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the complete guide to ecommerce accounting

Ecommerce accounting is a growing service that will likely not be going away anytime soon. In fact, according to the US Census Bureau, ecommerce sales in 2016 were up 15% from 2015 and totaled $394 billion.

If entrepreneurs want to encourage more customers and increase revenue, they will have to keep track of their financial information.

This guide can help you get started with this process by explaining what is important when it comes time for tax season and how ecommerce businesses can make sure all of their expenses are accounted for.

This represents an incredible opportunity for entrepreneurs who want to start their own online businesses.

However, with this opportunity comes a lot of responsibility and complexity when it comes to accounting-related tasks such as taxes and bookkeeping. Fortunately, there are many tips today that make these processes much easier!

What is Ecommerce Accounting?

ecommerce accounting the complete guide

It’s the process of gathering, analyzing, organizing, and reporting financial data in an eCommerce company about commercial transactions and assets. Ecommerce businesses face a variety of challenges when it comes to accounting.

The following are some of the eCommerce accounting difficulties faced by retailers:

All of this financial data is crucial for online firms to build on as they plan future operations.

The three primary categories of accounting are bookkeeping, reporting, and submitting tax returns.

These accounting categories are broken down further into the following subcategories:

  • Financial Statements
  • Inventory Management
  • Fixed Assets
  • Cash Flow Analysis

How Ecommerce accounting and bookkeeping differ

When I began working in accounting, I remember sitting down with the CFO to discuss my role and responsibilities.

She asked me what tasks I would like to perform during my time there. With no hesitation, I responded that I wanted to learn how to do eCommerce accounting.

Her response was an expression of confusion followed by a short lecture on the difference between accounting and bookkeeping.

I’ve since learned that bookkeepers perform day-to-day tasks, such as coding invoices, sending out statements and responding to customer service inquiries.

Alan Chen

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By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.

Accountants prepare financial statements and reports and conduct analyses. businesses need both types of expertise to properly manage the finances of their business.

But, what exactly is the difference between accounting and bookkeeping?

The following are some of the most frequent bookkeeping tasks:

  • Transaction categorization.
  • Invoicing.
  • Account reconciliation.
  • Balance sheets preparation.
  • Payroll management.
  • Accounts payable and receivables management.

Accounting is the process of interpreting all of a bookkeeper’s financial records in order to generate financial reports, models, and forecasts. So you may better understand your present financial position and prepare for the future.

The following are the major accounting activities:

  • Preparation of adjusted entries.
  • Financial information audits.
  • Tax planning and reporting.
  • Expertise in financial planning and risk analysis.
  • Creating financial statements, reports, and models.

Accounting is designed to give you financial understanding so that you may make better commercial judgments.

Vital Things you need to know before Starting with Ecommerce Accounting

Vital Things you need to know before Starting with Ecommerce Accounting

The following prerequisites are necessary for successful accounting: a bank account is required. The business tax ID number is also required. An accounting solution & financial plan must be used.

Bank Account

The first step toward accurate and efficient accounting is to open a business bank account.

Different banks have different provisions for company owners. Their pricing and maintenance procedures may differ as well.

As a result, compare several lenders before deciding on the finest bank for your online business.

It’s important to identify a reliable and rapid payment processor to efficiently receive online payments.

There are 2 primary reasons to maintain separate accounts:

The first is that having a single account will result in confusion about where goods purchased on your personal or business card were obtained, and the second is that you’ll need an independent site.

Tax ID Number for Businesses

Entrepreneurs who start an online company in the United States must first apply for an Employer Identification Number (EIN) from the IRS. This is a 9-digit number that you’ll need for all tax filings related to your business. You don’t have to go to the IRS in person, but you can fill out an electronic form to do it online.

It’s comforting to know that firms and collaborations need an EIN in order to operate.

On the other hand, sole proprietors use their Social Security Number (SSN) in taxation documents and other business papers.

