Ecommerce Accounting for DTC Businesses: Your Guide to Profit in 2024
Rayla Rappaport & Aaron Orendorff
January 13, 2024
Rayla Rappaport & Aaron Orendorff
January 13, 2024
What is ecommerce accounting? How do you pick the best Shopify bookkeeping software? And why should business owners care?
In any business, money is the only objective truth.
Its rules are as simple as they are binding. More in. Less out. And you win.
Unfortunately, most ecommerce accounting exists far from the comforting shores of certainty. Instead, we spend our days adrift in “approximations”: approximate revenue, approximate costs, approximate profits.
But it’s not your fault. Approximations feel objective. Plus, they work.
Right up until they don’t.
Maybe you’ve hit a financial wall in your planning. Maybe you need clarity for potential investors. Or maybe you’re just frustrated with always playing catch-up, clean-up, and correction.
Good news: With the right set of principles, you can easily navigate your ecommerce business’ accounting, bookkeeping … (even) taxes.
Together, let’s explore three topics + answer three questions.
What Is Accounting for Ecommerce? The Types
How Do You Do Ecommerce Bookkeeping? The Tasks
What Is the Best Shopify Accounting Software? The Tools
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1. Accounting for Ecommerce Businesses: The Types
What Is Ecommerce Accounting?
Ecommerce accounting is the practice of reporting and analyzing financial data for the purpose of making profitable business decisions.
While “accounting” and “bookkeeping” are often used interchangeably, bookkeeping focuses on financial transactions: recording, tracking, and managing data.
In other words, accounting is the what of ecommerce finances. Bookkeeping is the how.
That distinction matters because how you keep your books — timeliness, categorization, and reconciliation — determines what those books can tell you. Accounting only becomes a profit-generating mechanism when the right data is combined in the right way.
We’ll cover bookkeeping in the next section.
Here, let’s define the two types of accounting methods and the three key types of reports.
Accounting Methods: Cash Basis vs Accrual
As the name implies, cash-basis accounting records transactions when cash changes hands. It’s straightforward and provides a clear picture of how much money your business has at any given time.
Personal finances run on a cash basis. In their early stages, so do most small businesses.
Real money in? Add it. Real money out? Subtract.
A straightforward case would look something like this …
On December 10, you pay $400K in various operating expenses for salaries, office supplies, influencer fees, etc. On the 20th, you receive payouts from Shopify for $750K related to sales generated in December.
At the end of the month, you have unpaid bills of $100K relating to other operating expenses — such as a marketing agency fee — and you have open B2B invoices of $250K from a wholesale channel.
Despite its simplicity, cash basis doesn’t provide an accurate financial picture of inventory-intensive businesses like ecommerce.
Nor for any business with pending receivables or payables.
More to the point, only businesses generating less than $25M for three years can file taxes using cash-basis accounting. What’s the alternative?
The alternative is accrual-method accounting, which records transactions on the date they’re incurred — regardless of when money is exchanged. For the sake of clarity, perhaps a better word than either accrual or incur is value.
When you purchase inventory, your business loses money. But it doesn’t lose value. You exchange cash for an asset. The value of that asset isn’t lost until you sell it. At which point, it produces value in excess of what you originally paid.
Accrual accounting reflects that value exchange in monetary terms as though it occurred on a single date. As an accounting system, it’s no less real than cash.
Real value in? Add it. Real value out? Subtract. Both at the same time.
Simple in principle; complex in practice. Why? Because value is much harder to track than cash, which is more quantifiable and can be seen directly from your bank account.
Plus, there’s the unique complexity of costs ecommerce sellers incur through the online exchange of a business’ value (product) for a customer’s value (price). Costs like specific discounts, payment processing fees, refunds or chargebacks, as well as shipping and fulfillment.
Thankfully, that complexity can be addressed with the right accounting software. As long as it’s built for ecommerce.
Once you’ve settled on the type of business accounting, only then can you leverage your financial records for better decision-making based on your business’ financial health.
Financial Statement & Reports
Three major types of financial reports exist. Each has a role to play in accounting’s fundamental purpose to make profitable decisions.
Profit and Loss (P&L)
A profit and loss statement, also known as an income statement, is a financial report summarizing all income versus all expenses over a specified period. The delta between those two variables equals either profits or losses.
It starts with the top line (gross sales or gross revenue) and subtracts the total costs of doing business — including the cost of goods sold, operating expenses, and interest expenses — to arrive at net profit … the bottom line.
