Before You Start

This guide assumes a basic understanding of e-commerce platforms and accounting principles. Familiarity with your platform’s reports will be beneficial.

Overview

30 min
Setup Time
Intermediate
Difficulty
Monthly
Review

What You’ll Learn

  • How revenue is recognized for dropshippers (Net vs. Gross method)
  • Calculating Cost of Goods Sold (COGS) without holding inventory
  • Handling merchant fees, shipping, and refunds correctly
  • Managing sales tax obligations in a dropshipping model

1. Essential Account Setup

Before recording any transactions, ensure these accounts are set up in your accounting software (e.g., QuickBooks Online):

Required Accounts

  • Dropship Revenue (Income)
  • Cost of Goods Sold - Dropship (Cost of Sales)
  • Payment Processor Fees (Expense)
  • Sales Tax Payable (Liability)
  • Payouts Clearing Account (Bank or Other Current Asset)

Recommended Accounts

  • Shipping Income (Income)
  • Shipping Expense (Cost of Sales or Expense)
  • Refunds & Allowances (Income)
  • Customer Discounts (Income)

2. Choosing Your Revenue Recognition Method

For dropshipping, how you recognize revenue is crucial. You have two primary options:

Method A: Gross Method

Recognize the full customer payment as revenue and the supplier payment as COGS.

Pros:
  • Simpler to implement.
  • Matches total cash flow.
  • Often default for basic integrations.
Cons:
  • Inflates revenue and COGS.
  • Less accurate reflection of margin.
  • May misrepresent business size.

Method B: Net Method

Recognize only your profit margin (selling price minus supplier cost) as revenue.

Pros:
  • GAAP compliant.
  • Accurate gross profit margin.
  • Clearer financial performance.
Cons:
  • More complex setup.
  • Requires detailed order data.
  • May need custom integrations.

Expert Tip: We strongly recommend the Net Method for dropshipping. This approach correctly reflects that you are acting as an agent, not a principal, in the transaction, only recognizing the gross profit as your revenue.

3. Step-by-Step: Implementing the Net Method

To accurately implement the Net Method, you’ll need to capture specific data points for each order: the customer’s payment, the supplier’s charge, and any shipping or tax. This typically involves using a specialized e-commerce connector or custom reporting.

Here is a sample data structure showing relevant information for a dropshipping order:

{
  "order_id": "DS-2025-001",
  "platform_sale_amount": 100.00,
  "supplier_cost_of_goods": 60.00,
  "shipping_charged_to_customer": 5.00,
  "shipping_paid_to_supplier": 4.00,
  "payment_processor_fee": 3.50,
  "sales_tax_collected": 8.00,
  "net_revenue": 40.00,
  "customer_id": "C-12345"
}

4. Recording Dropshipping Transactions

  1. 1

    Record the Customer Sale

    Debit Cash/Accounts Receivable (full customer payment), Credit Sales Tax Payable, and Credit Dropship Revenue (your profit margin + any shipping income).

  2. 2

    Record the Supplier Payment

    Debit Cost of Goods Sold - Dropship, Debit Shipping Expense, and Credit Cash/Accounts Payable (to supplier).

  3. 3

    Record Payment Processor Fees

    Debit Payment Processor Fees and Credit Cash/Bank (for the fees deducted from payouts).

Critical: Matching Payouts

Ensure your bank deposits from payment processors (e.g., Shopify Payments, PayPal) can be easily reconciled. The “Payouts Clearing Account” helps manage the timing difference between sales/expenses and the actual bank deposit.

5. Testing and Reconciliation

Reconciliation Checklist

  • Verify net revenue recognized matches expected profit margin
  • Confirm COGS reflects actual supplier costs accurately
  • Check all payment processor fees are recorded
  • Reconcile payout clearing account to zero monthly
  • Review sales tax collected vs. paid to authorities

Need Help?

Get Support

Struggling to implement the right accounting methods for your dropshipping business? Our expert team is here to help.

Contact Us