17 Sept 2026 · ECOMCA Team
D2C Accounting Basics: Chart of Accounts and COGS
D2C Accounting Basics: Chart of Accounts, COGS Mapping, and Contribution Margin
A brand selling on its own website and on Amazon in the same month is not running one business. It is running two, with two cost structures, two payout cycles, and usually two very different margins. Most founders find this out only when they try to answer a simple question — "which channel is actually making money" — and the books cannot tell them.
This gap is almost always structural, not a bookkeeping error. A chart of accounts copied from a generic Tally or Zoho Books template, built for a trading business or a service firm, simply has no place to hold channel-wise revenue, marketplace fees, or RTO loss separately. Once that structure is missing at the ledger level, no report built on top of it — however well formatted — can show true channel profitability.
Key takeaways
- A D2C chart of accounts needs revenue, COGS and fee accounts split by channel (D2C site, Amazon, Flipkart, and so on), not one blended set of ledgers.
- FIFO (First-In-First-Out) is the inventory costing method permitted under Indian accounting standards; LIFO is not allowed under AS 2 or Ind AS 2.
- Landed cost — purchase price plus inbound freight, customs duty where imported, and other direct procurement cost — is what should flow into COGS per unit, not the invoice price alone.
- Contribution Margin 1, 2 and 3 are layered profitability views: CM1 after direct selling cost, CM2 after variable marketing, CM3 after variable fulfilment cost, all before fixed overheads.
- There is no single regulatory definition of CM1/2/3 — the terms are a management accounting convention, and firms define the layers slightly differently. Consistency within your own reporting matters more than matching someone else's exact formula.
Why a generic chart of accounts does not work for a D2C brand
A standard chart of accounts groups revenue into one "Sales" ledger and cost into one "Purchases" or "COGS" ledger. That works for a business with one sales channel and one supplier chain. A multi-channel D2C brand has neither.
Revenue arrives through at least three different mechanisms: direct payment gateway settlement for the website, marketplace payout net of commission and fees for Amazon or Flipkart, and sometimes cash-on-delivery collection through a courier partner. Cost is not one number either — product cost, marketplace commission, payment gateway charge, shipping, and return cost all behave differently by channel and need their own ledger heads to be traceable back to a decision.
The fix is to design the chart of accounts around channels first, and account types second.
| Account head | Type | Why it needs to be separate |
|---|---|---|
| Sales – D2C Website | Revenue | Gross of returns, before gateway fee |
| Sales – Amazon / Sales – Flipkart | Revenue | Recorded at gross order value, not net payout |
| Sales Returns & RTO – by channel | Revenue (contra) | RTO behaves very differently on COD vs prepaid |
| Inventory – Finished Goods | Asset | Valued on FIFO |
| Inventory in Transit | Asset | Goods dispatched to marketplace fulfilment centres |
| COGS – D2C / COGS – Marketplace | Expense | Same SKU, cost is identical, but margin differs by channel |
| Marketplace Commission & Fees | Expense | Amazon and Flipkart charge differently; keep separate |
| Payment Gateway Charges | Expense | Applies to D2C site collections only |
| Freight Outward & RTO Cost | Expense | The single largest hidden cost in most D2C P&Ls |
| Ad Spend – Meta / Google / Marketplace Ads | Expense | Needed to compute CM2 by channel |
| Marketplace Receivable – Amazon | Asset | For reconciling settlement reports against books |
Table: illustrative D2C chart of accounts structure, channel-first. Not exhaustive — GST-related ledgers (Output GST, Input Tax Credit, GST rationalised under the 0%/5%/18%/40% structure effective 22 September 2025) sit alongside these and are outside the scope of this post.
The same SKU sold on the website and on Amazon should hit two different COGS ledgers even though the unit cost is identical, because the point of the split is not the cost — it is the ability to subtract channel-specific fees from channel-specific revenue later without manual allocation.
