The order dashboard is celebrating. The bank deposit is smaller. Finance has a third number, and everyone suspects somebody else's spreadsheet. Ecommerce accounting gets easier once you stop asking one figure to describe sales, profit and cash at the same time. Start with what was sold and when it was earned. Then subtract the relevant costs. Finally, follow when money actually enters and leaves the business. These 20 terms give founders and finance teams a common language for that bridge. The worked examples are illustrative; accounting treatment follows the applicable framework and the actual contract.
🧭 Jump to a term
Sales and earning the money: Gross sales · Net sales · Revenue · Revenue recognition
Product economics: COGS · Gross profit · Gross margin · Contribution margin · OPEX · EBITDA
Timing and cash: Accrual accounting · Cash-basis accounting · Inventory capitalization · AR · AP · Working capital · CCC · Operating cash flow · Payment reconciliation · Deferred revenue
⭐ Know these first
Start with Net sales, Revenue, COGS, Gross margin, Contribution margin. Then follow the grouped learning order below.
📎 How to read this page
What it means gives the precise meaning. Operator translation gives the version you might hear in a real ecommerce meeting. In real life shows an illustrative example. Watch out and the confusion boxes show where a familiar term can mislead.
📈 Read the relationships first
These combinations are diagnostic hypotheses, not proof of causality. Compare the same period and scope, then investigate the mechanism.
Net sales ↑ + gross margin ↓
Usually means: More trading can leave less profit per sales dollar. Check next: discounting, product mix and inventory cost.
Profit ↑ + operating cash flow ↓
Usually means: Cash may be tied up in stock or receivables. Check next: working-capital movements and non-cash entries.
Revenue steady + payout ↓
Usually means: Fees, refunds, reserves or settlement timing may explain the gap. Check next: Reconcile transaction detail before diagnosing a sales problem.
Sales and earning the money
01 · 🔵 Operations
Gross sales
🧠 What it means
The value of product sales before discounts, returns and allowances. Here it excludes sales taxes and shipping; confirm the reporting convention before comparing a store dashboard with accounting records.
💬 OPERATOR TRANSLATION
“The biggest sales number in the meeting, before the awkward deductions arrive.”
🛍️ In real life
100 units at $50 produce $5,000 gross product sales, even if coupons later reduce the amount charged.
⚠️ Watch out
An order report can include unpaid or canceled orders; that is not automatically recognized revenue.
🔗 Related: Net sales · Revenue · Revenue recognition · ↑ all terms
02 · 🟢 Core
Net sales
🧠 What it means
Product sales after discounts, returns and sales allowances for a stated period. This is a sales measure, not profit: product costs, advertising and overhead still have to come out.
💬 OPERATOR TRANSLATION
“The sales number after coupons and customers changed their minds, before running the business costs anything.”
🛍️ In real life
$5,000 gross sales minus $500 discounts and $300 returns leaves $4,200 net sales.
🧮 Formula
Gross sales − discounts − returns/allowances. Keep tax, shipping and reporting dates consistent.
🔗 Related: Gross sales · Revenue · Revenue recognition · ↑ all terms
03 · 🟢 Core
Revenue = Recognized revenue
🧠 What it means
Income from ordinary activities recorded when the applicable accounting requirements are met. For a retailer selling its own goods, this generally follows transfer of control, rather than merely accepting an order or receiving cash.
💬 OPERATOR TRANSLATION
“Finance's answer to “did we actually earn that yet?””
🛍️ In real life
A paid December preorder delivered in January may become January revenue when control transfers, under the contract's terms.
⚠️ Watch out
A platform acting as an agent may recognize its fee rather than the full shopper transaction value.
🔗 Related: Gross sales · Net sales · Revenue recognition · ↑ all terms
04 · 🔵 Operations
Revenue recognition
🧠 What it means
The process of deciding when and how much revenue to record under the relevant accounting framework and contract. Timing follows satisfaction of obligations; payment dates and storefront order dates do not settle the question.
💬 OPERATOR TRANSLATION
“The calendar debate that stops December from borrowing January's sales.”
🛍️ In real life
A retailer examines delivery terms to determine when a customer obtains control of a shipped product.
💡 Why it matters
IFRS 15 and US ASC 606 use contract-based frameworks; the exact treatment depends on the facts.
🔗 Related: Gross sales · Net sales · Revenue · ↑ all terms
Product economics
05 · 🟢 Core
COGS = Cost of goods sold
🧠 What it means
The inventory cost assigned to goods sold during the period. It includes the costs included in inventory under the accounting policy, rather than every expense involved in acquiring a customer or running a store.
💬 OPERATOR TRANSLATION
“What the stuff cost us before marketing claimed it sold itself.”
🛍️ In real life
Selling 100 units with a $20 recorded inventory cost creates $2,000 COGS.
⚠️ Watch out
Inbound freight may be included in inventory cost; outbound shipping and fulfillment need explicit treatment in your margin model.
