Fundamental Accounting Tips For Ecommerce Businesses

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    Accounting is one of the many important aspects of running a successful eCommerce business. However, it can be confusing and complex, especially for those not familiar with it. This guide provides some fundamental tips to help you get started. By understanding accounting basics, you'll be better equipped to make informed decisions about your business' finances.

    Both small and large commerce businesses can benefit from understanding a few basic tenets of accounting. This information is critical to making sound financial decisions that will keep your business thriving.

    Though every business is different, there are some fundamental accounting tips that all eCommerce businesses should follow.

    By keeping your books in order, you can make it easier to track your profits and losses, make strategic decisions about where to allocate your resources, and stay compliant with tax laws. In this post, we'll briefly explore the most important aspects of accounting for eCommerce businesses so that you can get started on the right foot.

    As an eCommerce business, it's important to understand and utilize basic accounting principles to keep your finances in check. In this blog post, we'll provide some tips on fundamental accounting concepts that you can use to make sound financial decisions for your business.

    By following some basic accounting tips, you can keep your business on track and ensure that your books are in good order. This blog post will outline some of the most important accounting tips for eCommerce businesses. We'll also provide a few resources to help you get started. So, if you're looking for ways to improve your financial situation, read on!

    Let's get started!

    It would help if you learned about eCommerce accounting

    You have opened a storefront for your new eCommerce venture on Amazon, Shopify, or one of the many other platforms available. You are concentrating on tasks such as placing orders for inventory, monitoring inventory, dispatching orders, attracting customers to your items, branding, and so on.

    You are vaguely aware that you will need to conduct some accounting work for your company, but you probably don't give it much thought because you think it will be simple. When it comes to learning about accounting in general or eCommerce accounting specifically, relying on the knowledge you gained in your college accounting class 10 years ago should be sufficient.

    Perhaps you should conduct some research on Google. When things become too time-consuming or complicated, you can even decide to hire a book-keeper to help you out (this is a fantastic idea, by the way).

    You will have the impression that you are keeping up with your bookkeeping if you use these approaches. However, the premise that accounting for an eCommerce business is the same as accounting for any other business is typically the foundation upon which they are built.

    If you model your eCommerce accounting after those of other businesses, you will probably end up with an erroneous picture of your own business, which could have a significant impact on the success of your own organisation. Therefore, what are the essentials of eCommerce accounting that you or your selected bookkeeper need to know in order to get it right?

    Specific facets of accounting for online businesses

    Every sector has its own peculiarities when it comes to accounting. In order to obtain accurate data and make decisions that are based on that information, it is vital to have a thorough understanding of these intricacies.

    Accounting is the key to unlocking the secrets of profitability and cash flow, and inadequate accounting will lead to mediocre firm performance or possibly its demise. Therefore, whether you are currently handling your own accounting or have hired a bookkeeper, you will want to educate yourself on eCommerce accounting and the distinctive facets that come with it.

    Surprisingly, a significant number of normal bookkeepers will either be unaware of these facets or struggle to navigate them effectively. Our expert eCommerce accountants work with firms just like yours, and as a result, we've identified four primary areas of eCommerce accounting that are essential for obtaining accurate numbers:

    • Where to look for information regarding transactions
    • Comprehensive knowledge of stock levels and cost of goods sold
    • Tax on purchases made through the internet
    • Lowering the fees associated with international transactions

    Transactional data locations

    As you continue your education in eCommerce accounting, this is likely the most important concept to fully grasp. For companies that do not engage in eCommerce but are looking for commercial transactions.

    A simple examination of the company's bank account or credit card statements will typically reveal to a company every transaction that has been processed. However, if they include accrual transactions, such as unpaid invoices, bills, and other expenses, they will be 99% of the way there.

    Online firms, on the other hand, are in a category all their own. A significant number of bookkeepers will approach bank transactions for online retailers and other companies in the same manner. For instance, a book-keeper will record a transaction as "income" on the day of the deposit when they see a deposit in the bank account from Amazon or Shopify. There are two issues that arise from using this method:

    • There is an error in the income (as well as other numbers).
    • There are inaccuracies in the timing of the transactions.

