Setting Up Your Ecommerce Chart of Accounts: A Guide for Online Businesses

Every DTC brand is justifiably concerned with their profit & loss statement (P&L). At the end of the day, you need to know if your business can put real money into your bank account. But, don't underestimate the powerhouse of knowledge the balance sheet can be if you know how to use it.

The balance sheet shows you (and your lenders / investors) if your company has sufficient resources (like cash) to operate the business and pay off of its debt.

For example, let's say you have 2 businesses with identical net income. You self-funded Company A by investing your savings of $70k and didn't borrow a penny. To fund Company B, you borrowed $70k from friends & family and you have to pay them back with interest.

Looking only at the P&L tells you they are equally financially healthy. The balance sheet is the report that can help give you the full picture. Given how central they are to ecommerce accounting and bookkeeping, in this guide we'll cover both forms of financial reporting, and learn about how your financial accounts can inform your decision making (hint: it’s not only about compliance).

What is an Ecommerce Chart of Accounts (CoA)?

A chart of accounts is a financial tool — a hierarchical structure (list)— that orders the categories (and subcategories) for your business’ transactions.‍

It’s the brain as well as the backbone of bookkeeping.

Framed in the least exciting way possible, a chart of accounts determines where the rows of money-in versus money-out get placed in your books. All of your financial data. In one place.

What Chart of Accounts Should My Business Use?

Finaloop's CoA is based on best practices after years of working with various DTC business owners like your + extensive experience in accounting and tax. It's been through rounds of due diligences and reviews, so it's tried and tested.

Our CoA has more than 700 accounts to give you real data insights into your business. We won't include all 700 accounts here (you're welcome) but we will show you the key accounts and breakdowns we use for our customers.

Your Balance Sheet

Current Assets

1. Bank accounts

Your bank account section should include all bank accounts and digital banks used for the business. Examples of digital banks include Paypal, Payoneer, and BlueVine.

A note about Paypal: Paypal can function as a payment service provider (PSP) for your online store and can also act as bank. Cash is often transferred from your bank account or credit card to Paypal or from Paypal to your bank account. if you are using an accounting software, like Quickbooks, with a Paypal integration, make sure your Paypal transactions are not being double-counted by reviewing these transactions and treating them as transfers and not as expenses. If you are using an AI-native ecommerce accounting service like Finaloop, we'll automatically reconcile this and categorize it for you so you can be sure your transactions are not double-counted.

Depending on the sophistication of your accounting setup, you may also see a Money in transit account in your banks. Money in transit includes transfer of cash from your stores, payment processors, or banks that haven’t yet reached the intended destination.

2. Undeposited funds

Undeposited funds are funds you already earned from sales but haven't yet been deposited into your account from your payment processor or PSP. Tracking this amount is important for understanding your expected cash flow and for making sure your income is correct for tax purposes.

Finaloop integrates with your various apps and PSPs and syncs this data real-time. If you are doing your own bookkeeping or using a bookkeeper, make sure this information gets added each month.

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3. Accounts receivable

Your accounts receivable, or A/R, should include any income your earned from customers that you haven't yet received. It can include various types of receivables, including B2B invoices for wholesale or retail customers, or orders generated through your online store that aren't paid through a payment processor. For example, if orders come through Shopify but are paid via ncash, ACH, or wire, these sales should still be recorded as accounts receivable until the payment from the customer is received.

Note that if you use cash basis accounting, you won't see accounts receivables tracked in your Balance Sheet.

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4. Inventory

There is A LOT to consider about the best ways to track your ecommerce inventory and COGS. Overall, it should be tracked using landed costs of your products. These include all direct and indirect costs involved in getting the products from your vendor or supplier to your warehouse and ready for sale.

For most DTC brands, inventory should be recorded whenever you purchase products or raw materials. Cost of goods sold (COGS) should only be recorded when you actually sell your products.

While there are many different ways inventory can be tracked, we recommend tracking it by:

• Inventory - inventory on hand in your warehouses,
• Inventory in process - inventory purchased from your supplier that hasn't yet been shipped to your warehouse, and
• Inventory in transit - inventory shipped from your supplier that hasn't yet been received in your warehouse.

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5. Loan receivables

Loans receivable should be tracked in two categories: (1) loans to related parties (like owners or employees), and (2) loans to unrelated parties.

For loans to related parties, the IRS has pretty specific conditions you need to meet to treat them as loans and not return of equity. One important condition is charging interest.

If you have related party loans (for example, from the company to you) that are over $10k, we recommend speaking to a professional, like Finaloop, to make sure it gets treated correctly. Here's an example of how these loans should be recorded:

Loans to a related party

• Due to/from owner
• Related party loan receivable
• Related party accrued interest receivable
• Related party loan receivable - non interest bearing

Loans receivable

• Loan receivable
• Accrued interest receivable

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6. Prepaid expenses

Prepaid expenses are payments made for products or services that your business will receive in the future, such as rent, insurance, or subscriptions paid in advance.

Prepaid expenses are assets because they provide value to your business over time. Tracking them separately helps you accurately reflect your business’s financial position and ensures that your expenses are recorded in the correct periods.

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7. Other current assets

Other Current Assets include various assets that don't fit into more specific categories like cash or receivables but are still important to represent the overall asset value of your business.

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Long Term Assets

1. Net fixed assets and intangible assets

Fixed assets and intangible assets are long-term assets used in your business with a useful life of more than 1 year. If you own these types of assets, make sure you are depreciating or amortizing them correctly to avoid issues from the IRS.

Fun fact: If you purchase a fixed asset for $2,500 or less, you can take the full expense this year rather than treating it as an asset and depreciating it over a few years.

