Ecommerce Accounting Guide: Best Practices in 2024
For most merchants, the challenges of eCommerce accounting come as a belated surprise. It’s easy to get caught up in the excitement of launching your online business. But as the sales start rolling in, the not-so-fun stuff like tax obligations, achieving optimal product pricing, and ensuring secure cash flow can make or break a business.
To make matters worse, eCommerce accounting comes with unique complications compared with other forms of bookkeeping – even for experienced accountants.
This guide explores the ins and outs of eCommerce accounting: how it works; common challenges you’re likely to face; and some best practices for ensuring cost-effective, accurate bookkeeping.
What is eCommerce accounting?
Ecommerce accounting is the process of tracking and managing the financial documents, data, and transactions connected to an eCommerce business. It acts as the vehicle through which an eCommerce merchant can meet their legal tax obligations, improve profitability, and accurately report on the financial health of the business.
Though technically a subset of business accounting, eCommerce accounting is regarded as a task requiring special consideration. Added complexities like platform fees, payment gateways, and high order volumes mean accounting for eCommerce businesses is not always straightforward.
Ecommerce accounting is sometimes confused with eCommerce bookkeeping.
However, bookkeeping is just one of the tasks involved in managing a business’s financials. As we’ll cover shortly, eCommerce accounting is a broader responsibility that includes – but is not limited to – eCommerce bookkeeping.
Main tasks in eCommerce accounting
There are multiple areas of a business that need attention – and some companies have more responsibilities than others because of their location, product portfolio, or industry. If you’re based in the European Union, for example, registering for Value Added Tax (VAT) will add an additional layer of financial reporting.
To help you get a better grasp of how eCommerce accounting works, we’ve broken it down into its separate functions below.
Tax accounting
In most countries, a business is responsible for collecting and filing sales tax. The consequences of failing to meet legal tax obligations can be dire and may include heavy fines and court proceedings.
Resultantly, tax management is a fundamental aspect of eCommerce accounting.
The types of taxes you need to report will depend on the location and operational structure of your business. For example, businesses based in countries like Australia and New Zealand must pay GST on sales, whereas those based in the UK and Europe must pay VAT instead.
Ecommerce accounting software like Access Financials helps you streamline the tax management process and ensure taxes are reported correctly.
Financial reporting and growth
Financial reporting isn’t just important for tax purposes – it’s essential for making the right decisions for your business.
A crucial part of eCommerce accounting is collecting and analysing your financial data. This will allow you to accurately set budgets, determine optimal product pricing, and identify cost-cutting opportunities.
As a result, you’ll be in a better position to achieve sustainable business growth.
Order management systems, accounting software, and other eCommerce tools can help facilitate growth by automating the process of gathering and assessing your financial data.
Best accounting practices for online businesses
To make life easy for yourself (and anyone involved in your business’ financials) there are some best-practice eCommerce accounting methods you can implement.
The following tips will help you reduce the amount of admin required to maintain your books, ensure your financial records are up-to-date and accurate, and help you meet your various tax obligations.
1. Keep your business and personal finances separate
It’s important to maintain separate bank accounts, credit cards, and subscriptions for your personal and business finances. This will make your accountant’s life a lot easier (just ask them) and simplify the process of recording and tracking business transactions.
2. Maintain accurate records
Effective eCommerce accounting relies on accurate records of your business financials. You need to develop a system for keeping track of all expenses, sales, refunds, hidden fees, and chargebacks. Accurate documentation is essential for meeting your tax obligations and identifying growth opportunities.
3. Invest in cloud accounting software
Implementation of cloud accounting software is the best way to accurately track all your financials and monitor business performance. With cloud accounting, every transaction is recorded in a central system and can be updated in real time from anywhere with an Internet connection.
Some cloud accounting software tools also allow you to integrate your eCommerce books with other areas of the business, such as inventory control and supplier management. This can result in improved reporting and financial visibility.
4. Make cash flow management a top priority
The importance of cash flow in an eCommerce business is, unfortunately, a lesson often learned too late. Stay ahead of the risks by prioritising the management of your cash flow to ensure you have sufficient funds available to cover all your expenses. Cash flow forecasting and inventory optimisation strategies can help you to improve liquidity in your business.
5. Automate your core processes
Automation in eCommerce accounting serves two primary functions: saving time and improving data accuracy.
Use eCommerce automation tools such as order management software, accounting software, and connector apps to streamline data entry. Integrate these systems to further reduce the need for manual input and the risk of human error.
6. Keep track of your inventory costs and stock levels
Understanding how much you’re spending on inventory is essential to determining cost of goods sold and profitability at both the business and product levels. Effective inventory management also ensures you know exactly what you have in stock and what’s on order – making it easier to reconcile your purchases and make the right decisions.
Invest in a robust inventory management system – ideally, one that speaks to your accounting software – to improve accuracy and efficiency when accounting for eCommerce inventory.
