What Is Ecommerce Accounting – Complete Guide And How To Do It Correctly
Ecommerce accounting is a vital aspect of an online merchant’s operations. Whether you operate an online store or plan to conduct such activities, you should know basic ecommerce accounting concepts.
In this article from Upscribe, we’ll help you simplify ecommerce accounting for your online shop with the best tips and recommendations to help you organize your financial reporting.
Let’s dive in.
What is Ecommerce Accounting?
Ecommerce accounting is the systematic recording, organizing, evaluating, and maintaining of a company’s financial data. It also includes record-keeping of your ecommerce business’s receivables (what comes in) and payables (what goes out).
Some of the ecommerce accounting tasks include:
- Maintaining budgets
- Inventory management
- Cash flow statements
- Income statements
- Balance sheet
- Tracking regular expenses
- Preparing and submitting tax returns and payments
- Returns and chargebacks documentation
Ecommerce Accounting vs Ecommerce Bookkeeping
Ecommerce accounting is the process of gathering, analyzing, organizing, and reporting financial data for your ecommerce store. It has the same functions as traditional business accounting, as it also documents assets and liabilities.
Ecommerce bookkeeping is part of ecommerce business accounting. That’s because it involves storing and organizing financial records. For example, an ecommerce bookkeeper groups transactions into income and expenses before they prepare and analyze financial statements.
Other ecommerce bookkeeping activities include:
- Managing accounting software
- Tracking inventory
- Creating financial data templates
- Preparing income statements, including balance sheets
As is usually the case with traditional accounting, ecommerce accounting can be challenging! There are a lot of variables that you need to keep on top of, whether it’s stock, financial transactions, or making sure you’ve got enough budget to sustain your storefront.
Thankfully, many platforms can help simplify ecommerce accounting, making it easier for companies to keep track of the numbers. Let’s take a look at some of our favorites.
Best Ecommerce Accounting Software
QuickBooks is a nifty e-commerce accounting tool that allows you to connect your online store(s) flawlessly. Also, it lets you view your expenses and income in one place and track your receivables and payments.
It’s web-based accounting software that’s ideal for all of your e-commerce accounting needs. You can use it to manage invoices, bookkeeping, payroll, tax management, financial reporting, etc.
In addition, it integrates with Amazon, eBay, and Shopify, while keeping your financial data secure, regardless of the device you use.
A brilliant alternative to QuickBooks ecommerce accounting software is Xero. It’s the perfect online accounting application for your ecommerce business.
You can use its advanced tools for ecommerce accounting entries, bank reconciliation, invoice management, and monitoring income and expenses. Xero is also great for tax management, handling purchases, inventory management, and cash flow statements.
It’s accessible through mobile devices and integrates with over 800 third-party apps.
Need ecommerce accounting software that lets you create professional and branded invoices? Freshbooks is a great choice. It’s an ecommerce accounting tool that enables you to promote your online shop by customizing your invoices.
In addition, you can set up your billing on autopilot by automating invoicing, organizing expenses, and following up with clients. Freshbooks also offers several online payment options (ACH and credit card). It gives your customers choice when it comes to making payments.
Also, you can create automatic late payments and fee reminders. The accounting software’s dashboard gives you a glance at income and expense reports.
Zoho Books is an excellent ecommerce accounting software that simplifies managing your finances. As a cloud accounting platform, it’s great for tracking income and expenses, inventory management, and automating bookkeeping tasks.
You can also use Zoho to manage receivables and payables, prepare bank reconciliations and income statements, and generate other financial reports.
If you’re already using other Zoho products, you can integrate the online accounting software with its CRM. Plus, it’s available on all major platforms, like Windows, Android, and iOS.
Ecommerce Accounting Methods
You have two ways of recording, gathering, and evaluating your business transactions: cash basis accounting or accrual accounting. Let’s explore the two methods below.
Cash Basis Accounting
Cash basis accounting records revenue when your business receives it and expenses when it makes a payment. As a result, your income statement shows the actual cash paid or received in a particular financial period. It gives you a clear picture of the cash flow balance at any given time.
Your ecommerce business might find cash basis accounting handy due to its simplicity. It’s suitable if you’re running a small-scale online business.
On the other hand, the accrual method records earned revenue and incurred expenses. It means you record sales from a customer regardless of whether they have paid or you’re expecting payment at a later date.
Similarly, this will be how you record your expenses too. So you account for money before you receive it or pay it out. Because of this, you can have a realistic monthly business income statement.
Why is Ecommerce Accounting important?
Helps To Create Budget
Ecommerce accounting empowers you to create a budget for your online business. A budget is a useful tool as it helps you with allocating your money to payroll, purchasing inventory and equipment, making expense payments, and more.
