Q&A: What is ecommerce accounting?
Explore the fundamental questions surrounding ecommerce accounting and gain valuable insights to optimize your online business's financial success
1) What is ecommerce accounting?
Ecommerce accounting is the process used to manage the financial transactions and records of an ecommerce business. It encompasses the tracking, organizing, and reporting of financial information related to the online buying and selling of goods or services, including recording and tracking revenue, expenses, inventory and taxes. 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.
2) What are the accounting issues for ecommerce?
Ecommerce businesses have their own specific accounting issues and headaches which are different from their brick-and-mortar counterparts. Here are some common accounting issues for ecommerce businesses:
1) Revenue Recognition: Choosing the appropriate method and timing for recognizing revenue from ecommerce sales can be very hard, especially when many ecommerce businesses deal with subscription-based models, pre-orders, or digital goods with deferred revenue recognition.
2) Sales Tax Compliance: One of the most complex issues for ecommerce businesses is calculating and collecting sales tax, and then accurately reporting it Make sure your bookkeeper or accountant understands the complexities of sales tax nexus and how to manage the compliance requirements. 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.
3) Payment Processing Fees: Managing and properly accounting for payment processing fees is also a major issue. Many online sellers don’t know the difference between a payment gateway, payment processor, and payment service provider and don’t know they should be recorded as separate expenses or deducted from revenue.
4) Inventory Management: Ecommerce businesses find it hard to effectively track and value inventory, considering factors such as stock keeping units (SKUs), multiple sales channels, dropshipping, and potential obsolescence or spoilage of inventory.
Here’s a guide on Fundamentals of inventory management: How to track your ecommerce inventory
5) Cost of Goods Sold (COGS): The biggest pain point for ecommerce sellers us determining which costs to include in calculating inventory or COGS and accurately accounting for them. Most people don’t understand which costs to include in calculating inventory or COGS. Should you include only finished products or also packaging supplies? Inventory on hand or also inventory in transit? What about inventory ordered but not yet paid for?
6) Financial Reporting and Analysis: Unfortunately, many brands use traditional bookkepers that often don't understand ecommerce bookkeeping, as it is a very different process than bookkeeping for your dentist or for a brick & mortar store). Therefore a huge issue is preparing accurate and timely financial statements, understanding key performance indicators (KPIs) specific to ecommerce, and analyzing financial data to assess the business's performance, profitability, and growth.
3) What is the role of an ecommerce accountant?
An ecommerce accountant plays a crucial role in ensuring the accuracy, compliance with the relevant accounting standards and regulations, and financial health of an ecommerce business and therefore needs to stay updated on evolving accounting standards, tax regulations, and industry-specific trends in the ecommerce space. You could also use an accountant to help you with your ecommerce bookkeeping.
Here are some key responsibilities and functions of an ecommerce accountant:
1) Financial Recordkeeping: Maintaining organized and accurate financial records, including, expenses, sales transactions, inventory.
2) Revenue and Expense Tracking: Monitoring and tracking revenue streams from various online sales channels, including online marketplaces, websites, and mobile apps. Recording and categorizing expenses related to ecommerce activities such as inventory costs, shipping fees, payment processing fees, advertising expenses, and website maintenance.
3) Inventory Management: Overseeing inventory-related accounting processes, including tracking inventory levels, valuing inventory, and recording inventory adjustments for sales, returns, and write-offs.
4) Sales Tax Compliance: Ensuring compliance with sales tax regulations for online sales, including identifying applicable tax jurisdictions (nexus), calculating and collecting sales tax, and maintaining proper records for sales tax reporting and remittance.
5) Payment Processing and Reconciliation: Managing financial transactions related to online payments, reconciling payment processor accounts, recording payment processing fees, and ensuring accuracy in payment reconciliation.
6) Financial Reporting: Preparing regular financial statements, including income statements, balance sheets, and cash flow statements, to provide a clear overview of financial performance. Analyzing financial data to identify trends, insights, and opportunities for improvement.
7) Tax Planning and Compliance: Collaborating with tax professionals to develop tax strategies, ensuring compliance with tax regulations, and providing accurate financial information for tax filings, including income and sales tax returns.
8) Internal Controls: Implementing and maintaining internal controls specific to ecommerce accounting processes to safeguard assets, prevent fraud, and ensure accurate financial reporting.
9) Technology and Automation: Utilizing accounting software, ecommerce platforms, and automation tools to streamline accounting processes, improve efficiency, and integrate financial data from various sources.
10)Financial Analysis and Decision Support: Providing financial analysis, insights, and guidance to support strategic decision-making, pricing strategies, investment decisions, and business growth initiatives.
4) How do you account for ecommerce sales?
Accounting for ecommerce sales involves properly recording and categorizing the financial transactions related to online sales. Here's a general overview of how to account for ecommerce sales:
1) Sales Revenue: Record the gross amount of revenue generated from online sales. This includes the total sales value of products or services sold through various online channels, such as online marketplaces, websites, or mobile apps.
2) Sales Discounts and Returns: If applicable, account for any sales discounts or promotional offers provided to customers. Additionally, record returns or refunds related to online sales as separate transactions to accurately reflect the net revenue generated.
3) Sales Tax: Ensure compliance with sales tax regulations by calculating, collecting, and remitting sales tax based on the applicable jurisdictions.
4) Payment Processing Fees: Deduct payment processing fees charged by online platforms or payment gateways from the sales revenue to determine the net revenue.
5) Cost of Goods Sold (COGS): Determine and track the cost associated with the products sold online, including purchase costs, manufacturing costs, and shipping fees.
6) Inventory Tracking: Track and monitor the inventory levels and associated costs for products sold online. Ensure accurate recording of inventory adjustments, such as reductions for sales, returns, or write-offs, to reflect the COGS and inventory valuation accurately.
7) Reporting and Financial Statements: Summarize the ecommerce sales transactions and related information in financial statements. This includes income statements (profit and loss statements), balance sheets, and cash flow statements.
5) What is the best software for ecommerce accounting?
Choosing the best software for ecommerce accounting will depend on your specific business needs and preferences. Consider factors such as ease of use, integration capabilities, scalability, pricing, and specific features relevant to your ecommerce accounting needs when selecting the best software for your business. However, here are some popular options that integrate with various ecommerce platforms.
1) QuickBooks Online: QuickBooks Online allows you to track sales, expenses, and inventory, and manage invoices and payments.
2) Xero: Xero is a cloud-based accounting software that t provides features like inventory management, invoicing, bank reconciliation, and multi-currency support.
3) Zoho Books: Zoho Books is a comprehensive accounting software that offers features like invoicing, expense tracking, inventory management, and bank reconciliation.
4) Shopify Plus: If you are running your ecommerce store on Shopify, their advanced plan, Shopify Plus, includes accounting and financial reporting features specifically designed for ecommerce businesses.
It’s important for you to know that using these bookkeeping and accounting management tools is not enough to get the full picture of your financials and to get accurate books. This is because they require a bookkeeper's expertise and time to actually do the bookkeeping—classify transactions, enter bills, collect invoices, match payments, and reconcile discrepancies. A Tax CPA would also be needed to prepare ongoing and year-end tax filings.
Accurate ecommerce accounting and ecommerce bookkeeping is essential for your ecommerce business’ finacial health. Finaloop’s bookkeeping solution built for ecommerce and DTC brands allows brands to get their financial data 100% accurate, in real time, and fully reconciled 24/7.
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*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.*
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