eCommerce Bookkeeping is easy but first, I have to congratulate you for diving in the modern way of selling and earning anytime, anywhere.
Just like many in the eCommerce business selling in Shopify, Amazon or other online selling platforms, you have figured out what to sell and which online platform to display your merchandise. I am sure that you have thought of monitoring your expenses but zero understanding in accounting. eCommerce Bookkeeping will guide your through gathering the important data in your business.
Is it time for the books?
Checking bookkeeping courses may be overwhelming.
You think you are just a start-up and may not need bookkeeping but then one day, you find your payments does not match with your payouts. Tax season is about to come and you don’t know how to compute your tax due. Or maybe, you are not sure if your business is earning.
Before you start memorizing what you have read, I have to tell you that you only need to know the basic language in accounting to set-up your books of account. eCommerce bookkeeping should not be as complicated as you think it is.
The heart of accounting is analyzing and not memorizing.
eCommerce bookkeeping may be easy depending on your patience. In this article, I will teach you the basic know-hows in managing your accounting books in eCommerce set-up.
Bookkeeping, in simple terms, is…
Keeping records of all your business transactions.
eCommerce bookkeeping does not differ to any of the other businesses that you know, although, it evolved drastically. Selling platforms like Amazon, Shopify, and many more may be connected to accounting systems that you will be choosing later on.
For now, you may focus on learning on analyzing the transactions you do everyday and learn how to record it. One thing to remember is to keep every document that has your name (or company name) in it.
I will share to you the most common bookkeeping practices that most of the businesses do:
- Monitoring Bank accounts or Credit Cards Statements that is use solely for the business
- Keeping all the invoices, receipts in a folder or through digital photos
- Recording and summarizing business sales, revenue, expenditures and liabilities
- Payroll documents
- Tax returns and 1099 Forms
You may be doing these common practices already. Remember, you must have an actual purchase receipt (physical or digital) kept and available when needed because this usually gives you the benefit of lowering your taxes. eCommerce bookkeeping is a discipline of keeping records that you must use all of the time.
Basic Account Types
An organized and accurate record is the goal of bookkeeping.
To organize your records, you must know the five (5) types of accounts where you must identify your transactions and one by one record it to the right account. There are a lot of transactions that will fall on each type of account. It is important to understand if it is an asset, a liability, expense, income or equity while doing eCommerce Bookkeeping.
This is what the business owns for the business use and consumption. A piece of land, a warehouse, a jewelry, a car- these are some examples of assets that you may already have. Any properties used for business are business assets. Below are the most usual business assets that you have to account for.
Cash / Cash in Bank– Monies that you have on hand available to use anytime for your business.
Accounts Receivables- These are payable by your customers or the eCommerce platform where you are selling
Merchandise Inventory- These are the items that you sell in your chosen platform.
These are what you owe There are different types of liabilities:
Accounts Payable- Credit cards that you use to purchase your Merchandise Inventories, and inventories or items that are payable in cash in the future. Usually due in less that a year.
Salaries Payable- These are salaries you have to pay on the upcoming payroll date.
Long Term Loans– Funding that you secured for your business payable on a longer term.
As a business, you have to spend to make your business rolling. FBA Fees, marketing expenses, office supplies, warehouses, selling fees, shipping fees, taxes and more are business expenses. Assess which of your expenses are business related because these will decrease your taxes later on.
Aside from that, you will know when to tighten the belt when your profits are decreasing.
- Income or Revenue
When you provide sales or a service, customers pay either in cash or through wire transfer. Generating sales is how your business earns and survives. Interest earned and other income are part of this account.
The value of your business (assets) after subtracting all the liabilities.
Businesses have different ways to record their transactions.
but as long as you understand the different account types, you are a step forward to be a good bookkeeper.
How to record an accounting transaction for eCommerce Bookkeeping beginners
Every Debit has a corresponding Credit.
You may have heard of a debit and credit and it caused you a panic attack but it shouldn’t! Know that it is equivalent to cause and effect in bookkeeping.
Debit stays on the left, while credit is on your right.
A normal entry of an Asset (inc), Sales, and an Expense is debit while a normal entry of Liabilities (inc), Revenue, and Equity is credit.
Any decrease on Asset (dec), Sales, and an Expense will be a credit, and any decrease in Liabilities (dec), Revenue, and Equity is a debit.
For example, in the beginning of your business, you opened a bank account under the name of your company.
Now you know that cash-in is an asset to your company, and that an asset adds value to your company.
——————> Equity xxx
On the second day of your business, you decided to buy boxes of toys and sell it through Amazon, you paid cash.
You now know that the boxes of toys are your inventory which is an asset, and cash, although also an asset, will now decrease in balance because of the purchase.
Merchandise Inventory- Toys xxx
Shopify was able to sell your inventory but will be paying by the end of the month, you now know that Shopify owes you.
This is how you record the transaction:
Accounts Receivable xxx
And you also have to decrease your inventory with the amount that you just sold.
Cost of Goods Sold xxx
——————>Merchandise Inventory xxx
When you received a bill from your advertisers that you have to pay your advertisement next month, you now have an Expense, and a liability.