    1. There is an error in the income (as well as other numbers)

    There are a lot of bookkeepers out there who aren't aware of the fact that the money that is deposited into your bank account from your various selling channels is not an accurate representation of your income. These deposits come from your many selling channels and are referred to as "net deposits."

    When we talk about making a "net deposit," we indicate that the amount placed into our bank account takes into account not only sales but also other transactions. There are probably twenty to thirty different occurrences that have an impact on each "net deposit" in your bank account! These actions include making sales, accepting returns, calculating sales tax, processing chargebacks, and other related tasks.

    You will need to delve into the backend of each of your sales channels in order to discover the transactions that genuinely contribute to the success of an eCommerce firm. In this section, you will get accurate data not just for sales but also for all other operations.

    2. There are inaccuracies in the timing of the transactions

    You will not only fail to record the "net deposit" in your bank account, but you will also fail to record the precise activity timing. For instance, if Amazon makes a deposit into your bank account on January 5th, most of the transactions that led up to that transfer will have taken place in December. This is the case even if the money was made in January.

    The consequences of your company's inability to provide correct timing of transactions (sales, expenses, liabilities, and so on) will get more severe over time as the company expands.

    Comprehensive knowledge of stock levels and cost of goods sold

    You run an inventory-based corporation since you sell things through an online store. It should come as no surprise that the numbers for your inventory and cost of goods sold are perhaps the most crucial numbers to comprehend and get right. This subfield of accounting will require more knowledge from you than general bookkeeping does, so be prepared. The following items must to be clear to either you or your bookkeeper:

    Making an advanced COGS calculation

    Activities related to inventory management

    The fundamentals of bookkeeping for inventory and cost of goods sold (many bookkeepers get this incorrectly!)

    Bookkeepers who instantly deduct the cost of all products after they have purchased them from a supplier are responsible for one of the most frequent and widespread errors we observe in this department. For a more in-depth explanation of COGS and inventories, please see this blog post right here.

    Sales tax for online sales

    This one is bothersome, and to tell you the truth, it makes me a little bit nervous. The regulations governing sales taxes for online transactions are continually being updated (learn more about sales tax laws by state here).

    Because states are moving swiftly to establish and alter their sales tax rules, it is possible that you will be required to collect and pay sales tax in a greater number of states than you currently believe. Becoming compliant with sales tax regulations can be a difficult process, so you will need assistance from sales tax specialists and tools.

    Lowering the cost of foreign transactions

    You probably deal with more international transactions than the average company because you run an eCommerce firm. As a result, it is essential to your profitability that you find ways to lower the expenses associated with these transactions. You can cut these costs by working with experienced eCommerce accountants who can help you use the appropriate technologies.

    Moving onward and upward

    Learning about eCommerce accounting requires a solid foundation, which includes gaining an understanding of these four distinct components. As you progress through your path of eCommerce accounting, be sure to keep up with our blog so that you can get more in-depth solutions.

    Monitor Your Cash Flow

    Making a profit is supposed to be the goal of your company. Tracking your cash flow is essential if you want to get an accurate picture of how much money your company is making. (everything that leaves and enters your company) Many eCommerce firms believe that in order to enhance their cash flow, they need to increase the number of sales they make. While this is a reasonable solution, there are many alternative options.

    The first thing that needs to be taken into consideration is cutting any needless expenses. Spending less on inconsequential things can have a substantial impact on the total amount you spend. You also need to devise some plans to ensure that payments are made in a timely manner. Take credit terms as an example; if your clients do not have an established credit history, it is in everyone's best interest to complete the payment in full right away.

    In addition, you can boost your cash flow by negotiating better terms with the companies who supply you with goods and services. Your company may benefit from freeing up additional cash flow by offering incentives to customers, such as extended payment terms or discounts on additional purchases.

    Find Your Break-Even Point

    The number of units that must be sold before you can consider yourself to have achieved financial neutrality and begun the process of making a profit is known as the break-even point.

    In order to determine when your business has reached a point where it is profitable again, you must first calculate your costs, both fixed and variable, as well as the price of the product and its contribution margin (the value obtained after subtracting your variable cost from the selling price).