🔗 Related: Gross profit · Gross margin · Contribution margin · ↑ all terms
06 · 🔵 Operations
Gross profit
🧠 What it means
Net revenue or sales on a stated basis minus the associated cost of goods sold. It is a currency amount left before the expenses excluded from that gross-profit calculation.
💬 OPERATOR TRANSLATION
“The money left after paying for the product, before everyone else submits an invoice.”
🛍️ In real life
$4,200 net sales minus $2,000 COGS leaves $2,200 gross profit.
🧮 Formula
Sales/revenue on the stated basis − COGS. It is an amount, not a percentage.
🔗 Related: COGS · Gross margin · Contribution margin · ↑ all terms
07 · 🟢 Core
Gross margin
🧠 What it means
Gross profit expressed as a percentage of the corresponding revenue or net-sales base. It describes product economics before costs excluded from gross profit and must use the same reporting period and scope.
💬 OPERATOR TRANSLATION
“The percentage that looks generous until ads and delivery join the conversation.”
🛍️ In real life
$2,200 gross profit on $4,200 net sales is 52.4% gross margin.
🧮 Formula
Gross profit ÷ matching sales/revenue × 100. Markup uses cost as its denominator instead.
🔗 Related: COGS · Gross profit · Contribution margin · ↑ all terms
08 · 🟢 Core
Contribution margin
🧠 What it means
Revenue minus the variable costs included in a clearly stated calculation. It can be an amount or a percentage, and indicates what remains to cover fixed costs and profit after that chosen cost layer.
💬 OPERATOR TRANSLATION
“What an order leaves behind after the costs that follow it around have eaten.”
🛍️ In real life
A $60 order less $20 product cost, $8 fulfillment/payment costs and $12 acquisition spend leaves $20 contribution.
⚠️ Watch out
Contribution before advertising and contribution after advertising answer different questions; name the cost layer.
🔗 Related: COGS · Gross profit · Gross margin · ↑ all terms
09 · 🔵 Operations
OPEX = Operating expenses
🧠 What it means
Expenses of operating the business that are presented separately from cost of goods sold under the chosen accounting treatment. They commonly include administration, selling and other operating overhead; classification must stay consistent.
💬 OPERATOR TRANSLATION
“The subscription, salary and rent parade that arrives whether we sell one order or a thousand.”
🛍️ In real life
The store records $8,000 office salaries and $2,000 software expense in the month.
🔗 Related: COGS · Gross profit · Gross margin · ↑ all terms
10 · 🔵 Operations
EBITDA = Earnings before interest, taxes, depreciation and amortization
🧠 What it means
An earnings measure excluding interest, income taxes, depreciation and amortization. It is not a substitute for cash flow, and adjusted EBITDA can also exclude additional items that require a clear reconciliation.
💬 OPERATOR TRANSLATION
“Profit with several expensive real-world complications temporarily asked to leave the room.”
🛍️ In real life
$10,000 operating profit plus $2,000 depreciation and amortization gives $12,000 EBITDA on this simplified basis.
⚠️ Watch out
Inventory purchases, financing and capital spending still affect cash. Read any adjustment schedule.
🔗 Related: COGS · Gross profit · Gross margin · ↑ all terms
Timing and cash
11 · 🔵 Operations
Accrual accounting
🧠 What it means
Recording income when earned and expenses when incurred under the accounting rules, regardless of when cash is collected or paid. It matches economic activity to the relevant period rather than just the bank transaction date.
💬 OPERATOR TRANSLATION
“The month gets the bill even if our bank account hasn't heard about it yet.”
🛍️ In real life
A December warehouse service used in December is expensed then even if its invoice is paid in January.
🔗 Related: Cash-basis accounting · Inventory capitalization · AR · ↑ all terms
12 · 🔵 Operations
Cash-basis accounting
🧠 What it means
Recording income and expenses mainly when cash is received or paid, subject to the rules of the applicable regime. Eligibility and exceptions vary; it is not the universal basis for financial reporting.
💬 OPERATOR TRANSLATION
“If the bank didn't blink, this version of the books hasn't blinked either.”
🛍️ In real life
A customer pays an invoice in January; cash-basis records generally recognize the receipt in January.
⚠️ Watch out
Tax eligibility, inventory treatment and thresholds depend on jurisdiction. Do not select a method from a glossary alone.
🔗 Related: Accrual accounting · Inventory capitalization · AR · ↑ all terms
13 · 🔵 Operations
Inventory capitalization
🧠 What it means
Recording qualifying inventory costs as an asset rather than immediately expensing them. Those costs normally become expense when the goods are sold, with write-downs where required by the applicable accounting rules.
💬 OPERATOR TRANSLATION
“The boxes are assets today; finance will send their cost to the income statement when they leave.”
🛍️ In real life
A retailer buys 500 units at $12; $6,000 is recorded as inventory until sale or another required adjustment.