FIFO-based COGS mapping
Under Indian Generally Accepted Accounting Principles, inventory is valued using either the First-In-First-Out (FIFO) method or the weighted average cost method. Both AS 2 (Valuation of Inventories) and Ind AS 2 permit these two formulas; the Last-In-First-Out (LIFO) method is not a permitted cost formula under Indian GAAP or Ind AS. Most D2C brands running FIFO in practice do so because it matches physical stock flow reasonably well and because inventory management systems (Shopify, Unicommerce, and similar) are typically built around FIFO or batch-wise lot tracking by default.
FIFO means the earliest purchased (or manufactured) batch of a SKU is treated as the one sold first, regardless of which physical unit actually left the warehouse. When cost per unit changes between batches — a common situation given raw material price movement or a change in vendor — the COGS recognised on a sale depends on which batch is deemed to have been consumed.
Two things go wrong most often in D2C COGS mapping:
First, brands record COGS at the base purchase price only, ignoring landed cost. The correct cost to carry into inventory is the landed cost per unit: purchase price, plus inbound freight to the warehouse, plus customs duty and clearing charges if the input is imported, plus any packaging or labelling cost incurred before the unit is sale-ready. Leaving freight or duty as a general expense instead of loading it into inventory cost understates COGS and overstates margin, sometimes by a meaningful amount for bulky or imported products.
Second, RTO and returned inventory are often written off or ignored instead of being reversed back into stock at the correct cost. When a COD order is returned undelivered, the COGS booked at the time of dispatch should be reversed, and the unit should re-enter inventory — at original cost if resaleable as new, or at a written-down value if the packaging is damaged and the unit will need to be sold as a second or scrapped. Skipping this reversal inflates COGS for the period and understates closing stock, which distorts every margin calculation downstream.
Contribution Margin 1, 2 and 3
Contribution margin, in general management accounting terms, is revenue less the variable costs directly attributable to generating that revenue. For a D2C brand, one layer is not enough because "variable cost" covers several categories that behave very differently — product cost, selling cost, marketing cost, and fulfilment cost — and lumping them together hides which lever actually moved the margin.
There is no statutory or accounting-standard definition of "CM1", "CM2" or "CM3" — these are management reporting conventions used across the D2C sector, and different practitioners draw the lines slightly differently. The layering below is a common and defensible convention; what matters more than matching it exactly is applying the same definition consistently, period over period and channel over channel, so the numbers are comparable.
- Contribution Margin 1 (CM1): Net revenue, minus COGS, minus direct selling costs — payment gateway charges, marketplace commission, and shipping/RTO cost.
- Contribution Margin 2 (CM2): CM1, minus variable marketing spend attributable to that channel (paid ads, influencer payouts tied to performance, discounts and coupon cost).
- Contribution Margin 3 (CM3): CM2, minus other variable fulfilment cost that scales with order volume — pick-and-pack labour, packaging materials, warehouse handling — but before fixed overheads like rent, salaries, and software subscriptions.
Worked example
A brand sells the same product range on its own website and on Amazon in a given month.
| Particulars | D2C Website | Amazon |
|---|---|---|
| Net revenue (post returns) | ₹40,00,000 | ₹60,00,000 |
| Less: COGS (FIFO) | ₹14,00,000 | ₹21,00,000 |
| Less: Payment gateway / marketplace commission | ₹80,000 | ₹12,00,000 |
| Less: Shipping & RTO cost | ₹3,20,000 | ₹2,50,000 |
| Contribution Margin 1 | ₹22,00,000 (55.0%) | ₹24,50,000 (40.8%) |
| Less: Variable marketing spend | ₹9,00,000 | ₹4,50,000 |
| Contribution Margin 2 | ₹13,00,000 (32.5%) | ₹20,00,000 (33.3%) |
| Less: Variable fulfilment cost | ₹2,00,000 | ₹1,00,000 |
| Contribution Margin 3 | ₹11,00,000 (27.5%) | ₹19,00,000 (31.7%) |
Table: illustrative worked example, figures for one calendar month, for a hypothetical brand. Percentages are of net revenue for that channel.
