As an ecommerce owner, it's important to really understand the nuances and complexities of your ecommerce booking - what makes it different from any other bookkeeping process?
The short answer is: A lot.
Understanding the differences and how to account for them will help you get the most value and insights from your financials and prevent major issues down the line.
In this blog, we'll help you understand why ecommerce accounting is different than accounting for other businesses and how to get your ecommerce books set up properly so you can get the most out of your financial reports.
What is ecommerce bookkeeping?
68% of ecommerce owners polled by Finaloop list the lack of ecommerce-specific accounting knowledge as the main reason they are looking to replace their current bookkeeping service. This begs us to ask the question - is ecommerce bookkeeping that different?
The answer is this: The basic structure of all bookkeeping is generally the same - you’ve got your assets, liabilities, equity, income, and expenses. But, the breakdown of each category, the specific issues important for you to understand for your business, and the technology needed to properly record all transaction details are dramatically different from your physical store counterparts.
Many ecommerce owners and bookkeepers alike take the standard Quickbooks bookkeeping process, add an Intuit ecommerce service or third-party integration, such as OneSaaS or A2X to integrate with their store platforms, point-of-sale systems, fulfillment, and other ecommerce platforms to Quickbooks Commerce and consider this ecommerce bookkeeping.
Adding ecommerce integrations is only one piece of the puzzle in making your books ecommerce-friendly. There are many real differences between regular bookkeeping and ecommerce bookkeeping that also need to be taken into account (pun intended).
6 main differences in ecommerce accounting
Here we'll share the top 6 bookkeeping differences between ecommerce businesses and physical stores that should be considered by you or any bookkeeping service you choose so you can maintain your books accurately.
- Your income is not always what it seems
- Gross margin is calculated differently
- Inventory management is multi-faceted
- Ecommerce financing has different rules
- Sales tax is exponentially more complicated
- Chart of accounts (CoA) is not 'one size fits all'
1. Your income is not always what it seems
For non-ecommerce businesses, you see a deposit in your bank of $220, you record income of $220. Rocket science it is not.
For ecommerce, it's not quite so simple.
A deposit of $220 from Shopify, Amazon, or Walmart, is not $220 of income. It could mean, $300 of income, $60 of returns, and $20 of merchant fees. It could also mean that of the $220, $15 is actually sales tax you owe to the tax authorities.
In other words, it's complicated.
Using technology to integrate with your online stores (like Shopify), marketplaces (like Amazon), payment processors (like Paypal, Afterpay, or Stripe), or your other apps, can significantly reduce your errors and save you time on bookkeeping. Harnessing the power of automation here allows you to pull the data directly from your platforms into your books on a real-time basis.
If you are using Quickbooks, Intuit offers certain ecommerce integration services, mainly through third-party providers, to integrate your apps to Quickbooks. In 2021, Quickbooks acquired OneSaaS to expand their integrations of third-party ecommerce solutions to Quickbooks.
Instead, you can automate the full bookkeeping process start-to-finish using an automated bookkeeping service like Finaloop, which uses its own proprietary integrations to ecommerce platforms like Shopify, Amazon, Walmart, Etsy, Paypal, Stripe, AfterPay, etc. to pull your data and complete your bookkeeping process on a real-time basis.
Using an integration also allows you to track your undeposited funds, i.e., the remaining balances in your Shopify, Amazon, Paypal, or any other store or payment gateway, that has not yet been deposited into your bank account. This is important to track for both accounting and tax purposes and to give you a better view of your expected cash flow.
2. Gross margin is calculated differently
Everyone will agree that for a retail business, online or not, understanding your gross profit is a key metric in measuring the health of your business, determining your breakeven point, and forecasting your future profit. But, not everyone knows that the components of this calculation are different for ecommerce businesses.
MIND BLOWN, right?
Gross margin is meant to be a calculation of the profit you are left with after a sale. For brick & mortar businesses, the gross margin is essentially revenue minus cost of goods sold, better known as COGS.
For ecommerce stores, variable costs directly associated with making a sale should also be taken into account - specifically, merchant fees and costs for shipping to customers.
- Merchant fees or transaction processing fees are fees charged by a merchant service for processing transactions and payment gateway services (such as Paypal, Stripe, AmazonPay, Shopify pay, etc.). For ecommerce businesses, it's best practice to treat these expenses as part of COGS in determining the gross margin, rather than an operating expense since they are directly related to sales.
- Shipping-out/ freight-out expenses are the costs related to shipping a product to a customer. For the businesses of yesteryear (i.e., brick & mortar stores), shipping-out was not considered a key selling expense and was often recognized as an operating expense. For ecommerce businesses, this expense is a necessary cost of sales that increases with each additional sale. Accordingly, this too should be treated as part of COGS.