7. Stay on top of tax requirements for all your selling locations
Keep on top of all your sales tax obligations for the various states or countries where you are expected to pay tax (known as your sales tax nexus).
While the ability to expand into different regions is a major benefit of launching an eCommerce store, it also adds an extra degree of complexity to your accounting responsibilities.
8. Integrate multichannel sales data for holistic reporting
If you’re selling through multiple sales channels – for example: Shopify, Amazon, and Etsy – it can be challenging to keep track of your costs and cash flow. Integrated financial data is a crucial part of any successful multichannel strategy.
9. Reconcile accounts regularly
Staying on top of reconciliation will ensure you have adequate time to identify discrepancies so that you can resolve them. When unreconciled transactions begin to pile up, it’s easier for things to fall through the cracks. Set a regular schedule for reconciling bank statements and stick to it.
10. Develop budgets based on financial forecasts
Financial forecasting helps you understand where your money has been spent so you can set performance expectations for the future. It can also shine a light on the liquidity in your business.
Use your forecasted sales projections to accurately allocate future spending based on your business’ goals and expected cash flow. This reduces the risks of running out of cash, over-ordering stock or supplies, and hiring too few or too many staff.
4 common eCommerce accounting mistakes
There are a few eCommerce accounting mistakes many businesses make when they’re just getting started. Don’t fall for the same traps – stay wary of the following risks for business owners.
1. Getting lazy with reconciliation responsibilities
Leaving your reconciliation too late isn’t just a pain because it creates an enormous workload – it also increases the odds of discrepancies slipping through the cracks.
Another issue that arises when businesses fail to reconcile their bank statements on time is that, when there are discrepancies, it may be too late to rectify them: the window of opportunity to amend any errors has closed.
2. Mistaking platform payouts for income
If you’re using a major eCommerce platform like Shopify or Amazon, you’ll receive money from sales via regular payouts. These are typically delivered once per week and can easily be mistaken for income.
However, the reality is that there are numerous hidden fees, costs, and other microtransactions in each payout. These can include payment gateway fees, refunds, and platform fees.
To ensure accurate accounting for your eCommerce sales, you need to break out each payout into its individual transactions and record them as such. While this can be done manually, it’s a tedious process made much easier with the aid of software applications.
3. Not accurately tracking cost of goods sold
Profitability and cash flow are fundamental to the success of any eCommerce business. The metric for unlocking these figures is your cost of goods sold (COGS).
A common mistake new businesses make is inaccurately recording cost of goods sold. This happens when different accounting systems are used across the business, hidden or late costs are not added on, or indirect costs are included with your direct costs.
4. Staying ignorant about sales tax obligations
Sales tax is important – so important that your government may send people over to retrieve it from you if it’s not paid on time and to the correct value. It’s especially vital that you understand the different sales tax obligations in each country your business operates within.
Glossary of eCommerce accounting terms
We’ve covered the essentials of best-practice eCommerce accounting. But as you’ve likely discerned, there is extensive information surrounding the topic.
Below are some additional eCommerce accounting terms:
|
Term |
Explanation |
|
Revenue |
The total amount of income generated from the sales of products and services related to an organisation. |
|
Profit margin |
The percentage of revenue from sales that is kept by an organisation after all costs and expenses have been deducted. |
|
Value Added Tax (VAT) |
A tax that is added to the products and services sold by VAT-registered companies (typically used by the UK and countries in the European Union). |
|
Reverse Charge VAT |
A charge used by VAT-registered companies for purchases of goods and services from other businesses. It doesn’t affect businesses providing services directly to the end customer. |
|
Cash flow |
The movement of money in and out of a business pertaining to income and expenses. |
|
Pay as you earn (PAYE) |
A tax system that collects income tax and national insurance from businesses in some countries, including the United Kingdom and Australia. |
|
Cash accounting |
An eCommerce accounting method that records income at the time money is received and records expenses at the time money is paid out. |
|
Accrual accounting |
An eCommerce accounting method that records income at the time money is earned and records expenses when liabilities are incurred. |
|
Cost of goods sold (COGS) |
The total direct costs of producing or preparing a product that is sold by a business. |
|
Inventory turnover |
The speed and frequency with which a company sells (turns over) its physical goods. |
Simplify eCommerce accounting with Access finance software
Cloud-based finance software can help you to overcome many of the challenges associated with eCommerce accounting.
By implementing a tool like Access finance software, you can:
- Ensure accurate records of all your financial transactions
- Streamline the accounting process with automated processes
- Stay on top of tax obligations and avoid expensive fines
- Take the guesswork out of bookkeeping for eCommerce
- Analyse historical data to identify key trends and make informed decisions
If you’re ready to simplify your eCommerce accounting, take a look at Access finance software or book a demo to see Access Financials in action.