Advertising Expense xxx
——————>Accounts Payable xxx
When you pay the advertising expense a day after billing, you will decrease your accounts payable and decrease cash.
Accounts Payable xxx
Give it time to analyze the cause and effect of each transaction. By now, you must be very proud of yourself for understanding a journal entry.
More transactions to encounter later on but I shared to you the basics of creating a journal entry. For instance, make it a practice to record your transactions on time. More so, that it will be easier to recall what type of transaction you did on every receipt you have on hand.
eCommerce Bookkeeping Schedule
Bookkeepers have one main goal, that is to keep your records organized and available for audit. To do this, a bookkeeper, or you, must form a habit on what to do daily. Some may take a while to develop a habit but when you do, expect that most of your tasks will get easier overtime.
Accounting is historical in nature, its main essence is to keep track of the past.
Bookkeepers usually record transactions on a daily basis to make sure that it won’t pile up, no missed payments, and carefully assessed to record to their proper account type. eCommerce bookkeeper does the same.
On a monthly basis, you might want to prepare the summary of each type of account that you have learned and come up with a useful report. For manual recording, list all the debit and credits of each account (e.g. cash, accounts receivable, inventory, accounts payable) and . That will be your period closing (month-end or year end) balance.
Three most useful basic eCommerce reports
Although reporting is an intermediate skill, it is not impossible for non-accountants to learn this. It may take a while to figure this all out but it comes in handy to know and understand what you can see from these reports whether it was generated by a professional accountant or by the accounting software tools that you use. You can look up online free formats of your month-end report.
For now, you may want to understand the standard financial reports that most companies look at, then in the future, you will be doing this on your own!
In this report, you will include your Assets, Liabilities, and Equity, with this, financial data users will know how much your business worth.. All the accounts under the balance sheet are continuous, it means, the ending balance for the current month will be the beginning balance for next month.
Are you making money from what you are selling? Sales and Other Revenue less Expenses should equal to profit but if it is negative, it means you are at loss and you must make more sales or tone down your expenses. Income Statement or Statement of Profit and Loss gives you a bird’s eye view of your business performance.
Understanding how you make use of the cash that you received for the period will benefit your eCommerce business. Computed as the cash that you received from generating sales / revenue, add your beginning cash for the month the deduct all the expenses and liabilities you paid through cash. It is a very useful report that many businesses use for their forecast. This is also a part of eCommerce Bookkeeping.
Taxes for eCommerce Bookkeeping Beginners
Now that you know the eCommerce bookkeeping basics, the next that you will be thinking about is taxes. A portion of your income due to the state.
Depending on the type of your legal business structure, your taxes will be computed either as a personal income tax or a business income tax.
Sales Tax is the most common E-commerce business which is slowly being introduced in the e-commerce industry in 2018. The different tax laws per state made it difficult for e-commerce businesses to pay its taxes.
Payroll tax is also something to keep in mind when you hire workers under your company. You’ll need a Federal Employer Identification Number (FEIN) and a State Identification Number for each state your business operates in.
The term “nexus” is used in tax law to describe the jurisdiction of the state to your business. A connection where the taxing authority of the state may collect tax and you, as a business, are required to pay taxes on the collecting state.
Still need help with eCommerce bookkeeping
You get the idea but you still lack confidence in starting your own books.
There are a lot of tools that can help you with bookkeeping. Most e-commerce businesses use cloud accounting software that is available online. This is a revolutionary way of bookkeeping, initially, bookkeepers traditionally write accounting transactions on physical ‘books’, then, it improved by installing accounting software on your computers, and now, to logging-in online where anyone, anywhere has 24/7 access to your accounting records.
These cloud accounting softwares can be modified to automatically compute sales taxes, record a recurring bill (or invoice) on a certain day of the month, bill your customers and even connect to your bank account to receive and send money.
Digitized photos or scanned copy of receipts may also be stored on these softwares. Anytime, reports can be generated, too.
Xero and Quickbooks are the leading cloud based accounting software being used in e-commerce business, as a result, this helps many business owners manage their own accounting books.
If you still consider your transactions very small, you may also start with using Microsoft Excel or Google Sheets on recording your transactions, this will compute formulas faster and in a more effective way than calculators.
Hiring a professional bookkeeper
Maybe you read this article over and over but you still have questions. You might want to hire a bookkeeper to help you out. Either someone to set-up the accounts for you or someone who will record and prepare reports for you.
Thank God for the internet! You can work with anyone at the comforts of your own home.
Putting up a business is never a walk in the park. You have to think about sales strategies, how to source products, collaborate with suppliers. It is overly satisfying when you start earning but in order to maintain your brand and expand, you also need to have good financial health. To do that, you have to be knowledgeable on recording and reading financial records.
Once you are comfortable with numbers, you will begin to foresee a pattern of your earnings and expenditures. With that, you may start to analyze which area you must improve on, this is what accountants call ‘financial planning’.
Whether strengthening your marketing strategy or lessening the company’s expenses, it will all boil down to how informed you are with your business money and how you use it.