These accounts show you your long-term assets like property, cars, equipment, or machinery. It will also show you a corresponding negative account for any accumulated depreciation or amortization. These are essential for the ongoing operations of your business.

If relevant, these accounts include the following asset accounts as well as associated accumulated depreciation and amortization:

Net fixed assets

• Buildings
• Equipment
• Furniture & fixtures
• Computers
• Other fixed assets
• vehicles
• Land

Net intangible assets

• Start up costs
• Other intangible assets

2. Other long-term assets

Other long term assets include:

Investments

Stocks, bonds, or other financial instruments that your business holds to generate future income or capital gains. These investments are usually not part of your day-to-day operations but are crucial for long-term financial growth.

Security deposits

Funds paid in advance to secure a lease, contract, or service. These are typically refundable and should be tracked separately to ensure they are accurately accounted for when returned or applied.

Long-term receivables

In this account, you’ll see a breakdown of any loan due in more than 1 year.

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Current Liabilities

1. Credit cards

Your balance sheet should include all credit cards used for your business.

Note that if the credit card is used for the business but is actually a personal card in your name or another person's name, the treatment can be a bit different.

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2. Accounts payable

We recommend to only include net term bills as accounts payable (e.g, amounts owed to your vendor). No need to add an accounts payable for each upcoming payment.

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3. Deferred revenue

Deferred revenue includes income received but not yet earned, such as gift card liabilities from platforms like Shopify or upfront payments from wholesale customers. This section of your Balance Sheet tracks these liabilities until the revenue is recognized when the product or service is delivered.

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4. Loan payables

Loan should be tracked in two categories: (1) loans from related parties (like owners or employees), and (2) loans from unrelated parties.

For loans from related parties, the IRS has pretty specific conditions you need to meet to treat them as loans and not investments. One important condition is charging interest.

If you have related party loans (for example, from you to the company) that are over $10k, we recommend speaking to a professional, like Finaloop, to make sure it gets treated correctly.

Many ecommerce loans or financing arrangements, like merchant cash advances, have different accounting or tax treatment than traditional loans.

Here are the links to learn more about Shopify Capital, Amazon Lending, and Clearco. In the accounts below, we included some common examples our customers use so you get an idea of what the loan section may look like for yourself.

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5. Other current liabilities

Other current liabilities can include:

Payroll liabilities

Payroll liabilities in your balance sheet include any payroll payable or payroll tax liability owed for wages, salaries, bonuses, and payroll taxes that your business owes but hasn’t paid yet.

These liabilities must be tracked carefully to ensure accurate payroll management and compliance with tax obligations.

Tax liabilities

Tax liabilities on your balance sheet include any taxes your ecommerce business owes but hasn’t yet paid. This can cover a range of taxes, including sales tax, federal and state income tax, and payroll tax.

For ecommerce brands, sales tax liabilities can be particularly complex, especially if you sell in multiple states with different tax rules. Finaloop helps you track all tax liabilities and syncs this directly from Shopify. We’ll reduce this by any payments made to the state taxing authorities.

Other current liabilties

Other Current liabilities include various liabilities that don't fit into more specific categories, such as accruals.

Long-term Liabilities

Long-term liabilities are debts you owe that you don't need to pay for at least 12 months. It typically includes long term loan payables and long term accrued interest payable.

Equity

Equity can be quite confusing and is treated differently for different entity types.

You should consider both the type of legal entity you are - a sole proprietor, LLC, partnership, or corporation - and the type of tax entity you are - Schedule C filer, partnership, S corporation, or C corporation - to make sure your CoA can track all the details you need for your business and for your taxes with respect to your equity accounts.

Below are examples of different equity sections for different type of entities.

Your Profit & Loss Statement

1. Sales

Sales should include your gross sales amount for each of your various revenue accounts.

Finaloop integrates and syncs directly with many sales apps like Shopify, Amazon, Walmart, eBay, Stripe, Shop Pay, Paypal, etc. in order to pull in the data real-time and map it to your income statement accounts.

It’s highly recommended to use an app that integrates with your sales channels to break down this data without a significant amount of manual work on your side.

Let's say you sell your organic quinoa snacks in your branded store on Shopify, Amazon, as well as wholesale to Wholefoods. Here is an example of how your net sales in your P&L should look (remember not to forget refunds and returns, and that sales tax should be a balance sheet item):

2. Cost of goods sold (COGS)

There are different ways to track your COGS depending on whether you track it based on the cash basis where all of your inventory purchases during the month are recorded as COGS or accrual basis where you record your COGS based on the cost of the actual units sold.

Here you can learn more about the fundamentals of accounting for inventory management.

COGS should also include shipping costs (shipping out) to ship your product to customers and merchant transaction fees that you get charged per transaction. Here is a sample COGS breakdown:

3. Operating expenses

The key to breaking down your expenses is including enough detail to give you data and insights you need to properly manage your business but not too much detail that it becomes impractical and inefficient to manage.

Here is an example of how we breakdown the operating expenses for our customers.

There are many different potential expense accounts and not every account applies to every company, so every P&L should look a bit different depending on the needs of your business.

There are many different potential accounts and not every account applies to every company, so every P&L should look a bit different depending on the needs of your business.

4. Other income and expenses

Not all income and expenses are part of your regular operating expenses. Here is an example of some accounts that should be included in a separate section of your P&L:

5. Interest and Taxes

Last but not least, here is a sample of how the interest and taxes section of your P&L should look:

The Right Chart of Accounts for Your Ecommerce Business

Setting up the right chart of accounts template creates an opportunity to get real value from your financial statements and can give you a great, real-time picture of your financial health enabling you to make informed decisions about your business.

If you’re looking for custom-tailored bookkeeping and ecommerce accounting software specially for your online brand, with unbeatable pricing, see if Finaloop can help.