# Treatment of Inventory & COGS Categories

What happens when you categorize a transaction to an inventory category? This article will help you understand how this impacts your books

Written by Emily Burrows  
January 27, 2026

# About

Finaloop gives you the flexibility to choose from **three inventory and COGS tracking methods**, so you can pick the one that fits your business best:

- Purchase-based COGS  
- Sales-based COGS  
- Unit-based COGS (InventoryIQ).

Each method treats inventory purchases a bit differently. This article breaks down the different inventory-related categories in Finaloop and explains how they’re handled depending on the COGS method you use.

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# 1. Inventory & COGS categories in Finaloop

When a transaction from your bank/credit card or from a bill is categorized into any of the categories listed below, Finaloop automatically tags this as inventory-related.

These categories include:

- Finished products (via dropshipping)
- Finished products
- Shipping & freight-in
- Supplies & materials
- Packaging materials
- Production costs
- Consignment
- Custom fees & services
- Other inventory indirect costs
- Production labor costs
- Duties & tax
- Inventory insurance
- Pallet costs
- Shipping surcharge
- Vendor fees
- Warranty reimbursement

How Finaloop treats transactions in these categories depends on your selected COGS tracking method.

**Heads up**: There are three inventory-related categories that are always treated as an expense, no matter which COGS tracking method you’re using.

These items won’t impact your inventory balance—instead, they’ll show up directly in your Profit & Loss (P&L) in the relevant expense or COGS category.

These exceptions include:

- Dead inventory
- Product donations
- Product giveaways

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# 2. **Purchase-based COGS method**

With purchase-based COGS, we recognize the cost of goods sold **when you buy inventory**, not when you sell it.

- Any transaction in the categories above will **increase your COGS** on the Profit & Loss (P&L).
- These purchases **won’t affect your inventory balance** on the Balance Sheet.

📌 **Key takeaway:** Expenses hit your books right away, even if you haven’t sold the products yet. Learn more [here.](https://help.finaloop.com/en/articles/9570599-purchase-based-cogs-everything-you-need-to-know)

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# **3. Sales-based COGS method**

With sales-based COGS, we recognize your cost of goods sold **only when you make a sale**.

- Transactions in the above categories will **increase your Inventory** on the Balance Sheet.
- They **won’t impact your COGS** on the P&L at the time of purchase.
- Your COGS will be recognized **only when products are sold**, using:
  - The cost per unit synced from Shopify, or
  - The COGS data you input in Finaloop’s Inventory module.

**⚠️ Exceptions:**

You can change the purchase type for specific transactions on your **Purchases** tab or set default rules for specific vendors or categories to treat their transactions as **COGS** (e.g., packaging materials or labels) or as **dropshipping** instead of the default inventory treatment.

1. **COGS**
   - Treating transactions as **COGS** will:
     - Directly increase your **COGS** in the P&L at the time of purchase, and
     - Won’t impact your **Inventory** on the Balance Sheet.

2. **Dropshipping**
   - Depending on your dropshipping set up, purchases marked as dropshipping will either:
     - Directly increase your **COGS** balance with no impact on inventory, OR
     - Will reduce your **Inventory Vendors - Dropshipping** AP balance. In this case, dropshipping COGS are recorded based on an average dropshipping cost per unit you provide for each product.

📌 **Key takeaway:** COGS will only hit your P&L when you sell products, not when you purchase them, unless you mark a purchase as COGS or dropshipping. Learn more [here.](https://help.finaloop.com/en/articles/9419220-sales-based-cogs-everything-you-need-to-know)

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# **4. Unit-based COGS method with InventoryIQ**

With InventoryIQ, COGS are recorded **when you sell products**, based on detailed purchase order (PO) data you manage in Finaloop.

Here’s how it works:
- You add a **Purchase Order (PO)** in InventoryIQ.
- This increases your **Inventory** on the Balance Sheet and also increases a separate account called **“Vendor POs - rolling balance.”** This account reflects the open balance owed for inventory that’s been ordered but not yet paid for.
- When you categorize a payment (from a bank, credit card, or bill) using one of the inventory-related categories listed above, it **reduces the “Vendor POs - rolling balance”** accordingly.

**⚠️ Exception:**

You can change the purchase type for specific transactions on your **Bills & Payments** tab or set default rules for specific vendors or categories to treat their transactions as **COGS** (e.g., packaging materials or labels) instead of the default inventory treatment.

📌 **Key takeaway:** COGS will only hit your P&L when you sell products, not when you purchase them, unless you mark a purchase as COGS.