Let's be honest. No one starts a DTC or ecommerce business because they want to deal with accounting or bookkeeping. The result is that most of you are working with books that are often completely inaccurate and out of hand.
We believe that with the right set of tools, you can easily navigate your eCommerce business's bookkeeping, accounting, and taxes. It's all about understanding ecommerce accounting basics, finding the right ecommerce accounting tools, and finding the right ecommerce accountants to get you numbers you can actually trust on a daily basis (and not just once a year for tax filing purposes).
In this blog, we'll cover the basics of ecommerce accounting that every brand founder and operator should know to effectively manage your business and your financial stack.
What is ecommerce accounting?
Ecommerce accounting and ecommerce bookkeeping is the process used to manage the financial transactions and records of an ecommerce business. It includes the tracking, organizing, and reporting of financial information related to the online buying and selling of goods or services.
Ecommerce accounting includes recording and tracking:
- Revenue - Gross sales from your sales channels, discounts, and refunds
- Cost of goods sold (COGS) and inventory- Total cost of producing and distributing a product. For ecommerce, this generally also includes the cost of sales such as shipping, warehousing and fulfillment (including FBA fees), credit card and merchant fees, and any other costs directly related to selling products.
- Expenses - Categorization of transactions from your banks and credit cards
- Accounts payables and accounts receivables - also known as bills and invoices
- Ecommerce loans and interest expense - for merchant cash advances, lines of credit, revenue-based financing, or traditional loans
- Ecommerce sales tax - ensuring sales tax in the states in which you have nexus are collected and paid to the sales tax authorities.
Having accurate ecommerce accounting is crucial for the overall financial health of your ecommerce business. Ecommerce accounting should ensure accurate and reliable financial data for decision-making, tax compliance, budgeting, and financial reporting purposes.
What does ecommerce accounting include?
Ecommerce accounting is term that often includes your ecommerce bookkeeping and tax management. The term is often used to include strategic finance services like
Want to understand the difference between an ecommerce accountant, bookkeeper, and Fractional CFO? Check out this article to learn more about who you need to create your perfect financial stack.
1. Account for Merchant Fees and Payment Processing Fees
If you use an eCommerce platform or an online shop like Amazon, Shopify, WooCommerce or BigCommerce the sale of products over these platforms is typically associated with a merchant fee. The merchant fee can be an annual or monthly lump sum subscription fee, or it can be in the form of a small percentage of the overall transaction amount.
In addition, in case you use a payment processor such as Stripe ,Amazon Pay, Shopify Payments or PayPal the payments charged through the payment processor are subject to payment processing fee which is usually comprised of 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. However, it is important to understand that these payouts do not necessarily reflect your income, but rather they reflect your income minus refunds, chargebacks and merchant or processing fees. From a bookkeeping and tax reporting perspective, it is important to properly record your gross sales (sales before refunds, chargebacks and merchant or processing fees) and separately record your merchant and processing fees as expenses.
In this regard, we recommend having expenses accounts for merchant fees and processing fess in your chart of accounts.
2. Account for Returns and Chargebacks
Every eCommerce business experience refunds and chargebacks from its customers.
What are refunds?
A refund can be one of the following:
- Return of money for over-charging;
- Return of money for returned products; or
- Return of money for a cancelled transaction before the product has been provided.
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 booked after the order was fulfilled, no matter if later the money was returned to the customer. Refunds for returned products and chargebacks for products which were already provided should be booked separately and ultimately decrease the gross profit. For this purpose, we recommend having an account for refunds and chargebacks in your chart of accounts.
3. Do Not Forget Shipping Expenses
Shipping is a material cost for any eCommerce brand (and also a material tax deductions Shipping expenses are divided into two subgroups -the cost of shipping inventory to your warehouse (freight-in) and for shipping the products to your customers (freight-out).
Being aware and track your eCommerce business shipping expenses can help you to effectively manage your expenses, understand your cost structure, and eventually help you set the right price for selling your products on your online shop, marketplace account or website. We see a lot of eCommerce shops incur losses as a result of an unexpected level of shipping expenses.
For bookkeeping purposes, as well as for expense tracking purposes, we recommend creating two shipping expense accounts in your chart of accounts: one for freight-in expenses and the other for freight-out expenses.
In this regard, we would like to note, that there are different opinions regarding the nature of this expense, and more specifically, whether these should be booked under Cost of Goods Sold (COGS) or as an operational expense. While this determination depends on the facts and circumstances, most eCommerce brands treat and book shipping expenses as COGS.
4. Remember to Collect and Remit Sales Taxes
If your eCommerce business sells products that are subject to sales tax in a states you have "nexus" in, your business should collect sales tax. Your business should then remit the Sales tax to the relevant states. In addition, a sales tax return should be filed with the sales tax department of that state.
Sales tax determination, calculation and collection can be complicated. Therefore, many eCommerce businesses set their online shop to calculate and collect sales tax automatically. Shopify for example, offers the feature of calculating and collecting sales tax from customers in the states in which the eCommerce business has a nexus. However, it is important to note that the online shop platform typically does not perform nexus check, and this is the responsibility of the eCommerce business. In addition, the eCommerce business is responsible for registering in the relevant state, file the sales tax return in that state and remitting the sales tax collected.
In case 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. Therefore, it is important to check whether the sales tax for these transactions were already collected and remitted to the relevant state by the marketplace, so it will not be remitted twice. It is important to also note, that if you have a nexus in a state in which the Marketplace Facilitators law applies, your eCommerce business might still need to file a sales tax return in that state.
Many eCommerce businesses choose to use a sales tax platform (such as TaxJar and Avalara) which collects your sales information from your online store and marketplaces, and then calculate the sales tax due. These platforms typically also offer sales tax return preparation and filing, as well as "nexus" check services.
From a bookkeeping perspective, it is important to book revenue net of sales tax. The reason is that sales tax is not part of your income (and is not subject to income tax). The eCommerce business is an 'agent' for collecting and remitting the sales tax from the purchaser to the relevant state. Another common account in the books of a typical eCommerce business is "Sales tax liability". The sales tax collected but yet remitted to the state is recorded as a liability for bookkeeping purposes.
5. Properly Record Your Sales in Foreign Currencies
Does your eCommerce business also sell to foreign customers and collect revenues in foreign currencies? If yes, you should remember that as a U.S. business, your business income from sources outside of the United States would generally be included in your income for tax purposes.
The practice in these kinds of situations is to record your income from these sales in U.S. dollars, by converting these amounts into U.S. dollars. The purpose is to keep the bookkeeping records unified - in U.S. dollars currency.In this regard, when choosing the right bookkeeping software for your business, it is important to check whether it provides the possibility to easily convert your foreign currency transactions into U.S. dollars.
As an eCommerce business owner, you are managing so many business processes crucial for your success. Bookkeeping, accounting and tax processes are important. They are helpful in understanding your financial standing, cash flow, cost structure and product pricing, and tax obligations. Managing your finances on an ongoing basis will help you save money, and mitigate financial and tax exposures.
We all know though that managing the books can be time consuming, taking up time better spent on other aspects of running your business. Using our cutting-edge technology, Finaloop automates the bookkeeping, accounting and tax processes of eCommerce businesses. We integrate with most of your eCommerce applications, including Shopify, Amazon, Stripe, and PayPal, and take financial operations off your hands. [Contact us](finaloop.com "Contact us") today for more information.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.