Among the world’s most popular digital activities, online shopping is at its peak, showing an upward graph in the present era. It gives birth to an interest in the e-commerce industry, but what pains the owner is its accounting part.
Business accounting is one thing, and ecommerce accounting is separate, as it includes confusing taxes, inventory management, large transaction volume, and complex financial numbers. We’ll learn details of eCommerce accounting in the post.
Table of contents:
● What is eCommerce accounting?
● What are the key aspects of accounting that sellers must consider?
● Why is accounting important for e-commerce business?
● What are the common e-commerce accounting problems?
What is eCommerce accounting?
eCommerce business is the buying and selling of goods and services through online platforms over the internet.
Accounting in e-commerce is collecting, updating, and evaluating financial data and producing reports, paying taxes, following government guidelines, advice on business decisions, and everything you can name.
Businesses with the slightest accounting knowledge must look for ecommerce accounting services or hire an accountant.
Accounting for an eCommerce business starts with five things:
● Categorising transactions
● Maintaining a business budget
● Staying up to date with taxes
● Distinguishing returns and chargebacks
● Practising accurate record keeping
The long-term strategies for e-commerce Accounting include
● Running and analysing detailed accounting reports
● Tracking your cash flow
● Implementing scalable accounting policies
● Forecasting major expenses
● Setting money and time aside for taxes
● Supervising inventory management
What are the key aspects of accounting that sellers must consider?
Here are a few accounting considerations that eCommerce sellers cannot miss out on:
1. Cash or Accrual accounting
Business owners can choose the way to record their business financials. The most common bookkeeping methods are cash accounting and accrual accounting.
In cash accounting, an owner records a transaction when they receive money from a sale or money goes out as an expense.
But, in accrual accounting, an owner records revenue or expense when they occur and not when cash is exchanged.
In eCommerce, sellers must go with accrual accounting as they help you understand the longer-term impact of inventory purchases and sales on business financial performance. Furthermore, they give a better picture of your present and future cash flow and help you make accurate forecasts and more informed decisions.
2. Cost of Goods Sold (COGS)
COGS is an important metric for the e-commerce industry that helps you keep track of your finances. To understand if your product is profitable, you need to learn how much you paid to produce or purchase the product to sell.
You can make a profit if your selling price exceeds the product’s cost.
3. Gross Margins
An e-commerce accountant must understand, plan, and influence your business’s gross margins.
To find the gross margin, you must subtract the cost of goods sold from the companies’ net sales revenue. By tracking these numbers, you can measure production cost against sales revenue, adjust your sales strategy, and make decisions like paying debts, admin costs or operating expenses etc.
4. Variable expenses
E-commerce costs are not fixed, and you must stay prepared to track them. Learning about fixed costs is easy as you add them to find the total. But it is not the same for variable costs, which are likely to be more profitable once your fixed costs are covered.
To find variable costs, you must multiply the quantity of products produced by the variable cost per unit. Sellers keeping track of these numbers can look for new opportunities to renegotiate them, especially when you want to increase production quality and protect your margins.
5. Financial statements: Profit & loss, and Balance sheet
Profit and loss statements are standard accounting reports that summarise your revenue, expenses and cost incurred during a particular period. It shows whether your business can generate profit depending on its financial management and help you compare your performance monthly and yearly. Sellers need to look at their sales and net income increasing almost parallelly.
Balance sheets are a snapshot of any time showing what your company owns and is owed. Sellers can see if their equity is growing over time, their current assets against liabilities, and how to get the maximum revenue.
Why is accounting important for e-commerce business?
Look for an eCommerce accountant near me when you start facing accounting difficulties, late tax submissions, delays in employee payments, and other red flags in business.
But why is accounting important in this sector?
● Better sales management
● Understanding your margins
● Identifying profitable and loss-making products
● Compliance and charging correct VAT rates
● Better inventory management
● Ensuring tax compliance
● Creating a sound business model
● Improving corporate governance
There are several other benefits of having an accountant at your back.
But the question is, do you look for eCommerce bookkeeping services or accounting? A bookkeeper can save you basic accounting knowledge, recording transactions, preparing taxes, and other primary tasks in the initial years. But, as business starts expanding, you plan to go overseas, or finances get complicated, you need an experienced accountant.
Quick tips for beginners
● Use cash basis accounting
● Track and categorise expenses and transactions
● Syncing all your sales channel
● Automate your tax calculations
● Understand the difference between chargebacks and returns
What are the common eCommerce accounting problems?
Sellers keep postponing expense categorisation till the month end or VAT quarter end.
It creates issues as you may miss something important, like an unclaimed deduction or a significant omission on your tax return. You can hire an eCommerce tax accountant to help you understand your eligibility for tax deductions and claim amounts on your tax return.
Due to lack of time, you may make bookkeeping mistakes, leading to costly penalties or missing out on the input VAT. It affects your bottom line, cash flow and can cause a loss in business or invite an investigation.
To avoid making mistakes, you must hire the right accountants. For example, if you have a business on Shopify and are wondering how to manage Shopify accounting, you must look for an expert with experience on that platform.
They can help you identify your problems and find the best solutions. Furthermore, automating accounting systems can save you from human errors.
Becoming a certified or chartered accountant is not essential to stay on top of eCommerce finances. You can do it with basic knowledge for the initial years and, eventually, start looking for outsourcing accounting. Outsourcing can bring in the right expertise and is a cost-effective option for new businesses.