by the Shopify team
What is eCommerce Accounting?
eCommerce accounting is the practice of recording, organizing, and managing all financial data and transactions related to running an eCommerce business. Think of it as a subset of small business accounting that’s tailored specifically to meet the needs of eCommerce service providers.
At its simplest level, accounting is the practice of tracking and recording transactions, categorizing each transaction as either revenue or expense. Pretty straightforward, right?
However, it can be easy to get lost in accounting terminology, especially if you’re new to business finances. To simplify things, here are some key components of eCommerce accounting:
What Does eCommerce Accounting Include?
Like all business accounting, eCommerce accounting includes:
Basic accounting functions, such as managing invoices, payroll, and budgets
Advanced planning and reporting functions, such as preparing financial statements and creating a strategic tax plan
Tax management, accounting, and growth planning are often three key areas to focus on.
Accounting Methods for eCommerce Sellers
There are many different accounting service providers available – from accounting software platforms to traditional accounting firms. Before starting with a vendor, however, you’ll need to choose an accounting method.
There are two accounting methods: cash accounting and accrual accounting. An eCommerce business can use either method but not both at the same time. Switching methods requires filing paperwork with the IRS.
Cash Accounting
Cash accounting is the accounting method that measures cash transactions.
Here’s an example of how cash accounting works:
Seems simple, right? Under this method, you might receive an order for a handmade coffee table worth $800, make the table, and then ship it to your customer. Under cash accounting, you would only record revenue from the table when the buyer’s payment hits your account.
The same rule applies to expenses. You might owe $10,000 to a videographer for a series of promotional videos to be completed at the start of the second quarter, but because that $10,000 is still in your bank account at the end of the first quarter, you’ll pay taxes on it during the first quarter. From an accounting perspective, that debt only matters when the money leaves your account.
Accrual Accounting
Accrual accounting, unlike cash accounting, records the transaction when the money is earned or expenses incurred, not when the payment changes hands.
The accrual method is used more frequently by larger companies and requires more specialized accounting knowledge and a more proactive approach to account management than the cash accounting method.
This method provides a more accurate picture of a company’s financial situation but is more complex than cash accounting. Accrual-based accounting is the required method under Generally Accepted Accounting Principles (GAAP).
Here’s how it works:
While accrual accounting can provide a more accurate picture of your company’s financial situation in the long term, it can also mislead business owners about the current state of their accounts. For example, the aforementioned table maker might earn $800 immediately upon completing their table, but their business bank account could be empty afterward.
Best Accounting Software for eCommerce
Let’s take a look at the best accounting software for small businesses that you can use in your eCommerce business.
QuickBooks Online
QuickBooks Online is a comprehensive cloud accounting software that automates tasks in your eCommerce store. It integrates with popular online sales channels like Shopify. This feature is accomplished by eliminating manual entry and the need to cross-check sales and payments across different stores.
Includes
Features:
- Smooth integration: Connect your e-commerce platforms and marketplaces with QuickBooks to automatically import and categorize sales and payments to the correct accounts.
- Smart matching: QuickBooks automatically splits revenue, taxes, and fees across your sales channels and matches payments with the correct bank deposits.
- Trend analysis: Gain deeper insights into your sales, revenue, and best-selling products. Run detailed reports on your business performance across different sales channels.
- Tax management: By automatically detailing financial data, QuickBooks helps you maximize your deductions, making tax time easier.
Xero
Xero offers a cloud-based accounting software for small to medium-sized businesses. It provides a range of financial management features including unlimited users, double-entry accounting, and budget support. You can also customize your dashboard to review all performance metrics for your e-commerce business at once.
Features include:
- 800+ Integrations: Integrates with various third-party applications including Shopify and Stripe to enhance its functionality.
- Unlimited users: You can have as many users as you need, with multiple control levels for different accounts.
- Invoicing and quotes: Provides a customizable invoice template and a feature to create and send quotes. Also includes options for automatic reminders, recurring invoices, and the ability to send and receive money from other Xero users.
- Expense tracking: Connect your credit card and bank account directly in the app, categorize your expenses, split transactions, and remember previous transaction categories you’ve used.
Zoho Books
Zoho Books is a comprehensive platform for managing accounting tasks and organizing transactions for your business. It offers a single, secure location to handle your company’s invoices and bills, banking interests, and control spending.
Features include:
- Import: The ability to import and organize your existing data to streamline operations.
- Customization: Allows you to customize sales and purchase transaction templates to fit your business needs and reflect your brand identity.
- Automation: Makes prioritizing tasks and managing multiple tasks easier through automated workflows. This includes email alerts, field updates, and in-app notifications.
- Document management: Provides a central location for all your documents, allowing you to upload and attach documents like receipts to transaction records. Documents can be sent directly to your inbox where they are automatically categorized and processed.