The website looks far stronger at CM1 — no commission, and it holds a 55% margin against Amazon's 40.8%. But the website needs its own paid marketing to generate that revenue, while a meaningful share of Amazon's volume arrives organically through search and repeat purchase on the platform. By CM3, Amazon has actually overtaken the website on margin percentage. A brand looking only at CM1, or only at a blended P&L, would have drawn the wrong conclusion about where to put next month's ad budget.
What to actually do
A brand setting this up for the first time should start by splitting revenue and COGS ledgers by channel in the accounting software before anything else — this is a one-time chart of accounts change, not a monthly workaround. Next, confirm the inventory module is actually costing on FIFO and not defaulting to a simple average, since many systems default differently depending on configuration. Landed cost — freight, duty, packaging — should be loaded into the inventory valuation at the point of purchase, not booked as a period expense. RTO units need a defined reversal process: back into stock at a stated value, every time, not written off ad hoc. Finally, contribution margin should be calculated and reviewed by channel every month, using one fixed definition of CM1/2/3 written down somewhere, so the numbers are comparable across periods.
Where this is unsettled
Practice genuinely diverges on a few points here. Whether inbound platform advertising credits or cashback should reduce marketing spend or reduce COGS is treated differently across brands. Whether packaging cost belongs in COGS or in fulfilment expense (affecting whether it sits above or below CM1) is a judgment call with reasonable arguments either way. And the treatment of damaged RTO stock — full write-off versus written-down resale value — depends on the brand's actual ability to resell that inventory, which is a factual question, not an accounting one. None of these has a single correct answer under Indian accounting standards; what matters is picking a treatment, documenting it, and applying it consistently.
For brands trying to reconcile channel-wise contribution margin against marketplace settlement reports, the practical difficulty usually sits in the marketplace payout reconciliation rather than the margin formula itself — a topic that deserves its own treatment given how differently Amazon, Flipkart and quick-commerce platforms structure their settlement cycles. RTO and COD economics, similarly, affect contribution margin enough that they merit separate, closer treatment beyond the summary given here.
FAQ
What is the difference between Contribution Margin 1, 2 and 3? CM1 is revenue minus product cost and direct selling cost (gateway fees, commission, shipping). CM2 subtracts variable marketing spend from CM1. CM3 subtracts variable fulfilment cost from CM2. All three exclude fixed overheads like rent and salaries. There is no single fixed definition across the industry — consistency in your own reporting matters more than the exact formula used.
Can a D2C brand use LIFO for inventory costing? No. Under AS 2 (Valuation of Inventories) and Ind AS 2, only the FIFO or weighted average cost formulas are permitted for inventory valuation in India. LIFO is not an allowed method under Indian GAAP or Ind AS.
Should RTO cost be netted off against revenue or shown separately? For decision-making, RTO cost is best shown as a separate line within Contribution Margin 1, not netted silently against revenue. Netting it hides how much of a channel's apparent margin is being eaten by returns, which is often the single largest cost lever on COD-heavy channels.
Does the chart of accounts need to change if a new marketplace channel is added? Yes. Each channel needs its own revenue, COGS, commission and fee ledgers so contribution margin can be computed separately. Adding a channel without adding matching ledgers forces manual allocation at reporting time, which is slower and more error-prone than setting up the ledger correctly at the start.
Is landed cost the same as purchase price for COGS purposes? No. Landed cost includes the purchase price plus inbound freight, customs duty where applicable, and other direct costs incurred to bring the inventory to a sale-ready condition. Using purchase price alone understates COGS and overstates margin.
This post is for general information and does not constitute professional advice. It reflects the position as on 17 September 2026 and may not account for subsequent amendments, notifications or developments in accounting standards. Accounting treatment depends on the specific facts and systems of each business. Readers should obtain advice appropriate to their own circumstances before acting on anything stated here.