---
title: Pharmacy Accounting Basics: Margins, COGS, VAT & P&L
description: Accounting every pharmacy or agrovet owner should understand: margin vs markup, cost of goods sold, stock valuation, VAT, cash vs profit, monthly close.
url: https://www.poso.co/guides/pharmacy-accounting-basics/
updated: 2026-10-29
---

Guide · 10 min read

# Pharmacy accounting basics for owners.

Margin vs markup, cost of goods sold, stock valuation, VAT, why profit is not cash, and a monthly close any owner can follow.
By the poso team · Updated 29 October 2026

**Short answer:**
The accounting basics every pharmacy owner should know: gross margin is profit as a share of the selling price (not the cost); cost of goods sold is what the items you sold cost you; stock is an asset until it is sold, expired or lost; VAT you collect is not your money; and profit is not cash, because stock, credit sales and supplier credit all sit between them. Review margin, stock value, receivables and payables every month.

This is general information to help owners understand their numbers, not tax or accounting advice. Rules differ by country; work with a qualified accountant.

## Margin vs markup

The most common pricing mistake in pharmacies is confusing the two.

| | Formula | Example: cost 80, price 100 |
|---|---|---|
| Markup | (Price − cost) ÷ cost | 20 ÷ 80 = 25% |
| Gross margin | (Price − cost) ÷ price | 20 ÷ 100 = 20% |

If you want a 25% margin, a 25% markup isn't enough: you need a 33.3% markup. Formula: **markup = margin ÷ (1 − margin)**.

## Cost of goods sold

**Cost of goods sold (COGS) = opening stock + purchases − closing stock** (all at cost). Gross profit = sales − COGS. Without accurate stock figures, COGS and profit are guesses, which is why connected stock and accounting matters. Expired and stolen stock increases COGS without any sale, so it shows up directly as lower margin.

## Stock is an asset, until it isn't

Stock on the shelf is recorded at cost as an asset. It becomes an expense when sold (COGS), expired, damaged or lost (a write-off). Valuation methods:

| Method | How it works | Notes |
|---|---|---|
| Average cost | Each unit costs the weighted average of purchases | Simple and common for pharmacies |
| FIFO (cost) | The oldest purchase costs are charged first | Closer to current prices on the balance sheet |
| Standard cost | A fixed cost per item, adjusted periodically | Used where prices are regulated or stable |

Valuation is separate from how you rotate stock physically (which should be [FEFO](https://www.poso.co/guides/fefo-vs-fifo/)).

## VAT and sales tax

- Many countries exempt or zero-rate essential medicines, while cosmetics and some other items are standard-rated. Set tax per product.
- VAT you charge customers is collected on behalf of the tax authority; it isn't income.
- VAT you pay suppliers can often be reclaimed, depending on whether your sales are taxable or exempt, and your country's rules.
- Keep tax invoices for purchases; your accountant will need them.

## Profit is not cash

A profitable pharmacy can run out of cash. The usual reasons:

| Where cash goes | Effect |
|---|---|
| More stock bought than sold | Cash turns into stock on the shelf |
| Credit sales to customers | Profit is earned but cash arrives later |
| Paying suppliers faster than terms | Cash leaves earlier than needed |
| Loan repayments and owner drawings | Cash leaves but isn't an expense |

Watch three balances monthly: stock value, money customers owe (receivables) and money you owe suppliers (payables).

## A monthly close in 6 steps

- **Reconcile cash and mobile money**Match till takings and payments to bank and mobile money statements.
- **Enter all supplier bills**And check them against deliveries.
- **Record expenses**Rent, salaries, utilities, transport.
- **Write off expired and damaged stock**With reasons.
- **Review receivables and payables**Chase overdue customers, schedule supplier payments.
- **Read the reports**Profit and loss, margin by category, stock value. Compare with last month.

## Connected accounting

When the till, stock and accounts are one system, most of this happens by itself: each sale posts revenue, tax and COGS; deliveries post stock and payables; write-offs post losses. See [pharmacy accounting software](https://www.poso.co/pharmacy-accounting-software/) and [poso accounting](https://www.poso.co/features/accounting/).

## Pharmacy accounting questions

### What is a good gross margin for a pharmacy?

It varies widely by country, regulation and product mix (prescription medicines often carry lower margins than cosmetics or supplements). Track your margin by category and watch the trend.

### How do I calculate pharmacy profit?

Gross profit = sales − cost of goods sold. Net profit = gross profit − operating expenses (rent, salaries, utilities and so on).

### What is the difference between markup and margin?

Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A 25% markup gives a 20% margin.

### Why does my pharmacy make a profit but have no cash?

Usually because cash is tied up in stock or in credit given to customers, or is going to supplier and loan payments faster than sales bring it in.

### Do medicines attract VAT?

In many countries essential medicines are exempt or zero-rated, but rules differ by country and product. Check with your tax authority or accountant.