Principal vs agent, the core question.
Principal means you control the goods before transfer to the customer; even briefly. You are the seller of record, you bear inventory risk (even on consignment), you set price, you face the customer for refunds. As principal, you book revenue gross. The cost of goods, even if invoiced from a supplier, is your COGS.
Agent means you are facilitating a sale between supplier and customer. You take a commission. The supplier is the seller of record, sets price, controls fulfillment, and faces returns. As agent, you book only the commission as revenue. Most Shopify drop shippers are principal under accounting standards even when they think they are an agent. The classification matters because gross-up vs net-down changes your reported revenue by 5-10x.
When does title transfer?
Title transfer is the moment you legally own the goods, even if briefly. For drop shippers using FOB-origin terms with the supplier, title transfers at the supplier’s warehouse the moment the order is placed and transfers to the customer at delivery. For AliExpress-based dropshippers, title often transfers at customs entry in the destination country.
On a $85 sale where the supplier invoices $42, the principal-model journal is: at order, debit Shopify clearing $85, credit Sales $85. At fulfillment, debit COGS $42, credit Accounts payable to supplier $42. The inventory line never moves because you never warehouse the goods. Gross margin is $43 or 51%.
Sales tax and nexus traps.
In the US, drop shipping creates surprising nexus exposure. The Wayfair decision lets states impose sales tax on remote sellers above economic thresholds (typically $100k revenue or 200 transactions). A drop shipper with no physical presence can still owe sales tax in 30+ states. Marketplace facilitator laws shift some of this to Shopify or Amazon when applicable.
For cross-border drop shipping (US to EU, UK to AU, etc.), the destination country’s rules govern. EU IOSS handles low-value B2C imports (under €150). UK VAT applies on imports under £135 collected by the marketplace. Australia GST applies on low-value imported goods. The principle: register where you have nexus, collect where required, remit promptly.
- US: state economic nexus thresholds, often $100k/year or 200 transactions
- EU: IOSS for B2C below €150, OSS for distance sales above thresholds
- UK: marketplace facilitator collects on imports below £135
- Always: keep tax in a separate liability account, never inside revenue
Supplier credit terms.
Drop shippers often pay suppliers on a different cycle than they receive payouts from Shopify. The 7-14 day Shopify payout creates a working-capital cushion if the supplier offers net-30 terms. The journal handles this naturally if you use Accounts payable: debit COGS, credit AP at order. Settle AP when you actually pay the supplier. Cash flows separately from accruals.
On 100 orders a month at $85 each with $42 supplier cost, you accrue $4,200 in AP through the month while collecting $8,500 in Shopify payouts. The cash gap looks like profit but is just a timing offset. Without proper AP accrual you would mistake working capital for income, then face a cash crunch when the supplier invoices land.
Returns are harder when you do not own the goods.
A Shopify drop ship return is mechanically harder than a stocked return. The customer ships back to you (or to the supplier directly), the supplier may or may not credit you, and the units are often damaged in transit and unsellable. The accounting must reflect this messy reality.
If the supplier issues a credit note for the returned unit: debit Accounts payable, credit COGS. Net result on margin is zero. If the supplier does not credit you: debit Inventory write-off, no change to AP, COGS stays. The customer’s refund still flows: debit Sales returns, credit Shopify clearing. The asymmetry between supplier credit and customer refund is normal in drop ship and needs its own line item.
Multi-supplier drop shipping.
Many Shopify drop shippers use multiple suppliers per SKU based on price or fulfillment speed. The cost basis of the same SKU varies by supplier. Without per-order cost tracking, your COGS is wrong on every order that does not use the default supplier.
The fix is order-level cost tagging. Every Shopify order records which supplier filled it and the actual supplier invoice cost. Nonari supports this via per-order cost overrides on the COGS line, so a SKU with three suppliers has accurate COGS regardless of routing.
Drop ship in a multi-branch model.
A merchant might run a drop-ship-only Shopify storefront alongside an Austin warehouse storefront and a London warehouse storefront. Each has different COGS dynamics: the drop ship branch has zero on-hand inventory, the warehouses have WAC-based stock. Nonari treats each as an online branch with its own connection and its own COGS rules.
On the drop ship branch, COGS posts to the supplier AP at order. On the stocked branches, COGS posts to inventory at WAC. P&L consolidates at org level so you can see which model is more profitable per category. Many merchants discover their drop ship category is less profitable than they thought once the principal-model accounting is honest.
Where Nonari fits.
Nonari treats drop ship orders as gross-up by default, with a per-branch toggle for agent-style net-down if you legitimately qualify. Supplier AP is auto-accrued at order time, customer refunds reverse cleanly, and supplier credit notes match against AP without reversing customer-facing entries. Per-order cost overrides handle multi-supplier routing without manual work.
For merchants running both stocked and drop ship inside one org, the unified ledger means a single P&L tells the truth about both. Tax liabilities accumulate per registration jurisdiction. FX from cross-border drop ship flows through the same multi-currency engine that handles stocked sales.