That way, you can always ensure that you have enough money to secure your business while ensuring you reach your objectives.
Helps You Understand Your Business’s Profit
Your business’s profitability determines whether you can continue operating or not. Ecommerce accounting can help you understand your profit margins by providing revenue and expense reports.
Additionally, cash flow statements indicate your online store’s performance regarding receipts and payments. With all of this information at your fingertips, you can identify profitable products and services, in addition to areas that you can improve upon.
Helping with Tax Preparation
The revenue authorities want you to comply with tax regulations concerning taxes withheld, deductibles, business income tax, and more. Ecommerce accounting can make this task as easy as 1, 2, 3.
Ecommerce accountants can use software to prepare your tax information and help you comply with the law. As a result, you can have more time to zero in on your critical tasks to run your online shop efficiently.
How to Maintain Ecommerce Accounting
Determine Which Accounting Method To Use
Earlier, you learned about two standard accounting systems for maintaining your ecommerce business accounts. You can use either cash basis accounting or the accrual method.
Cash basis accounting is the right choice if you run a small online shop strictly in cash. As your business grows and starts invoicing clients, you may need accrual accounting so that you can start tracking payments that have yet to come in and record them properly.
Monitor Cash Flow
One of the vital ecommerce accounting tasks is keeping a healthy cash flow balance. It ensures you have enough cash to meet your day-to-day expenses and payments.
A cash flow statement shows your working capital, which is equal to the cash you have generated and spent in a given period (monthly, quarterly, or yearly). It includes operating activities, investing activities, and financing activities.
As a result, it’s advisable to analyze your cash inflow and outflow not less than 13 weeks out of the year.
Measure Your Revenue and Growth
Track your revenue growth to determine if your ecommerce shop is on course to meet its income objectives. Revenue growth measures an increase in revenue over a particular time. By monitoring this metric, you’ll be able to keep track of sales increases or decreases.
You also need a capable tool to help you measure subscription revenue if your ecommerce store is subscription-based. Upscribe makes it easy to treat your email subscribers like royalty.
You can get the charge you need to grow your business by accessing powerful out-of-the-box tools that drive growth. Take a look at our prices to find a plan that works for you.
Keep Track of Your Cost of Goods Sold
COGS (cost of goods sold) is the cost your online store incurs to earn revenue. For example, purchases, shipping expenses, etc., contribute to your COGS.
You can calculate your business’s gross profit if you’re aware of COGS. It ensures you allocate your financial resources efficiently without producing a negative net profit.
And forecasting your inventory gives you an insight into the costs you’re likely to incur to supply your products. As a result, you can budget enough funds to meet the expenses. You can find out more about how you can manage your inventory through forecasting, which can help you properly plan for specific periods of the year.
Track Chargebacks and Customer Returns
Keeping tabs on customer returns and chargebacks is another crucial ecommerce accounting task for your business. According to CNBC, customers returned nearly 16.6% of products in 2021, and this number is likely to skyrocket.
Chargebacks can eat into your income and double your liabilities as card companies claim refunds. For these reasons, you should account for these anomalies on your bank statements.
Ensuring Regulatory Compliance
Hire ecommerce accounting professionals to assist with federal compliance and regulatory policies. They’re up to date with the latest accounting and tax changes. Also, experts in accounting can offer you investing and budgeting advice to help you make better decisions.
Ecommerce Accounting Best Practices
Integrate Accounting Software with Your Online Shop
You have a wide range of ecommerce accounting software from which to choose. Zoho Books, Freshbooks, Xero, and Quickbooks are popular online accounting applications.
However, ensure your choice integrates with your ecommerce store. It helps keep your finances intact and secure as you make the migration.
In addition, get an ecommerce accounting tool that automatically classifies transactions into income and expenses. It makes it simple to see your income status at any given time, helping you gain control over your payments.
Errors like overcharging payments by your bank are likely to occur. You can only discover these errors when you print out statements and perform bank reconciliation.
Fortunately, ecommerce accounting software can create automated bank reconciliation reports. Still, you should analyze the records monthly for any inconsistencies.
Set Money (and time) Aside for Taxes
According to one study, small businesses spend over 41 hours preparing federal tax returns every year. It shows tax management is an essential and unavoidable accounting exercise.
To help you handle the tax season without putting yourself under pressure, set aside between 30% and 40% of your revenue. Use the savings to pay your tax obligations at year’s end.
Ecommerce accounting is the recording, gathering, evaluating, and reporting of financial data for your online store. You should use ecommerce accounting software to maintain your accounts. Also, follow ecommerce accounting best practices to prepare and manage your income statements.
Monitoring revenue growth is the key to your business’s success. Upscribe provides you with powerful out-of-the-box tools to help you drive growth.
Schedule a demo to get started.