Your P&L statement measures the efficiency of your business.
Not just its ability to create positive value overall, but specific areas generating the most value or incurring the most costs. Particularly when you can view the various costs as absolute dollars as well as by each’s percentage of net sales.
It also reveals taxable income and is used by external entities to evaluate a company’s financial performance and risk profile.
A balance sheet provides a snapshot of your brand’s cumulative financial position. Basically, what you’re worth right now without any future projections.
It details assets, liabilities, and equity.
Assets: Everything your company owns that has value; cash, inventory, property, and equipment.
Liabilities: All debts and obligations your company owes; credit card debt, loans, accounts payable, and mortgages.
Equity: Net value calculated as total assets minus total liabilities; including retained earnings and net profit.
Examining a balance sheet reveals how well your business can meet its short-term obligations (liquidity), its long-term viability (solvency), and how much of the company's assets are financed through debt versus shareholder investment.
It’s a critical tool for internal management to make informed decisions about capital allocation, debt management, and business strategy.
Cash Flow Statement
As you might expect, a cash flow statement details the inflows and outflows of cash in terms of real money — meaning, deployable capital. Unlike the P&L statement, it shows actual funds available for use.
Your cash flow should be divided into three main parts: operating activities, investing activities, and financing activities.
Operating Activities: Day-to-day sales and OpEx
Investing Activities: Acquisition or disposal of assets
Financing Activities: Loans minus interest and payments
What’s crucial, however, is for your cash flow to be reconciled in real-time with your cash on hand.
Sound redundant? It’s not.
Reconciling your cash inflows and outflows relating to your operating, investing, and financing activities to your actual cash on hand is the only way to be sure you know exactly where your money is going.
Cash reconciliation brings it all together. Inflows minus outflows against the actual amount of money you have at your disposal.
2. Bookkeeping & Ecommerce Accounting Tasks
How Do You Do Ecommerce Bookkeeping?
Ecommerce bookkeeping is the practice of recording, tracking, and managing financial data in order to fuel your accounting accurately.
If accounting means combining the right data for the purpose of making profitable decisions, then bookkeeping for ecommerce demands setting the right data as a foundation.
The “accounting” tasks involved in recordkeeping boil down to:
Mapping your chart of accounts
Reconciling sale channels
Tracking inventory and COGS
Invoicing accounts receivable
Reconciling bills (accounts payables)
Tracking sales tax liability
Recording interest and depreciation
What is an ecommerce chart of accounts (CoA)? A chart of accounts is a hierarchical structure that orders the categories for your transactions — it’s the brain as well as the backbone.
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.
Here’s the rub.
Not all money is created equal. Neither are all definitions of sales and costs.
It may seem nit-picky to nail down exactly what’s meant by those words. But if our goal is to arrive at objective truth — rather than “approximations” — we need to be precise about both sides of the equation.
First, money in. Second, money out.
Money In: Sales, Then Profits
Sales (also known as top-line revenue) are all the “money in” you collect from customers — regardless of the channel — including shipping income.
Broadly speaking, gross sales do not exclude discounts and promotions.
It’s an important distinction because ecommerce platforms, like Shopify, list them the same way. Moreover, if you run seasonal dollar- or percentage-off deals, total sales help you understand total demand.
Net sales subtract discounts and promotions as well as refunds and returns from gross sales.
In most cases, when brand founders talk about how much revenue they generated, they’re referring to gross sales. Investors, on the other hand, will be a lot more interested in net sales.
Net sales more directly impacts the financial health of your business.
After discounts, promotions, refunds, and returns … how much cash from sales do you actually have to cover expenses?
Returns and Chargebacks
Every ecommerce store experiences refunds and chargebacks from its customers.
What are refunds? A refund can be one of the following:
Return of money for overcharging
Return of money for returned products
Return of money for a canceled transaction
What are chargebacks? Chargebacks are meant to provide consumer protection by reversing transactions by the credit card company or bank of the customer.
For bookkeeping purposes, sales should be recorded after an order is fulfilled, no matter if later the money is returned to the customer. Refunds for returned products and chargebacks for products that were already provided should be booked separately and ultimately decrease the gross profit.
Gross profit subtracts the cost of goods sold from net sales — meaning, the total costs of getting your products from non-existent into your customers’ hands.
