What drop shipping actually is.
In a drop ship arrangement, a customer orders from your shop. You order from your supplier. Your supplier ships directly to the customer. You never physically hold the goods. The financial transaction is: customer pays you, you pay supplier, supplier ships. Title passes from supplier to you to customer in a near-instant cascade.
For sellers serving local or international customers via drop ship, the typical setup involves a wholesale supplier (often in China, Vietnam, or Mexico) and ecommerce platforms like Shopify, Amazon, eBay, or your own site. The accounting question is when revenue is recognized, when COGS hits the books, and what inventory shows up where.
The passing-title moment.
Under IFRS 15 (revenue recognition), revenue is recognized when control transfers to the customer. For drop shipping, this is typically when the goods are delivered to the customer, not when the customer paid you and not when you paid the supplier. The supplier shipping to the customer creates a gap — sometimes hours, sometimes weeks — between order and revenue recognition.
The clean accounting captures three moments. Order: customer pays you (Debit Cash, Credit Customer Deposit / Deferred Revenue). You order from supplier (Debit Inventory In-Transit, Credit Accounts Payable). Delivery to customer: revenue is earned (Debit Deferred Revenue, Credit Sales) and COGS posts (Debit COGS, Credit Inventory In-Transit). Until delivery, your books carry the inventory in-transit and the deferred revenue — an asset and a liability of similar size.
A worked example: 30-day drop ship cycle.
A Brisbane drop shipper sells phone cases via Shopify. October 1: customer orders one case, pays AUD 25.00. October 1: drop shipper orders from Vietnamese supplier at AUD 10.00 plus AUD 3.50 shipping. October 5: supplier ships from Vietnam to customer. October 25: customer receives.
Books on October 1: Debit Cash 25.00, Credit Customer Deposits 25.00. Debit Inventory In-Transit 13.50, Credit Accounts Payable 13.50. Books on October 25: Debit Customer Deposits 25.00, Credit Sales 25.00. Debit COGS 13.50, Credit Inventory In-Transit 13.50. Net result on month-end October if order is delivered: revenue 25.00, COGS 13.50, gross profit 11.50. If not yet delivered: deferred revenue 25.00 sits as liability, inventory in-transit 13.50 sits as asset, no revenue or COGS yet.
Common drop shipping accounting mistakes.
Mistake 1: recognizing revenue at order. The cash arrived, looks like a sale, owner books it as sales. But control has not passed; the goods have not even left the supplier. This overstates revenue at month-end and creates a reversal headache when goods are eventually delivered or returns happen.
Mistake 2: not booking COGS at all because "we never held the inventory." Wrong — you took title for the moment of resale, even if briefly. The economic substance is that you bought and resold; the books need to reflect both legs. Mistake 3: treating supplier payments as expense. The payment to supplier is for goods, not an expense — it goes to inventory or in-transit, then to COGS on delivery, not to a generic "purchases" expense line.
- Recognize revenue at delivery, not at order
- Record COGS at delivery, against inventory in-transit
- Customer payment before delivery = deferred revenue (liability)
- Supplier payment for goods = inventory in-transit (asset), not expense
Returns and refunds in drop shipping.
Returns are the painful part. The customer returns the goods to you (or sometimes to the supplier directly). If to you, you now hold inventory you never planned to hold. If to the supplier, you might never see the goods and need an RMA from the supplier. The accounting reverses the original sale and COGS, but with extra steps.
If returned to your warehouse: Debit Sales Returns, Credit Cash (or refund payable), Debit Inventory at WAC, Credit COGS. The goods now sit in your inventory until you resell, return to supplier, or write off. If returned to supplier with RMA: same revenue and COGS reversal, plus Debit Accounts Payable / Refund Receivable from Supplier, Credit Inventory In-Transit. The supplier credits you for the return; you credit the customer.
Marketplace fees and platform charges.
Drop shipping rarely happens on your own site alone. Platforms like Shopify, Amazon, and eBay charge commission, payment gateways take a percentage, advertising costs accrue per sale. These are operating expenses, not COGS — they reduce gross margin contribution but do not adjust inventory cost.
A clean P&L: Revenue 25.00, COGS 13.50 = gross profit 11.50. Then platform commission 2.50 (10%), payment gateway 0.50 (2%), ad cost per sale 1.50 (estimated from total ad spend / orders) = 4.50 in operating expense. Contribution: 7.00. The COGS line stays clean for inventory and cost-of-sale analysis; the platform costs are visible separately and can be optimized separately.
How nonari handles drop shipping.
Nonari supports a drop ship workflow: a sales order created against a customer can be flagged as drop ship and linked to a purchase order to a supplier. The system automatically creates the inventory in-transit record on supplier order, defers revenue on customer payment, and posts both sales recognition and COGS when delivery is confirmed.
Multi-supplier drop ship is supported — a customer order can be split across two suppliers if they fulfil different SKUs in the same order. Returns are handled with a clear RMA workflow that distinguishes between returns to your warehouse versus returns directly to supplier. The result: drop shipping has the same accounting rigor as held-inventory selling, with all the operational lightness drop shipping promises.