⚠️ Watch out
IAS 2 generally measures inventory at the lower of cost and net realizable value. Obsolete stock is not automatically worth its purchase price.
🔗 Related: Accrual accounting · Cash-basis accounting · AR · ↑ all terms
14 · 🔵 Operations
AR = Accounts receivable
🧠 What it means
Amounts owed by customers for goods or services already billed or recognized, subject to the accounting policy. A payment processor settlement balance may be recorded separately, so do not assume every pending deposit is customer receivables.
💬 OPERATOR TRANSLATION
“Sales we can point to, money we still have to chase.”
🛍️ In real life
A wholesale customer owes $6,000 on an invoice due in 30 days.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
15 · 🔵 Operations
AP = Accounts payable
🧠 What it means
Amounts owed to suppliers for goods or services received on credit. These are obligations to pay, not free financing forever; agreed payment terms and overdue balances matter to supplier relationships.
💬 OPERATOR TRANSLATION
“Supplier money temporarily living in our bank account, with a checkout date.”
🛍️ In real life
A supplier delivers $10,000 of goods on net-30 terms; the unpaid bill is recorded as a payable.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
16 · 🔵 Operations
Working capital
🧠 What it means
Current assets minus current liabilities. For ecommerce operations, inventory, receivables and supplier payables are important moving parts; operating working-capital models often exclude cash and debt and must state that scope.
💬 OPERATOR TRANSLATION
“The cash trapped between “we bought the stock” and “someone finally paid for it.””
🛍️ In real life
$100,000 current assets minus $70,000 current liabilities gives $30,000 working capital.
⚠️ Watch out
Faster growth can consume working capital before it produces more cash.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
17 · 🔵 Operations
CCC = Cash conversion cycle
🧠 What it means
A timing measure of how long operating cash is tied up: inventory days plus receivable days minus payable days. Use consistent average balances, period lengths and sales/cost denominators when calculating the components.
💬 OPERATOR TRANSLATION
“How many days our money goes on a warehouse holiday before returning to the bank.”
🛍️ In real life
50 inventory days + 10 receivable days − 30 payable days = a 30-day cash conversion cycle.
🧮 Formula
DIO + DSO − DPO. Different business models can legitimately produce a negative cycle.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
18 · 🔵 Operations
Operating cash flow
🧠 What it means
Cash generated or used by operating activities during a period, as classified under the applicable accounting framework. It reflects collection and payment timing as well as operating performance; financing cash is a different category.
💬 OPERATOR TRANSLATION
“Whether the actual business put money in the bank while the profit slide was smiling.”
🛍️ In real life
The business collects $40,000 and pays $35,000 for operating items, producing $5,000 operating cash inflow in this simplified example.
💡 Why it matters
Accounting profit can rise while cash is tied up in stock or unpaid customer invoices.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
19 · 🔵 Operations
Payment reconciliation
🧠 What it means
Matching orders and accounting entries with payment transactions, fees, refunds and settlement deposits. The aim is to explain differences and confirm completeness, rather than forcing the sales dashboard to equal the bank deposit.
💬 OPERATOR TRANSLATION
“Finding out why the payout is smaller without accusing the payment provider of stealing lunch.”
🛍️ In real life
$1,000 captured payments less $30 fees and $100 refunds explains an $870 deposit, before any other adjustments.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
20 · 🔵 Operations
Deferred revenue
🧠 What it means
A liability for consideration received or due before the related goods or services have been provided under the applicable contract. Cash can therefore arrive before the business has earned the corresponding revenue.
💬 OPERATOR TRANSLATION
“Money in the bank with work still attached to it.”
🛍️ In real life
A store receives $120 for a service to be supplied over 12 months; its accounting policy releases revenue as that obligation is fulfilled.
⚠️ Watch out
Gift cards, preorders and subscriptions need treatment matched to their actual contract and local rules.
🔗 Related: Accrual accounting · Cash-basis accounting · Inventory capitalization · ↑ all terms
🔀 Gross sales vs net sales vs recognized revenue
Gross sales starts before deductions; net sales removes stated sales deductions; recognized revenue adds the accounting question of when the amount is earned. An operational report is not the ledger.
🔀 Gross profit vs gross margin vs contribution margin
Gross profit is a currency amount. Gross margin relates that amount to sales. Contribution removes a stated variable-cost layer. Name the denominator and cost scope.
🔀 Accrual vs cash-basis accounting
Accrual follows earning and incurring; cash basis mainly follows receiving and paying. The eligible method and exceptions depend on the applicable regime.
🔀 Revenue vs revenue recognition vs deferred revenue
Revenue is the recognized amount; recognition is the process and timing; deferred revenue records an obligation before the associated earning conditions are met.
🤔 Still confused?
Follow this thread: Gross sales → COGS → Accrual accounting. That sequence moves from the basic object or relationship to the decisions and checks it supports.
Sources and scope
Primary documentation checked on 27 September 2026. Platform features and eligibility can change; examples and cartoon situations are illustrative.