While gross profit (also known as profit margin) is a key metric for your financials, another similar metric that should also be tracked is your contribution margin, which can be expressed as a dollar value or a percentage.
Contribution margin takes net sales minus all of your total variable costs; namely, COGS + non-fixed marketing costs (i.e., ad spend and affiliate fees).
Both gross profit and contribution margin are different ways to determine the money you’re left with after each sale.
Net Operating Profit
Net operating profit subtracts operating expenses from gross profit. Operating expenses should be categorized into four buckets:
General and administrative (G&A)
Salaries & wages
Advertising and marketing
Research and development
Finally, net profit (the bottom line) takes your net operating profit and subtracts any other non-operating amounts — such as interest and financing, foreign exchange gains or losses, and other income or expenses like capital gains.
It’s the most objective of objective truths. The one north star your business lives or dies by.
Money Out: Variable & Fixed
Every kind of “money in” is defined by its relationship to “money out.” Sales minussomething is the pattern we followed over and over again above.
While all those somethings vary widely, they can be divided into two essential types: variable costs and fixed costs.
Variable costs are costs that change in direct proportion to your volume of sales. When you sell more, you pay more. Therefore, your costs vary.
Fixed costs are costs that do not change in direct proportion to sales. For example, your rent is your rent — no matter how much space you actually use.
Variable: Cost of Goods Sold (COGS)
Inventory Purchases vs Landed Costs
In its widest sense, cost of goods sold encompasses everything you pay to get your products from non-existent into your customers’ hands.
Let’s start with the first half of that journey — getting your products from non-existent into your business’ hands … ready to sell. To do that, money leaves your business in the form of lump-sum inventory purchases (i.e., the cost of inventory), which include:
Supplies and materials
Packaging and labeling
Shipping and freight-in
In-house production costs
Value, on the other hand, leaves your business only when you sell inventory.
Whether you are recording your books on an accrual basis or a cash basis, most inventory-based businesses record the inventory and COGS component of their financials on an accrual basis for tax purposes.
When you purchase inventory, it becomes an asset on your balance sheet. When you sell the inventory, it becomes a cost of goods sold (hence the name cost of goods sold and not cost of goods purchased).
Because of the complexities involved in properly tracking inventory and COGS, some brands may choose an alternative method of tracking their inventory. Here are two ways to record your COGS:
Purchase-Based (Cash): Recorded when inventory is purchased
Sales-Based (Accrual): Recorded when inventory is sold
For purchase-based COGS, you’ll have no direct view of your real inventory balance until a year-end adjustment is made to reduce your COGS for any unsold inventory still on hand.
Running sales-based COGS demands accurately sorting your inventory purchases into subcategories. Inventory itself is placed into your balance sheet as an asset and only subtracted from your P&L when it’s sold or becomes “dead” (unsellable).
Isolated to specific SKUs, the total cost of an inventory purchase divided by the number of products equals your average landed cost per unit.
Shipping & Fulfillment
Shipping expenses hit your P&L in two subgroups.
Freight-In: Cost of shipping to you, your 3PL, or warehouse
Freight-Out: Cost of shipping to your customers
For bookkeeping purposes, as well as for expenses, track in-versus-out shipping costs as different rows in your chart of accounts.
There are different opinions regarding the nature of this expense. More specifically, whether these should be booked under COGS (variable) or as operational (fixed).
While this determination can depend on circumstances, most DTC brands book shipping expenses as COGS. First, through the cost of inventory: freight-in. Second, through shipping and fulfillment to customers: freight-out.
This is because, as opposed to a brick & mortar business, ecommerce brands can’t sell to customers without these shipping costs and, therefore, it’s often treated as part of the cost of sales (i.e., cost of goods sold).
Being aware and tracking your shipping expenses helps you to effectively manage them, understand your cost structure, and set the right selling price.
If you use an ecommerce platform or an online shop — like Amazon, Shopify, Walmart, WooCommerce, BigCommerce, or any other — the sale of products over these platforms costs you money.
The merchant fee or processing fees often contain several components — an annual or monthly lump-sum subscription fee plus a fee in the form of a small percentage of the overall transaction amount.
In case you use a payment processor such as Stripe, Amazon Pay, Shop Pay, or PayPal, the payments charged through the payment processor are subject to payment processing fees. These are typically a small fixed fee per transaction plus a small percentage of the total charge amount.
You will see the payouts from your ecommerce platform, online shop, or payment processor in your bank account statement. It’s important to understand that these payouts do not necessarily reflect your income.