Accounting Solution for Ecommerce Businesses

Nobody manages their eCommerce accounting without the aid of a suitable accounting program today. It’s quicker, more exact, and more user-friendly to handle your finances using one of these tools.

When you pick up your accounting software, you have to look for features like automated reports, invoicing, tracking, accounting, inventory management, tax filing capabilities and so on.

Check out the following six accounting software alternatives for your eCommerce accounting requirements and see which ones meet your specific personal needs:

  1. QuickBooks: simple accounting (with many accruals), payroll management, straightforward reporting, simple tax filing
  2. Wave: a great accounting software platform for a service-based small business that sends simple invoices and doesn’t need to track inventory or run payroll for free.
  3. FreshBooks: it has more invoice customization options than other accounting software. Its primary function is to send, receive, print, and pay bills, but it can also handle basic bookkeeping activities with affordable price.
  4. Xero: The tool provides a user-friendly interface that is simply connected to other applications, automated bank procedures, and currency conversion.
  5. Sage: Customer support, inventory management, a customer support center, user-friendly features, and scalability are some of the other reasons why it’s an excellent fit for small businesses.
  6. ZipBook: Superior reporting, easy credit card processing, accrual and cash reports, limitless clients and suppliers, and more.

Maintain Your Financial Plan

A business budget is a way for entrepreneurs and small-business owners to keep track of all their financial obligations, like spending or revenue. The total number tells them how much cash they need in order break even (or make profit).

A budget is designed to assist you in the following ways:

  • Keep an eye on your cash flow patterns.
  • Keep track of all recurring and unanticipated expenditures.
  • Take the opportunity to adjust your expectations and find out how much money you truly need.
  • Set some money aside for a rainy day (and taxes).
  • Reduce or avoid company debt.
  • Make a point of keeping your attention on long-term financial objectives.

You know that 2021 was a tough year for small eCommerce businesses. Budgeting can be the best way to pick up and stick with it! Here’s how:

1. Review your cash flow.
2. Make a weekly budget calculator.

For further reading:

Business Account Types for Ecommerce

Business accounting is complex due to the different types of business accounts that entrepreneurs use including several related bank accounts, credit cards, merchant accounts and more.

There are numerous types of bank accounts available for companies, depending on the number of features and their function. The four most suitable business account kinds for eCommerce entrepreneurs are as follows.

1. Savings Account

Entrepreneurs who are far-sighted and considerate always put money aside for rainy days. To do so, you’ll need to open a savings account, which is why you should be aware of the following things:

  • You will earn interest on the money you contribute.
  • Interest rates are considered earnings, therefore they are taxed.
  • Certain rules must be met before you can withdraw money from a savings account.
  • There is a minimum balance requirement each day.

2. Checking Account

Checking accounts provide the following advantages:

  • You get immediate access to your money, thanks to the convenience of online transactions.
  • There is no minimum account balance requirement. Make sure you have enough funds in the account to cover your purchases.
  • There are generally low interest rates.

The major disadvantage:

  • A maximum number of cash deposits each month is a restriction.

Money Market Account

A money market account is a savings and checking account that has many of the same features.

Money market accounts offer higher interest rates than checking and savings accounts. You may deposit as little as $100 and earn greater interest than you would with checking or savings accounts.

This is a great alternative for companies with larger credit balances owing to the increased interest rates they obtain.

The key disadvantage:

  • There are a few restrictions to keep in mind while using the IRA. You may only make six withdrawals from your account each month.

Certificate of Deposits

A certificate of deposit is a savings account in which you commit to putting your money away for a specific length of time, such as one month or five years.

Certificates of deposits have a greater interest rate on average.

The major disadvantage:

  • The cash must be kept in the account until the contractually agreed-upon date, or else fines may be incurred.

Financial Statements for Ecommerce Businesses

E-store owners must remain aware of their financial transactions and statements. You will only be able to make logical financial decisions if you can see your company expenses clearly.

E-commerce merchants must stay on top of their financial transactions and statements.

You’ll be able to make sensible financial decisions only if you can properly see your company’s expenditures.

