You have primary valuation methods, each with significant implications.

Method A: FIFO (First-In, First-Out)

Assumes the first inventory purchased is the first sold.

Pros:
  • Matches physical flow for most businesses.
  • Reflects current market value on balance sheet.
  • Generally accepted by GAAP and IFRS.
Cons:
  • Higher taxable income in periods of rising costs.
  • Can be more complex to track specific inventory layers.
  • May overstate profit if costs are increasing.

Method B: LIFO (Last-In, First-Out)

Assumes the last inventory purchased is the first sold.

Pros:
  • Lower taxable income in periods of rising costs.
  • Matches recent costs against recent revenues.
  • Tax benefits in inflationary environments.
Cons:
  • Not permitted under IFRS (international standards).
  • May not reflect physical flow of goods.
  • Can result in older, lower costs on the balance sheet.

Expert Tip: For most e-commerce businesses, especially those with non-perishable goods, a Perpetual FIFO system offers the most accurate real-time inventory and COGS tracking. It’s also widely accepted globally.

3. Step-by-Step: Integrating Advanced Inventory

Accurate inventory integration requires a careful flow of data from your sales channels to your inventory management system, and then to your accounting software. This ensures COGS is calculated correctly and inventory values are always up to date.

Here is a sample data structure for an inventory update via API.

{
  "sku": "ADV-INV-BOOK",
  "quantity_on_hand": 500,
  "last_cost": 12.50,
  "valuation_method": "FIFO",
  "warehouse_id": "WH001"
}

4. Setting Up Your Inventory App (e.g., Dear Systems)

  1. 1

    Connect Inventory App to Accounting Software

    Authorize your chosen inventory management system (e.g., Dear, Katana) to connect with QuickBooks or Xero. Ensure proper API permissions and data synchronisation settings.

  2. 2

    Map Inventory Accounts

    Carefully map all inventory-related accounts: Inventory Asset, COGS, Inventory Adjustments, and Sales. This is crucial for accurate syncs and financial reporting.

  3. 3

    Configure Valuation Method

    Set your preferred inventory valuation method (FIFO, LIFO, Weighted Average) within your inventory app’s settings. This will dictate how Cost of Goods Sold is calculated for each item.

Common Error: Mismatched Item SKUs

Ensure SKUs (Stock Keeping Units) in your inventory app perfectly match those in your accounting software. Discrepancies between systems will lead to sync errors and inaccurate COGS calculations.

5. Testing Your Setup

Test Import Checklist

  • Perform a test sale and track its lifecycle through both systems
  • Verify COGS is accurately posted for the test sale in your accounting software
  • Check inventory asset balances after sales and purchases are recorded
  • Run an inventory valuation report from your app and compare it to your accounting system’s balance
  • Confirm inventory adjustments (returns, damages, write-offs) are correctly recorded

Need Help?

Get Expert Inventory Help

Advanced inventory setups can be complex. Let our specialists ensure your COGS and valuation are spot on, saving you time and preventing costly errors.

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