Rather, they reflect your income minus refunds, chargebacks, and merchant or processing fees.
Record your gross sales (sales before refunds, chargebacks, and merchant or processing fees) separately from your merchant and processing fees as expenses to really understand the breakdown of your sales.
Fixed: Operating Expenses
Fixed costs are costs that do not change in direct proportion to your volume of sales outside of major (operational) changes in your business.
As such, they can be categorized in four kinds of operating expenses:
General and administrative
Salaries and wages
Advertising and marketing
Research and development
General and Administrative (G&A)
General and administrative expenses encompass the day-to-day costs associated with managing and maintaining a business — such as rent, utilities, and contractors. The largest G&A costs in ecommerce regularly come from software and legal or professional services.
Salaries and Wages
Salaries and wages refer to the compensation paid to employees, including both hourly wages and fixed salaries. This category represents the cost of labor required to operate the business, from executive pay to part-time staff.
Advertising and Marketing
Advertising and marketing expenses are all costs related to promoting and selling products — including agencies or freelancers, affiliates, in-house content creation, retention tools (email and SMS), marketing-specific software, giveaways, and more.
For channels, you must be able to easily view total spend as both dollar values and as percentages of net sales.
Research and Development (R&D)
Research and development expenses are costs incurred in the pursuit of new products, services, or processes. These include expenditures on innovative activities, product development, and process improvements aimed at fostering long-term growth.
Ecommerce Sales Tax Compliance
If your ecommerce business sells products that are subject to sales tax in a state you have “nexus” in, you must collect and remit sales tax. Sales tax determination, calculation, and collection can be complicated. Many ecommerce companies set their online shop to do so automatically.
Shopify, for example, offers the feature of calculating and collecting sales tax from customers in the states you have a nexus. However, it is important to note that the online shop platform typically does not perform nexus checks.
If you sell your products on a marketplace — such as Amazon, Etsy, Walmart, or eBay — the marketplace facilitator laws obligate the marketplace facilitator to collect and remit taxes on your behalf … in certain states.
Be sure to check whether the sales tax for these transactions was already collected and remitted to the relevant state by the marketplace. Even if you have a nexus in a state in which the marketplace facilitators law applies, you might still need to file a sales tax return in that state.
From ‘Nexus’ to Income Tax
Here at Finaloop, we provide tax-ready books + flexibility for you to choose how to file your tax return. You can file with Finaloop, use your own certified public accountant (CPA), or let us introduce you to accounting firms in our network.
Regardless of your choice, be sure to book revenue net of sales tax.
Technically, sales tax is “money-in” from your customer.
The reason we don’t record it as income is that sales tax is not part of your income, nor is it subject to income tax. Your ecommerce business is an “agent” for collecting and remitting the sales tax from the purchaser to the relevant state.
Instead, the sales tax collected is recorded in the books as “sales tax liability.” The sales tax collected but yet remitted to the state is recorded as a liability for bookkeeping purposes.
This way, you’re ready to turn tax season into tax day.
3. Ecommerce Accounting Software for Shopify: Tools
What Is the Best Accounting Software for Ecommerce?
Truth be told, it depends on your size, budget, and the level of integrations required.
Make sure to carry out your due diligence by exploring the features, pricing, and customer reviews of each software to make sure it fits your needs and can grow your business.
Finaloop is the only ecommerce-first accounting software for online sales platforms — like Shopify or Woocommerce — as well as marketplaces — like Amazon, Walmart, eBay, and more.
We differ from QuickBooks and Xero in that it’s not only a “Shopify app” but also a full bookkeeping service with native integrations across the DTC SaaS landscape.
With advanced automation technology and a team of in-house bookkeepers, we use your real-time financial data to provide fully reconciled books, optimized tax returns, and actionable insights alongside customer support 24/7.
Finaloop also has accrual versus cash-basis flexibility, inventory management, plus a prebuilt, thorough ecommerce-focused chart of accounts for flawless categorization.
Automate cost of goods sold (COGS) into your books: Syncs real-time COGS to your P&L from Shopify orders with SKU-by-SKU breakdowns, allowing full financial visibility without waiting until the month is over.
Real-time data from channels and payment processors: Connects sales channels and payment gateways to pull your data directly from the sources of truth, then maps them to financial reports based on tax rules and accounting best practices.
