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.
9 Most Crucial Ecommerce Tax deductions The IRS Doesn't Want You To Know
Use the SAME tax strategies companies like Amazon and Google use and take advantage today. (Even without accounting knowledge/degree)
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.
You may also like:
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 online 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.
You may also like:
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.
4. 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.
You may also like:
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.
——————> CREDIT xxx
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
——————> Cash 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
——————> Sales 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
——————> Cash 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.
You may also like:
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.
Whether you keep track of your own books using accounting software, engage a professional bookkeeper, or employ a bookkeeping service, you’ll need an bookkeeping solution that can handle the complexities of eCommerce bookkeeping, such as:
1) Merchant Fees
Merchant charges are built into the price of using an e-commerce platform like Shopify or BigCommerce to host your online business.
There are a lot of advantages to building your store on top of those platforms, from faster startup time to easier search optimization.
However, by collecting a fee out of each transaction you make on their site, e-commerce storefronts take a significant cut of your profit with each sale.
That might be a problem from a bookkeeping standpoint because the deposits that show up in your bank account are net sales rather than gross sales.
That’s because the platform has already taken its cut and then deposited the funds in your account.
To correctly show this in your books, make a note of the gross sales, then subtract the final money deposit from it to arrive at merchant fees.
2) Using tools and Issuing Refunds
Third-party platforms and services such as payment processors (such as Stripe and PayPal) can make recordkeeping more difficult.
This is especially true when it comes to tracking returns and exchanges.
For example, if you sell through Shopify, Stripe handles the payment (and there will be a merchant fee as previously stated).
If your customer returns an item a week later, where does the return get recorded? You might run into tracking difficulties if you use several tools.
As you will be asking yourself “Is Shopify or Stripe keeping track of the return? Was it registered more than once in your accounting records?”
It’s important to note that many payment processors (including Stripe) will not refund the merchant fee you paid just because a client returns an item.
That money is gone from your business and must be recorded accordingly in your accounting records.
3) Inventory Status on Multiple Sales Channels
most of the eCommerce platforms have inventory management built in. This makes it simple to keep track of and handle inventory for internet purchases through your store.
However, if you sell on multiple platforms online for example, on your own Shopify store as well as on Amazon (which is a common situation nowadays).
You’ll be “locked-in” to your platform if you don’t give inventory tracking for outside sales. As a consequence, Shopify’s inventory management will ignore your Amazon purchases.
When you have an inventory management system that works with your products, it’s critical to have a single location where you can keep track of your stock. Whether or not it updates your books automatically, having one central place to keep track of inventory is critical.
A bookkeeper can use that information to keep track of sales, returns, and restocks in your books if you choose to work with one.
You may also like:
4) Ecommerce Bookkeeping for Alternative Sales
Customer credit cards account for the bulk of your income, but you may still choose to accept alternative payment methods (particularly if you also offer in-person services).
In addition to credit, some eCommerce systems can track sales generated by cash, check, and gift cards.
If you want to accept those payment options, make sure your solution is compatible with them.
The prospect of providing additional payment options to your clients is appealing, but keeping track of them from a bookkeeping standpoint may be more difficult.
Note: If you get a payment in cash or check, the sale will not be recorded fully in your books until you deposit that money into your bank account.
A typical sale means someone pays you and you give them a gift card at the same time.
Because you haven’t exchanged anything yet, this money inflow is recorded as unearned revenue in your accounting records. You may account for the untaxed revenue on your income statement when the gift card is used.
5) Foreign Sales
Ecommerce allows you to sell items in various countries and many eCommerce platforms make it simple to sell in multiple currencies.
When you export and deliver goods to foreign nations, though, your accounting books may need further information to reconcile the transactions.
When you’re preparing to exit your business, understanding all of the technicalities involved can be overwhelming.
For example, if you’re selling in a foreign currency and your gross sales are made up of both transaction fees and merchant expenses, you’ll need to know how much each translates to in local currency to reconcile the sale with the ultimate deposit to your
That conversion might occasionally result in a discrepancy between the foreign sale and the final deposit in your account.
When this happens, the difference must be recorded in your books as a “gain or loss on foreign exchange.”
You may also like:
6) Recording Shipping Fees
Shipping and delivery costs are another source of debate.
Is it necessary to give customers free delivery? What is the best approach for you to charge them? A fee-based on weight or volume?
Some eCommerce platforms connect directly with shipping systems to make managing delivery more simple.
This implies that your platform can handle both receiving shipping expenses from the client and purchasing postage from your logistics provider.
Keep in mind that, while this is one less step for you to worry about, eCommerce service providers typically take a cut of the transaction.
Another thing to be aware of is that the shipping charges you charge customers frequently don’t match up to how much it costs you to ship those items.
Let’s assume you charge a flat rate of $5 for delivery, you may end up spending $2 to ship one order and $10 to ship another. Your accounting has to be able to handle those variances.
7) Sales Tax
Sales tax is one of the most critical aspects of running an eCommerce business.
Some eCommerce platforms, such as Shopify and Squarespace, will process both sides of the transaction and send payments to your state sales tax agency.
However, just a few platforms will tax customers. They deposit the money into your bank account along with the rest of the sale, so it’s up to you to send it to the proper tax authority.
It’s crucial to comprehend that tax money isn’t revenue from a bookkeeping standpoint.
When you make a transaction, the sales tax is immediately imposed as an obligation on you.
The difference between gross revenues and sales tax, merchant fees, and the prior bank deposit must be recorded in your books.
When a consumer purchases an item for $98, your eCommerce platform will collect $105.84 from them.
$98 for the goods and $7.84 in sales tax (which is 8% of the purchase).
Keep in mind that sales tax rate varies by location.
The eCommerce platform will withdraw the entire amount obtained from the client, which is $105.84 in our example, after subtraction of any merchant costs (typically around 3 percent or $2.94 in this situation).
As a result, your accounting needs to show:
- $98 in gross revenue.
- $2.94 in merchant processing fees.
- You’ll owe $7.84 in sales tax to your local tax authority because of the extra fee.
You may also like:
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.
You may also like:
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 eCommerce 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 eCommerce 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.
If you feel overwhelming (which is not your fault) feel free to book a free consultation call with Alan Chen, CEO of Free Cash Flow. To share your your financial statements (if have any) and any tax related information with him in addition, your fears and concerns.
What is the role of an eCommerce accountant?
Ecommerce accounting is the process of gathering, analyzing, organizing, and reporting financial data about commercial transactions and assets within an eCommerce firm. All the financial information that eCommerce businesses gather via these methods is critical for future business decisions.
Why is bookkeeping and accounting so vital to online shopping?
You’re just aimlessly piloting your eCommerce company if you don’t have adequate bookkeeping. To discover (and validate) your strengths, weaknesses, threats, and opportunities, you’ll need financial data. Without data, business decisions are nothing more than guesswork.
What do you mean by bookkeeping in business?
Bookkeeping is the process of recording and organizing all company activities that occur throughout a business’s existence. Bookkeeping is an essential element of accounting and focuses on keeping track of the company’s financial transactions on a daily basis.
What are the two types of bookkeeping?
The single-entry and double-entry techniques are the most frequent bookkeeping systems. While each has certain benefits and drawbacks, the firm must choose the one that is best suited to their needs.
What is the main purpose of bookkeeping?
The primary goal of bookkeeping is to maintain a complete and accurate accounting of all financial events in a systematic, organized, and logical manner. This ensures that the financial results of these activities are recorded in the books of accounts.
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.
You’re lucky enough to be here to Download our FREE E-book “9 Most Crucial eCOM Tax Deducations The IRS Doesn’t Want You to Know“.