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 is 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 ecommerce accounting.
The following are some of the ecommerce accounting difficulties faced by ecommerce retailers:
All of this financial data is crucial for ecommerce firms to build on as they plan future operations.
The three primary categories of accounting are bookkeeping, reporting, and submitting tax returns.
These ecommerce accounting categories are broken down further into the following ecommerce accounting 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.
Accountants prepare financial statements and reports and conduct analyses. Ecommerce 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.
- 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
The following prerequisites are necessary for successful ecommerce accounting: a bank account is required. The business tax ID number is also required. An accounting solution & financial plan must be used.
A dedicated business bank account is the first step toward accurate and systematic ecommerce accounting. Different banks have various packages for company owners. Their pricing and upkeep policies can vary, as well.
As a result, before deciding on the best bank for your ecommerce endeavor, compare several lenders.
Aside from that, it’s critical to find a dependable and quick payment processor to efficiently collect online payments.
There are two main reasons to have separate ecommerce 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 ecommerce site.
Tax ID Number for Businesses
In the United States, e-commerce entrepreneurs must contact the IRS to acquire an Employer Identification Number (EIN). This is a 9-digit number that you’ll need for all tax filings for your company. You don’t have to visit the IRS in person, but you can fill out an electronic form to do so. It’s delivered to you via e-mail.
It’s comforting to know that businesses and collaborations need an EIN.
On the other side, sole proprietors utilize their Social Security Number (SSN) on tax paperwork and other company 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, ecommerce tracking, ecommerce accounting, inventory management, ecommerce 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 needs:
- QuickBooks: simple accounting (with many accruals), payroll management, straightforward reporting, simple tax filing
- 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.
- 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.
- Xero: The tool provides a user-friendly interface that is simply connected to other applications, automated bank procedures, and currency conversion.
- 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.
- 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:
- Why You Should Invest In Bookkeeping In 2022 (Forecasting Provided)
- 16 Ecommerce Expenses and how to reduce them
- How Can Entrepreneurs Leverage The Profit First Method In 2022
- How To Find an E-commerce CPA For Your Business
Business Account Types for Ecommerce
Business ecommerce accounting is complex due to the different types of business accounts that ecommerce 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
Ecommerce entrepreneurs that are far-sighted and conscientious always set aside money for a rainy day. To accomplish this, you’ll need to open a savings account, which is why you should be aware of the following things:
- You will be paid interest on the money you put in.
- Rate of interest are regarded as income, so they are subject to taxation.
- A savings account has certain requirements for withdrawing money.
- There is a minimum daily balance requirement.
#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.
The main advantages are:
- You can deposit as little as $100 into a money market account and earn higher interest rates than you would with checking or savings accounts.
- Suitable for ecommerce businesses with larger credit balances that want to obtain higher interest rates.
The key disadvantage:
- Withdrawals are limited to six per month.
Certificate of Deposits
A certificate of deposit is a savings account in which you entrust your money for a specified length of time, such as one month or five years.
The main advantage:
- Certificates of deposits generally have a higher interest rate.
The major disadvantage:
- The money must be kept on the account until the agreed-upon date, or else penalties 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.
You can prevent potential losses and minimize hazards by monitoring and auditing your financial reports.
The Ecommerce entrepreneur must pay close attention to the following three financial statements:
- Balance Sheets.
- Income statements.
- Cash flow statements.
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 balance sheet is made up of two columns, with assets on the left and liabilities on the right. The equation below serves as its foundation:
Assets = Liabilities + Shareholders equity
An income statement is a financial document that details a company’s earnings over a particular period of time. It covers company gains, losses, revenue, and expenses and is sometimes referred to as a profit and loss statement or the statement of revenue and expense.
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)
Here’s a sample of an income statement:
Cash Flow Statements
The cash flow statement measures a company’s ability to generate cash and its equivalent payments. It determines how much money a firm may produce to pay off its debts and finance its day-to-day operations.
Cash flow statements provide the following advantages:
- Providing the company’s owner with information on how the company’s financial activities are managed.
- Who pays the money to the firm.
- Examine how the firm’s money is spent.
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 ecommerce accounting in order.
On an everyday basis, every ecommerce 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 ecommerce taxes in each state may be too difficult, so ecommerce companies should use ecommerce 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.
If you want to master ecommerce accounting You should track your ecommerce expenses, including business accounts and merchant accounts. If you use ecommerce software to process transactions, it may include a section for tracking expenses.
You can also track personal expenses that are related to your ecommerce business, such as the purchase of a computer.
The following financial items must be tracked in-depth ecommerce accounting:
- 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 ecommerce taxes, income, expenses, inventory and ecommerce 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.
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 in stock as well as recording the cost and sales value of each item. Every change to your business’s quantity of inventory items is reflected in 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: To keep track of your inventory, use automated accounting software. As a new item is scanned or added manually to your storage, the software you’re using updates the inventory count and total cash figures automatically.
Track inventory cash flow
For ecommerce firms that sell the items they make, an inventory cash flow report determines how much money was spent on manufacturing and selling goods as well as the manufacturing and selling expenses.
To track ecommerce inventory cash flow, you need to know the following:
- Cost per item.
- Number of ecommerce inventory items.
You can calculate your ecommerce inventory cash flow by doing your ecommerce accounting on a monthly basis. by dividing the total ecommerce inventory costs by the number of items in stock.
If you want to get the whole picture of your inventory cash flow and correctly calculate net profit, you’ll need to keep track of inventory losses, such as:
- Damage during production.
Track customer returns and chargebacks.
Customer returns and chargebacks are two distinct categories.
- Customer returns: the initial transaction should be recorded as an expenditure and added to the accounts payable list. The return of your product to your organization should be entered in the Returns and Allowances area, with revenue adjusted.
- Chargebacks: A chargeback occurs when a consumer files a claim with their bank in the event of fraud or missed deliveries of paid goods or services. All chargebacks should be listed under Returns and Allowances. If any additional costs are incurred as a result of chargebacks, they should be recorded as business expenses.
Tip: Save yourself and your customers by being up to date with ecommerce fraud.
Calculate Break Even Sales
Sales and business income taxes are the two 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.
According to the Law of Taxation, if an e-store is registered in one state, its owners must contact the relevant tax authority in that state to learn more about any ecommerce taxes they may be responsible for.
Every single customer’s shipping address determines their tax burden. You may either enter sales taxes manually at the checkout or have a software program calculate them for you using the ecommerce platform you’re utilizing.
Important Key terms for ecommerce accounting
The following ecommerce 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:
- Sale details.
- Number of sold goods or services.
- Price of goods and services.
- Delivery address and date.
- 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.
Ecommerce accounting is a broad field, with many divisions and subspecialties. Ecommerce retailers must understand what each of these components means and how to use them in their ecommerce operations.
Entrepreneurs working in ecommerce 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