How to choose the right accounting software for your e-commerce
Selecting the best accounting solution for your online store is a significant decision. While comparing your various options, consider the following considerations:
- Integrations: When you combine the two systems, you can easily transfer data automatically, keep inventory levels accurate, and streamline your tax compliance.
- Scalability: As your business grows, your accounting needs will change. Look for software that offers different pricing plans or packages that you can upgrade as your needs increase.
- Features: Look for tools that save time like invoicing, expense tracking, sales tax calculation, payroll, and multi-currency support that can help streamline your administrative tasks.
- Ease of use: You don’t want to spend too much time learning (or training your team) on the software. Ensure it is user-friendly and has a clean interface.
- Customer support: Good support is a real win if you run into problems. Look for software with strong customer support, including live chat, phone support, and a robust knowledge base.
- Security: Your financial data is sensitive information. Make sure your software has features such as two-factor authentication, data encryption, and regular backups to protect your information.
- Good reviews: Check reviews from other e-commerce businesses. You can browse sites like G2 or the Shopify App Store to get a good understanding of the software’s pros and cons.
Overall,
In general, the best program depends on your specific circumstances. Before committing to one, try a free trial to see if it has everything you need.
Best Practices in E-commerce Accounting
Accounting rules and tax regulations vary from country to country, so staying well-informed is crucial to your success. Even if accounting isn’t your strength, there are some simple guidelines to help keep your e-commerce operation running smoothly.
Whether you’re running your first online store or your fifth, here are some best practices in accounting to adhere to:
- Prioritize good accounting: Keeping your books balanced is key to effective e-commerce accounting. Accurately record all financial transactions, including sales, purchases, revenues, and expenses. This way, you’ll have a clear understanding of the health of your finances.
- Automate wherever possible: Technology makes it easy to automate many accounting tasks. You can use software to track sales, calculate taxes, and even send invoices on your behalf. This reduces the risk of human error and saves you time.
- Use e-commerce accounting software: There are many accounting software options available for online businesses that integrate with your e-commerce platform. These systems can help you manage and reconcile your sales, inventory, and expenses.
- Regularly reconcile your accounts: Get in the habit of comparing your financial records with your bank statements regularly to ensure everything matches. This can help you discover and correct any errors before they turn into serious issues.
- Track inventory: Excellent inventory management is critical for e-commerce businesses. You need to know what you have in stock, what has been sold, and what hasn’t. Your accounting software may offer inventory tracking features, or you might want to use a specialized inventory management system.
- Monitor cash flow: Keep an eye on your cash flow – the amount of money coming in and going out of your business. Positive cash flow means money is coming in, and your business is financially healthy, but if more money is leaving than coming in, you will need to address this quickly.
- Understand sales tax: The complexity of sales tax for e-commerce businesses, especially if you sell to customers in different states or countries. Understand your obligations and ensure you’re collecting and remitting the correct amount of sales tax.
With Shopify Tax, you can manage your current sales tax obligations from Shopify’s dashboard, accurately collect the correct amount at checkout based on product and location, and allow Shopify to automatically apply pricing and regulatory changes whenever they occur. Explore Shopify Tax.
Frequently Asked Questions about E-commerce Accounting
How do you account for an e-commerce business?
E-commerce accounting involves accounting for online transactions, which are often paid for using credit cards or other digital payment systems. Unlike traditional retail stores, an e-commerce business must track and reconcile sales, returns, refunds, and payments from multiple sources like PayPal and Stripe. Additionally, e-commerce businesses need to account for and track inventory, shipping, taxes, and other transactional data.
What are the accounting issues in e-commerce?
E-commerce accounting faces many issues, including managing sales tax obligations across different states due to “economic nexus” rules. It also involves the complicated task of inventory management, which requires tracking the status and location of goods across multiple warehouses or distribution centers. Other issues include tracking various fees charged by e-commerce platforms, handling product returns and ensuring accurate accounting for them, and limitations in accessing actual data analytics, hindering strategic decision-making.
What
What are the benefits of e-commerce accounting?
Accounting and bookkeeping are important for e-commerce businesses for several reasons. First, accurate accounting and bookkeeping are essential for tracking cash flow and understanding the financial health of the business. This information can help guide business decisions and ensure the business complies with all applicable regulations. Furthermore, good accounting and bookkeeping practices can identify areas where the company can cut costs and increase sales. Finally, by tracking financial information, businesses can better plan for taxes, track customer payments, and manage inventory.
Do I need an accountant for my e-commerce business?
It depends on the size of your e-commerce business. If you are just getting started, you may not need an accountant. However, if your business is growing and you need help with taxes and other financial issues, an accountant may be beneficial.
Source: https://www.shopify.com/blog/ecommerce-accounting
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