Starting a business is exciting, but many people don’t realize just how much accounting work comes with it. When you hear the word “accounting,” you probably imagine piles of papers, vast numbers and various tables. E-commerce accounting is similar to your imagination, but everything happens digitally due to the nature of online business.
Today we’ll talk about e-commerce accounting, what it involves, its peculiarities and best practices. It may look overwhelming, but you just need someone who’ll break it down for you. Luckily, we’re here to help.
What is e-commerce accounting?
E-commerce accounting is the process of recording, organizing, and managing the financial transactions and data specific to an online business. It is quite similar to traditional business accounting, but there is a twist. The actual problem is how to manage data from multiple channels, such as marketplaces and payment gateways, where information has to be retrieved and analyzed frequently.
Picture this: you are selling phone cases on Amazon. You will deal with managing transactions and inventory to maintain accurate records, and the platform will take fees and taxes from you. You will need these records to be sure that you will not land in the red and most importantly, to avoid questions from the IRS especially during the time of filing for tax. And what if it’s not the only platform you’re using? But let’s sort everything out step by step.
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What does e-commerce accounting include?
When diving into e-commerce accounting, you’ll come across three main aspects. First of all, you need to manage bookkeeping and establish a solid workflow that allows you to track data from multiple platforms with ease. Next, you’ll have to tackle tax management. The challenge is that taxes vary not only between states, but also between platforms. Finally, there are financial statements you need to generate, which will help you see the full picture of your business’s financial health.
Now, let’s take a closer look at each part of e-commerce accounting.
Bookkeeping
Bookkeeping involves tracking all of a company’s transactions, including: sales revenue, orders, discounts, invoices, fees and returns, from all business platforms in use.
But that’s not all. As an online business owner, you’ll also need to track inventory often spread across various warehouses.
For example, let’s imagine that your best-selling product suddenly goes out of stock, and it’s stored in a warehouse located in another state. The culprit? Poor bookkeeping. If your records aren’t up to date, you won’t have any idea where your inventory level stands, and you might not see those warning signs well in advance of running out. Good bookkeeping from the start means that your shelves stay stocked and your business keeps running smoothly.
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Tax management
Tax regulations are non-negotiable, and e-commerce accounting keeps you on track. At a minimum, you need to handle sales tax, VAT, and income tax. Plus, don’t overlook the marketplace tax withheld by marketplaces, like Amazon or eBay, on your behalf, depending on the state or country. Even if these are collected by platforms, proper tax recording is still your duty, as they are associated with your business. That’s why you need to track all taxes in your books.
Financial statement preparation
Financial reporting consists of a variety of statements that provide information from different angles. These statements include:
- Income statement
- Balance sheet
- Cash flow statement
With accurate financial statements you’ll be able to quickly monitor the financial health of your business by tracking your assets and liabilities, see overall profitability and reveal how much money is coming in and going out. But in e-commerce, where sales, returns, and fees are flying around at the speed of light, how does one keep track of everything? The greatest challenge is taking that mountain-high load of information and converting it into a neat stream of actionable data without getting buried under it.
Take Square QuickBooks integration via Synder as an example. Automation with this software will provide you with an opportunity to sync with more than 30 platforms. You also will receive real-time data recording, error-free reconciliation, accurate P&L report, inventory tracking and even gift cards recording. What’s more, with automation, you can finally be sure that fees from different platforms are recorded properly.
Accounting methods for e-commerce business
The big question is how do you need to do your e-commerce accounting? There are two methods used in both traditional and e-commerce accounting that can help you manage your books:
- Cash basis accounting
Cash basis accounting is an accounting method that records transactions as money changes hands. On the surface, cash basis accounting is simple enough, but as with any part of bookkeeping, it’s important to be careful. The principle is simple: sales are recorded when payment is received, and expenses are recorded when they are paid.
Note: When a business makes an average of $26 million or more in gross receipts over three years, IRS rules require switching to the accrual method. So, it might be a good idea to start with accrual accounting from the beginning.
- Accrual accounting
In accrual accounting, expenses are recorded when an invoice is received, and revenue is recorded when the transaction is completed. If your business uses accrual accounting, it’ll be easier to understand the profitability of transactions.
Note: When using accrual accounting, it’s best to use a double-entry system. This means each transaction should be recorded as both a debit and a credit in different accounts, making it more accurate and reliable than single-entry accounting.
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What to keep in mind when doing e-commerce accounting
E-commerce accounting isn’t easy, and the nuances are more significant than you might imagine. With so much data, it’s easy to feel confused — we’re only human, after all. But if you’re going the online business route, you need to be prepared. Here are some essential tasks for your accounting routine and why they’re important:
- Track everything daily: To stay on top of your business, you need to track all the company’s transactions daily. It includes tracking sales, expenses, taxes, and fees from different platforms. This way, you’ll catch errors early and keep your books spotless.
- Reconcile books monthly: Reconciliation is something you can’t neglect. When your data matches up without mistakes or duplicates, it’ll give you peace of mind throughout the year, especially during tax season.
- Manage financial statements monthly: Your financial statements are your best advisors about the financial help of your company. By properly managing your income statements, balance sheets, and cash flow statements, you’ll keep your business flexible and ready for whatever comes your way.
- Handle taxes annually: Tax season can be a real nightmare, especially for online businesses that handle taxes from different marketplaces, but accuracy is key. If your transactions are properly recorded and reconciled, tax season will be much easier and smoother.
You might be thinking, “How can I juggle all these tasks on my own?” The answer is simple: automation. Trying to handle everything manually can quickly turn costly in terms of time and money, leading to mistakes and messy books. Just one miss can snowball into a series of headaches. But with automation software in your corner, you can streamline these processes, cut down on errors, and save yourself a ton of stress.
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Conclusion
E-commerce accounting might seem tough, but once you nail the basics, it’s a whole lot easier. With essentials like bookkeeping, tax management, and inventory tracking under your belt, you’re setting your business up for success. The right approach, paired with automation, slashes errors and saves your time. Sure, it can be daunting at first, but once you dive in, you’ll be cruising forward with confidence!