By monitoring and auditing your financial reports, you can prevent foreseeable losses and minimize risks.

The following three financial statements must be closely monitored by the eCommerce entrepreneur:

  • Income statements.
  • Balance Sheets.
  • Cash flow statements.

Balance Sheets Example

balance sheet for ecommerce busineses

A company’s balance sheet is a comprehensive account of its liabilities, assets, and stockholders’ equities at a particular time. It contains information on a firm’s assets and debts as well as investments made by investors and shareholders.

A company’s balance sheet is composed of two columns, with assets on the left and liabilities on the right. It has the following equation as its foundation:

Assets = Liabilities + Shareholders equity

Income Statements Example

Income Statement

Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)

A firm’s income statement documents revenue, gross income, and net income. It is also known as the profit and loss statement or the statement of revenue and expense.

Here’s a sample of an cash flow statement:

Cash Flow Statements Example

Cash Flow Statements

The primary goal of a business’s cash flow statements is to show how much money it can make and use to pay off its debts and meet its basic operational expenses.

The following are some of the benefits of cash flow statements:

  • Giving the owner of a company information on how his or her company’s financial activities are controlled.
  • Who pays the company’s bills?
  • Examine how the company’s money is spent.

Accounting Tasks for Ecommerce Businesses

Accounting tasks for Ecommerce Businesses

There are a lot of eCommerce businesses out there, and they all have one thing in common: at the end of every month, they need to get their accounting in order.

On an everyday basis, every company owner must complete a variety of accounting duties. The following five activities are involved:

  • Stay on top of taxes.
  • Track expenses.
  • Categorize expenses and transactions.
  • Track inventory.
  • Track inventory cash flow.
  • Track customer returns and chargebacks.
  • Calculate break even sales.

Stay on top of taxes

Tracking taxes in each state may be too difficult, so companies should use accounting software that can do it automatically.

And you can stay on top of taxes if you:

  • Track your Income each month.
  • Keep all paystubs.
  • Keep receipts and review bank statements.
  • Hire an eCommerce CPA.
  • Keep old tax returns.

Track Expenses

If you want to master eCommerce accounting You should track your expenses, including business accounts and merchant accounts. If you use software to process transactions, it may include a section for tracking expenses.

You can also track personal expenses that are related to your business, such as the purchase of a computer.

The following financial items must be tracked in-depth accounting:

  • Bills.
  • Invoices.
  • Receipts
  • Proof of payments.
  • Previous tax returns.
  • W2 and 1099 forms.
  • Canceled checks.
  • Financial statements from the bookkeeper.
  • Supporting documents for any deductions, income, or additional credit indicated on your tax return.

Categorize Expenses and Transactions

Every eCommerce entrepreneur must categorize expenses and transactions.

It will then help you stay on top of taxes, income, expenses, inventory and cash flow.

The operating activities of a company are concerned with how much money is generated through the firm’s products and cash used in business operations.

Income and costs are the two most common kinds of transactions.

Filters and user-defined rules allow transactions to be sorted on their own. Still, you should double-check each transaction and add any necessary further criteria (e.g., marketing spend, salaries, etc.).

This data may be utilized to calculate monthly profits as well as single and regular expenses.

Track inventory.

All eCommerce business owners need to keep track of their inventory.

And to do so There are two ways to track inventory:

Periodic tracking: The first and most important step in using this technique is to calculate the amount of money invested. It includes counting each inventory item. The periodic inventory method is used to track the amount of inventory stored at specific intervals of time. Adding and removing inventory items affects the money spent and gained on inventory for a specific time period. New e-store owners need to perform this method once a month. As your e-commerce business develops, Periodic tracking is done every quarter or annually.

Perpetual tracking: Use accounting software to keep track of inventory. As items are scanned or added manually to your storage, the software updates the inventory count and total cash figures automatically.

Track inventory cash flow

An inventory cash flow report calculates how much money was spent on manufacturing and selling items as well as manufacturing and selling costs for companies that manufacture their own products.