    Use the following formula to determine when you will be profitable again:

    Point of Breakeven = Fixed Costs Divided by Contribution Margin

    In this scenario, the contribution margin is equal to the average price minus the variable costs.

    If your point at which you break even is high, you may want to think about boosting your prices or reducing your variable expenses. You can do this by charging more for shipping, purchasing supplies in bulk, or any number of other strategies.

    Managing Your Money

    The balance sheet is a snapshot of your company's financial health at a given point in time. Your total assets, total liabilities, and owner's equity are the three components that go into the calculation of the balance sheet. Your company's assets include anything of value that it owns and manages, such as its merchandise or its office equipment.

    Your liabilities consist of the sum of money that you owe to other individuals. Your long-term assets and short-term obligations are what define your assets and liabilities, respectively; the difference between your assets and liabilities is what constitutes your owner's equity.

    Because it offers a more comprehensive view of the situation and has the ability to highlight errors in other financial statements, your balance sheet is an essential financial document.

    If your income statement indicates that your eCommerce firm is profitable, but your balance sheet indicates something different, it's possible that you entered some information improperly at a later point in the process. Keep in mind that the only way for your balance sheet to be accurate is for your assets to match both your liabilities and your owner's equity.

    Inventory Control

    If you didn't already have products in stock, you won't have anything to put on the market. The accumulation of unneeded inventory, on the other hand, might have a negative effect on your liquidity and reflect adversely on your books. As a result, you need to maintain control of your stock and decide how much of each item you wish to keep in stock at any one time.

    You don't want to run out of inventory because you run the danger of losing sales; but, having an excessive amount of inventory that hasn't been sold can also create a financial strain for your business. Keep in mind that the only things you really need to keep on hand are the bare essentials.

    You will be provided with fast visibility into stock levels and order statuses for up-to-the-minute information of your inventory if you utilise strong inventory management systems like Dear Systems. These systems allow you to keep track of your inventory in real time.

    Taxes, Taxes, Taxes

    Taxes are difficult to understand and may often be avoided; if you offer a variety of goods and services, it is in your best interest to speak with an expert in the field of sales tax. Be sure to mark the things that are subject to taxation. It is recommended that you divide the items you buy into two categories: those for which you are required to pay tax and those that are exempt from tax.

    Your tax obligations are generally determined by the location of your company's physical operations. As a point of departure, you can make the assumption that the amount of tax you owe will equal the amount of tax that you have already collected from your clients.

    You have a responsibility to acknowledge that the money you have set aside for taxes is not a piece of the revenue you have brought in. If you don't, you could run into trouble when it comes time to make your tax payments because of this.

    When the amount of the tax and the actual price of the goods are combined, it is easy to lose sight of the actual profit. If you establish a separate account for your taxes, you won't have to worry about this issue.

    The peculiarities of accounting for online transactions

    Accounting for e-commerce and more traditional forms of accounting have just a small number of similarities. For example, there is still a requirement to retain crucial financial records (such as receipts), monitor cash inflows and expenditures, and guarantee that the business will continue to be solvent. Nevertheless, the equation is made more complicated by a number of subtleties.

    Regarding Inventory Management for Online Sales

    The inventory can be converted into cash. Therefore, the liquidity of your company is at risk if you do not maintain adequate inventory.

    It is an absolute must in this area of work to keep close track of your inventory at all times, beginning with the manufacturing stage and continuing through the selling phase. This procedure will get more difficult to understand and manage as the volume of your transactions increases. What steps would you take if you found yourself in this predicament?

    1. Examine your inventory procedures again 

    When you were a startup, selecting a technology to manage your inventory felt more like a game of chance than anything else.

    It's possible that this strategy was successful in the beginning phases of the company, but as the company grows, it's likely to deteriorate into a fruitless condition that will end up costing you more money or causing you to settle for larger taxes than you're already obligated to pay.

    Acclimating to your existing practise and the practises of other companies in your industry is one method you may use to reevaluate the way you manage your inventory. By turning over a new leaf, your operations will be reinvigorated, and you will have a stronger pulse on the scalability of your inventory.