To get a better understanding of your gross profit (and to determine if you are pricing your products correctly as an ecommerce business), check out our free ecommerce profit margin calculator.
3. Inventory management is multifaceted
Let's say you own a shoe store and have 50 pairs of shoes in your backroom. If you sell 10 pairs, you know you have 40 left to sell. It's easy to plan when to order more.
If, instead, you sell shoes online through multiple sales channels, such as your Shopify store and on Amazon, it becomes increasingly more difficult to track how many shoes you have left in stock and when it's time to order more.
Correctly accounting for your inventory costs and balances is something any good ecommerce accountant must understand. For more details about accounting for inventory costs correctly for ecommerce, check out Fundamentals of Inventory Management: How to Track Your Ecommerce Inventory.
4. Ecommerce financing has different rules
There are MANY ecommerce financing options out there - Shopify Capital, Stripe Capital, Amazon Lending, ClearCo, Ondeck, the list goes on. The way these financing instruments work are different than standard loans and can often impact the accounting and tax treatment.
For example, a merchant cash advance received from Shopify Capital should be treated differently than a traditional loan. It's important to find a bookkeeping solution that understands these nuances.
To learn more about ecommerce financing options and understand the real costs for your business, check out our free ecommerce loan calculator.
5. Sales tax is exponentially more complicated
One of the most complex issues ecommerce sellers need to deal with is sales tax. Sales tax can arise from physical presence in a state - an office, warehouse, employees, or from 'economic nexus' - selling a certain amount in a specific state.
For ecommerce businesses selling all over the U.S., sales tax can be a real headache.
Make sure your bookkeeper or accountant understands the complexities of sales tax nexus and how to manage the compliance requirements. We recommend using an automated service like Taxjar to help you with the compliance requirements.
6. Chart of Accounts (CoA) is not 'one size fits all'
A CoA is essentially the breakdown and structure of your financials. It shapes how you view and think about your finances.
A well-defined CoA improves your ability to monitor and analyze the financial performance of your business through meaningful reports and can directly impact your decision-making process.
As ecommerce accountants, we strongly believe that best practice CoAs vary significantly across different industries. The CoA for a doctor’s office, for example, should look different from the CoA for a CPG & DTC brands.
Here are some examples of how to optimize your CoA for ecommerce:
Marketing and advertising expenses
A standard CoA may have some general marketing accounts but generally does not have sufficient breakdown necessary for you to manage the marketing spend for an ecommerce brand.
A CoA for ecommerce should breaks down marketing & advertising expenses into more granular details to give you better insights into your expenses, including:
- Advertising & marketing contractors
- Marketing- Software & subscriptions
- Influencer expenses
- Trade shows & events
- Content creation & design
- Facebook - Advertising
- Amazon - Advertising
- Google- Advertising
Cost of goods sold
While each CoA is a bit different, for ecommerce-specific CoAs, both merchant fees and shipping-out should be part of COGS and taken into account in determining your gross profit.
An ecommerce CoA should track both merchant fees (per payment gateway), shipping-out expenses, Warehouse costs, and fulfillment fees as separate sub-accounts of COGS. This enables you to analyze these costs on a standalone basis and provides a more accurate gross profit for purposes of understanding your business’s financial health.
How to best manage your ecommerce bookkeeping
If you have read until here, you should have a pretty clear understanding of why using an ecommerce bookkeeping specialist is important in maintaining accuracy of your books.
Many people attempt to accomplish this themselves by using a DIY accounting software such as Quickbooks and adding on an app integration through the Intuit ecommerce services offerred to integrate with your relevant apps.
Unless you have a bookkeeping or accounting background, a lot of the important nuances of ecommerce bookkeeping may be lost in your books. It's important to make sure any bookkeeping solution you choose, has the ecommerce knowledge you need to get the most from your financials.
To simplify the process and save you time and money on bookkeeping, you can use an automated bookkeeping service like Finaloop which covers your accounting software, app integrations, and full-service bookkeeping so you can get the most accurate ecommerce books with only about 15 minutes of input a month.
What’s the bottom line?
Don’t underestimate the importance of setting up your books based on ecommerce best practices. Ecommerce businesses don’t work like brick & mortar stores and the accounting treatment and CoA breakdown should not be the same.
The best option is to find a cost-effective automated solution that integrates with Shopify, Amazon, Paypal, and other apps and pushes the data into your bookkeeping software in real-time.
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
*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.*