You must know the following to monitor eCommerce inventory cash flow:

  • The cost for each item.
  •  How many distinct goods are on your store?

On a monthly basis, you may calculate your inventory cash flow by performing your accounting. The total eCommerce inventory costs is divided by the quantity of goods in stock

Obtaining a clear picture of your inventory cash flow requires keeping track of matters like spoilage, theft, and damage throughout the manufacturing process.

Keep track of your clients’ chargebacks and returns.

The movement of goods to customers should be recorded as an increase of the inventory account. 

The provision of services to customers should be recorded as an increase of the accounts receivable list. When a customer returns a product or service, the transaction should be recorded as an increase of the accounts payable list. 

When a customer files a claim with their bank, all chargebacks should be recorded under the Returns and Allowances account. If any additional costs are incurred as a result of chargebacks, they should be recorded as business expenses.

Calculate Break Even Sales

Sales and business income taxes are two of the most important types of taxes for eCommerce businesses. 

There are two types of taxes to consider if you operate an e-store based in the United States: 

  • Local sales taxes. 
  • State-level sales taxes. 

If a business has an e-store registered in one state, the owners must contact their tax authorities in that state to learn more about any eCommerce taxes they may be responsible for, according to the Legal of Taxation.

Important Key terms for eCommerce accounting

The following accounting terms are essential for any online retailer to understand:

  • Ecommerce sales tax: It’s a sales tax that is levied by the state government and must be paid by businesses on sold items and services. It’s collected at the point of sale and transferred to the government. The formula for calculating sales tax is:
  • Invoice: A letter from the vendor to the buyer that informs them of the amount of money they must give to the seller for the arranged items or services. The invoice is delivered to the buyer when a sales order is in place.
  • Receipts: The bill of sale is an official written document from the seller that verifies that the buyer has paid for the provided items or services. It’s used by buyers as evidence of payment.
  • Sales order. A sales document prepared by the selling organization and submitted to the customer to confirm and validate sales of services and products. It contains the following items:
  1. Sale details.
  2. Number of sold goods or services.
  3. Price of goods and services.
  4. Quality.
  5. Delivery address and date.
  6. Payment method.
  • Purchase order: An authorized statement from a buyer that they want to acquire products or services from a vendor. It includes the required quantities and pricing. Purchase orders are used by sellers to create sales orders.

What Should You do if you are Overwhelmed? (Which is not your fault)

As your company grows larger, the issues you face become increasingly complicated.

When you reach this stage, you must hand over control to the specialists so they can assist you in growing your online business while keeping your focus in your business growth only.

We here at Free cash flow, helping online businesses (like your business) to boost their revenue and doing what other firms miss.

I know you’re anxious about not receiving as much as you had hoped, but believe me when I tell you that we exceed your expectations.

Move your online business to the next step NOW and book a free consultation call with Alan Chen, CEO of Free cash flow

FAQ

Is it necessary to hire an accountant for my eCommerce business?

An eCommerce accountant can help you keep your books in order and make sure you are compliant with tax laws. You may be able to do your own bookkeeping with software like Quickbooks, but it is important to have an accountant review your books at least once a year.

What is the role of an accountant for eCommerce businesses?

The responsibility of an eCommerce accountant is maintaining accurate accounting records, ensuring the financial integrity of an eCommerce business, monitoring account activity, collecting, analyzing, organizing, and reporting financial data from business transactions and assets. All financial information gathered through these methods is crucial for making future decisions.

How can you handle accounting as an eCommerce store?

Start with a basic accounting program to keep track of your cash flows, inventory, costs, sales, and break-even sales targets. Then It’s time to figure out the “COGS” to calculate your gross profit margin

Conclusion

Ecommerce accounting is a broad field, with many divisions and subspecialties. online retailers must understand what each of these components means and how to use them in their operations.

Online entrepreneurs may use the information provided in this article to minimize their accounting duties.

Check our free e-book 9 Most Crucial eCOM Tax deductions The IRS Doesn’t Want You To Know

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