Accounting is generally the last thing business owners think about when they’re starting out or planning to expand.
While initially, they manage their finances well, the need for precision becomes clear with the complexity of data and regulations.
More specifically, the need for accurate e-commerce accounting is driven by convenience as customers are buying from you through your online store, which has a limitless reach.
In this case, the rules of traditional accounting and bookkeeping don’t work.
Large businesses have developed teams to handle their finances, but small to mid-sized businesses struggle to sustain their growth, optimize profits, and ensure tax compliance.
Small e-commerce businesses have added complexities requiring a more nuanced approach to accounting.
Let’s explore everything you need to know about accounting for small e-commerce businesses.
Key Takeaways
- 90% of customers prefer online shopping, mainly due to convenience and variety.
- 23% of businesses mix their personal and business finances.
- E-commerce accounting is different from traditional accounting.
- Bookkeeping, tax management, and financial forecasting are essential parts of e-commerce accounting.
E-commerce accounting – how it is different from traditional accounting
E-commerce accounting focuses on managing sales, expenses, taxes, and inventory management. It gives businesses a comprehensive view of their finances, highlighting profits, losses, and all things in between.
It is much more complex than traditional accounting, demanding a more nuanced approach to handling online transactions.
For example, 90% of Americans now use e-commerce for shopping. 34% of online customers believe it offers more variety, 26% assert it makes product search simpler, and 22% believe it allows them to shop across locations.
Now if you look at the numbers clearly, you can find several variables that are added tasks or responsibilities.
For example, you have to manage sales across channels. It means you have to ensure data consistency and accuracy across channels, from sales to accounts to inventory levels.
Another aspect that makes e-commerce accounting more complicated is the multi-currency transactions. This usually happens when you’re making sales in different currencies, so you have additional considerations, like conversions and tax implications.
Inventory management is another key player in e-commerce accounting. You need to have real-time data across channels for financial reporting and analysis.
Recommended: E-commerce Accounting guide for small business owners
Key aspects of e-commerce accounting
Let’s explore the primary aspects of e-commerce accounting.
1. Bookkeeping and accounting
Bookkeeping and accounting is essentially the practice of tracking and categorizing daily business transactions. It includes sales, purchases, payments, bills, receipts, and invoices.
This role involves payroll management, preparation of balance sheets, and handling accounts payable and receivable.
It is important to keep the books organized as they help maintain accurate financial records for decision-making.
While you can hire bookkeepers to manage your books, most small businesses outsource their bookkeeping and accounting as it is a more feasible option.
2. Tax management and compliance
According to NFIB, the cost of tax compliance is 67% greater for small businesses compared to large businesses.
Tax management is the process of planning, preparing, and filing tax returns.
It can be one of the most challenging aspects of e-commerce accounting as inaccurate interpretations of tax codes are costly.
This task involves tracking and remitting all applicable taxes, including local, state, and federal taxes.
You have to calculate and file quarterly and annual tax returns. In addition, most businesses fill out and distribute 1099 to their contractual or freelance workers.
3.Financial forecasting and analysis
Another crucial aspect of e-commerce accounting is the reporting and analysis of financial data.
Your financial data is analyzed in depth to identify growth opportunities and reduce business costs. This is done by evaluating product profitability and determining ways to increase revenue.
You also analyze cash inflows and outflows to make financial projections and establish budgets.
Financial analysis helps when making investment decisions or seeking funding.
Tools and information you need to start e-commerce accounting
Setting up finances is an essential part of running an e-commerce business. Let’s look at three things that you need to get sorted to make accounting simpler.
Business bank account
23% of small businesses mix personal and business finances.
While it might be easier, you’re in for some serious trouble if you don’t track your transactions and cash flow daily.
It is best if you create a separate and dedicated business account. This way, you avoid any kind of untangling of finances.
Business tax ID
You need an Employer Identification Number (EIN) if you run a partnership business in the US.
You get EIN from the IRS and it is used to track customs information and other important tax-related information.
Accounting software
Most small businesses begin with a simple spreadsheet to track their money. However, as the business grows and the data becomes more complex, you’ll realize the importance of accounting software.
Accounting software tracks your sales, expenses, inventory, and even taxes. It automates financial reports for financial analysis and budgeting. Some accounting software also help you track mileage and manage payroll.