    2. Make use of software for managing inventory 

    If you want to grow your e-commerce business, you shouldn't be doing things the old-fashioned way by hand. Rather than doing this, you should think about making an investment in management software that will allow you to monitor your inventory across all of the channels that you sell your items on and aggregate all of the data regarding your inventory in real time.

    Accounting platforms that are top-of-the-line provide users with the flexibility and integrations that are necessary to have a problem-free experience when exporting data from software directly into their books.

    Software for keeping financial records recommended for online businesses

    There is no "one size fits all" answer to the question of how to choose accounting software for your online business. There is a wide selection of accounting software programmes available to pick from; however, you need to check that the programme you choose is suitable for the needs of your business. Consider using one of these industry-leading accounting software programmes for your online business:

    • QuickBooks Online
    • Xero
    • Zoho Books
    • FreshBooks
    • NetSuite
    • Sage Accounting
    • Wave Accounting

    What characteristics should you search for while selecting accounting software?

    When selecting cloud software, be sure to keep an eye out for the following components:

    1. Integrations 

    Choose an accounting programme that allows for simple integration of online marketplaces like Shopify, e-Bay, BigCommerce, Amazon, and the like into their system if you host your products on one of these online marketplaces.

    Your e-commerce channel will immediately reconcile any changes that occur in your sales or inventory to the accounting software that you use, and the process will work in the opposite direction as well.

    2. Reports

    These are typically provided by high-end software vendors, however they are only available on the most fundamental level. Choose advanced reporting, particularly for the inventory, if you are interested in gaining more in-depth insights.

    3. Inventory Management

    As was covered in this post, the inventory is the aspect that will determine the success or failure of an online business. To keep up with the requirements of modern inventory management, spreadsheets are insufficient on their own. The functionality of accounting software becomes relevant at this point in the discussion.

    Among the various back-office foundations that prepare your company for the severe competition in the industry is accounting for e-commerce. Unfortunately, the increase of e-commerce and the simplicity of online purchasing hide the impending change that the sector is about to undergo. As a result, if you want to stay ahead of the competition, you should begin by creating a solid financial base, and then work your way up.

    Watch your online doors

    Hacks on websites belonging to small and medium-sized organisations (SMEs) are widespread and will become even more common as an increasing number of SMEs attempt to compete in the online sales gold rush.

    Information about customers' credit cards is a target of thieves operating online. If hackers obtain a person's name, credit card number, and card verification value (CVV), which typically occurs in the time gap between a customer entering their payment details on a company's website and those details reaching the relevant payment gateway, those payment details can be sold on the dark web for approximately $50. In most cases, the amount of fraudulent activity that takes place is greater than one thousand dollars.

    The adoption of a fully hosted e-commerce solution such as BigCommerce or Shopify is something that we recommend to owners of SMEs. A less difficult target are small and medium-sized businesses (SMEs) that build and manage their websites on third-party e-commerce platforms like Magento.

    The good news is that business owners of small and medium-sized enterprises that rely on third-party solutions can still encourage bad actors to view their website as too difficult to hack. Have your website scanned on a regular basis, make sure that you are always running the most recent version of the software that powers your website, and ensure that you are in full compliance with the Payment Card Industry Data Security Standard version 3.2. This is the mandatory security standard for financial institutions and credit card companies.

    Obtain Success Over the Long Term

    Your accounting practises need to be on point if you want your eCommerce business to be successful over the long term. Consider using an outside accounting service if the cost of maintaining an internal department seems prohibitive.

    If the gross income of your company has surpassed one million dollars, you may find that a part-time book-keeper is no longer suitable for your business's needs. However, expansion is necessary, and in order to stay one step ahead of your operations, you will require a staff that is able to assist you in scaling.

    To record a sales invoice for sales through an e-commerce operator, you will need to create a ledger for the e-commerce operator, either beforehand or on the fly while recording the invoice. If you have already created a ledger, then you can update the ledger accordingly.

    Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

    Here are the different ecommerce business models:

    Business-to-Consumer (B2C) Consumer-to-Consumer (C2C) Consumer-to-Business (C2B)

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