Reconciliation, cash-flow analysis, trends report: Integrates with your apps, bank accounts, and credit cards for three-way reconciliation — orders to payouts to business bank accounts — providing cash flow analysis at any time from anywhere.
Prices start at $65 per month; more than the basic plans of QuickBooks and Xero since it includes full accounting services.
Intuit’s QuickBooks Online is one of the most recognized and widely used accounting software available in the U.S.
Because QBO is software only — not a service — if you don’t have accounting or bookkeeping knowledge, it can be fairly time-consuming and complex. For those with intermediate to advanced accounting skills (i.e., CPAs), it’s a preferred choice.
QBO has a connector app (A2X) that enables you to integrate your Shopify store and import sales and payouts, mapping them to the relevant accounts.
Automatic matching and trend analysis: Record tracking for fees, taxes, and revenue across your sales channel enables historical reports and forecasting.
Tax management and tax filing: With its automated financial breakdowns, QuickBooks simplifies tax time by ensuring a smoother tax filing experience.
Inventory and order management syncing: Though discontinued in 2023, Intuit used to offer these features through what it called QuickBooks Commerce.
Prices start from $15 for one sales channel; all sales channels cost $45, and assisted booking adds $50 per month.
To sync your Shopify store directly to QuickBooks requires A2X, which ranges from $19 per month to over $99 (depending on the number of orders).
Another favorite among accountants and bookkeepers, Xero is a cloud-based accounting software for small and medium-sized businesses.
It offers a range of features similar to QuickBooks Online, such as double-entry accounting, reporting, bank transactions, and various integration options. You can also customize your dashboard to review all your ecommerce metrics at once.
You can download the Xero and Shopify integration from the Xero App Store. Xero also has over 800 integrations with other third-party applications.
Unlimited users inside or outside the business: Adds as many users as you want and gives each user different levels of control — ideal for accounting firms or CPAs.
Generate invoices and quotes natively: Offers invoice customization together with a convenient feature for sending quotes, recurring invoices, and reminders.
Expense tracking and categorization rules: Links your credit card and bank account to categorize, split transactions, and create rules from previous transactions.
Prices start at $12 per month; for extra features, you’ll likely want to upgrade to the $34 per month plan.
Just like QuickBooks, Xero also requires a paid A2X integration with Shopify — $19 per month to over $99 (depending on the number of orders).
(4) Zoho Books
Zoho Books is a comprehensive platform for managing your bookkeeping tasks and organizing your transactions — handles your company’s bills and invoices, reconciles bank statements, and controls spending in a single, secure location.
It allows you to sync Shopify sales data directly, providing you with a clear overview of your business finances.
Fully customizable templates: Tailors sales and purchase transaction templates to suit your business requirements and reflect your unique brand identity.
Automate priorities and workflows: Streamlines multiple tasks through workflows — including email notifications, field modifications, and in-app messages.
Document management via emails: Sends files (such as receipts and transaction records) directly to your inbox where they can be easily categorized and processed.
Prices start at $15 per month; free for businesses with less than $50k per year in revenue.
FreshBooks has a reputation for being easy to set up and use. It’s also known for having excellent customer service.
FreshBooks offers an intuitive dashboard and basic features for tracking income versus expenses at an affordable cost, while reconciling credit and debit amounts.
However, it may not be the ideal choice for larger businesses and additional charges apply for multiple users. Built-in Shopify integration makes its online accounting software a solid fit for dropshippers.
Customizable invoicing and tracking: Provides a robust invoicing system for branded invoices to track, set up reminders, and accept online payments.
Expense capture and categorization: Tracks your expenses by capturing receipts, categorizing expenses, and attaching them to specific projects or clients.
Mobile application for iOS and Android: Create and send invoices, track expenses, and view financial reports from your mobile device, which syncs to your desktop.
Prices start at $8.50 per month for the basic plan plus the cost of the third-party app integrations.
One Financial Truth in 2024 & Beyond
We started this exploration of ecommerce accounting with a simple, all-controlling principle: In any business, money is the only objective truth.
In 2024, that reality is even more pressing. Rather than floating adrift in “approximations,” ecommerce brands that fail to take hold of their financials will drown.
More money in. Less money out. And you win.
Of course, the inverse if true also.
That’s not a warning. Nor is it fear-mongering.
It’s the one truth none of us can escape.
Finally, if you need help navigating any of those … just let us know. Guiding you from approximations to certainty is exactly why we exist.
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