The best way to use accounting software is to integrate Netsuite or any other ERP solution with your business. Many e-commerce businesses integrate QuickBooks Online with NetSuite, centralizing their data and increasing workflow efficiency.
An accounting tool basically eliminates the need for manual data entry, increasing data accuracy and productivity.
QuickBooks Online
QuickBooks Online is a popular accounting software that seamlessly integrates with e-commerce marketplaces, like Amazon and Shopify.
- It gives insight into your sales, profits, and top-selling products.
- It helps with tax preparation and filing tax returns, recording receipts, sales transactions, bills, etc.
- You can use QuickBooks to maximize your tax deductions.
- It seamlessly integrates and transfers data across channels, from inventory to accounts to sales.
Sage
- You can integrate Sage with 800+ third-party applications like Stripe and Shopify.
- Sage offers unlimited users with various control levels.
- You can get customized templates for invoicing and use them to create and send quotations.
- It automates reminders for payments, making sending and receiving money simpler.
E-commerce accounting tasks that you must perform daily
This is what it looks like to be an e-commerce accountant.
- You track and ensure all transactions are recorded correctly. This includes sales revenue, sales tax, and shipping. Make sure you categorize every transaction.
- Track and categorize all business expenses, including inventory costs, advertising, software subscriptions, and platform-related fees.
- You will record all refunds and returns. Make sure all account payables and receivables are in order.
- Review and analyze financial data, including bank statements to reconcile and avoid discrepancies.
- Prepare financial statements, like income, balance sheets, and cash flow statements.
- Evaluate all primary and secondary financial metrics, including gross and net profit margins. Also, analyze inventory levels and turnovers to identify trends and find cost-saving solutions.
- Plan and prepare for income tax returns and determine tax deductions to maximize profits.
- Plan your budget considering seasonal highs and lows.
- Organize and monitor all financial records. Make sure all information is updated in real-time and accurate. It is best if it’s consistent across channels and easily accessible to relevant departments.
E-commerce accounting methods: Cash basis accounting vs. accrual-basis accounting
An accounting method is recording and tracking business transactions and preparing financial statements.
It is important to choose a method that helps you implement a data-driven approach in all aspects of business operations.
Let’s explore the two popular accounting methods.
Cash-basis accounting
Cash-basis accounting is the simplest way of recording financial transactions. In this method, you record the income when it is received.
And the same goes for the business expenses, they are only recorded once they are paid.
This is an easy method of accounting that also gives a clear picture of the cash flow. It doesn’t give clarity on the money you owe or pending payments.
Accrual-basis accounting
This is a method where you record income and expenses as soon as they occur, whether or not the cash is received or paid.
For example, you will record income as soon as you make a sale. Now it doesn’t matter if the payment is done or not.
This method gives businesses clarity on their income and earnings. They are aware of the financial health of the company.
3 financial statements for e-commerce sellers
Let’s look at the three important financial statements for e-commerce businesses.
Balance sheet
A balance sheet gives insight into the financial position of the business. It highlights its total net worth including assets and debts.
It has three main sections:
- Assets: This section highlights what the company owns, including cash, investments, and inventory.
- Liabilities: This section highlights what the company owes, like the loans and bills.
- Equity: It is the share of the owner in the company.
Income statement
The income statement highlights revenue, expenses, and profit over a specific time. For example, there are monthly, quarterly, and annual income statements.
It includes the following three items:
- Revenue: This is the money earned from your sales.
- Expenses: This is the cost of running business operations. It includes rent, employee salaries, cost of raw materials, etc.
- Profit and loss: This is the difference between the expenses and revenue so you can establish whether the business made a profit or loss.
Cash flow statement
A cash flow statement highlights the company’s liquidity, ensuring you have enough in your pocket to cover all expenses and keep this boat afloat.
It gives you insight into how you spend and use your money.
The bottom line
E-commerce accounting is unlike traditional accounting, inclining toward the accrual-basis accounting method for a more nuanced approach to financial management.
While using accounting software for regular bookkeeping and tax management is convenient and necessary, integrate your accounting solution with an ERP system for higher operational efficiency.
Most small businesses choose to outsource accounting and bookkeeping needs.
And this is where you should know about Ledger Labs.
We have 12+ years of experience in the field, offering accounting and integrative solutions to businesses across industries and sizes.
Let’s book a consultation appointment today!
