Ecommerce accounting basics: The Principles for a Successful Store

The running of an online business requires more than good ideas as well as products, marketing and inventory. You also need an ecommerce accounting system that can track the financials. What is your spending? What is your profit? Do you have enough money in your business budget? Do you have the approval of the government for the business you run? Ecommerce accounting is a well-known method to track your financial records and business transactions and keeping up to date on taxes, payroll, and profits.

Whether you're just starting your ecommerce store or have been at it for a while, and are realizing that you require help in tracking your company's financials, this accounting guide will assist you in getting on the right track.

Ecommerce accounting empowers you to evaluate the financial condition of your company and create more accurate financial projections when the business expands.

What are the implications of ecommerce accounting?

Businesses that are based on e-commerce are built upon transaction and inventory. The company makes the sales. You deliver items. You purchase and refill inventory.
The basics of ecommerce accounting begin with the system of keeping track of and reporting on your transactions, which includes purchase orders, invoices, expenses as well as taxes.

However, it is more beyond that. Accounting firms then will analyze the information and then use the information to create financial statements that allow them to analyze and report on the financial health of your business.Ecommerce businesses also need specialized attention due to the basic principles of the business model.

Think about what happens when you have a sale on your online shop. This means that the buyer uses their credit card to make payment to your payment processor. What are all the ways that sale affects your finances?

• The payment processor you used to make the transaction has received funds, but the money isn't in your banking account yet
• Taxes on sales are paid in a variety of ways, and may be incurred from a different region or state
• Inventory declines
• Credit card and/or payment processor fees are charged
• The revenue from sale is different from the price of sale

No matter the sales channel the one sale can impact several areas of your financial record. The repercussions from that one sale will show up in your records of financial transactions over the next couple months. In the event that your order is to get returned, many of these transactions must now be reversed or modified.

And that's just one sale.

Tracking some of this is the responsibility of the bookkeeper. we'll talk about the differences between ecommerce bookkeeping and account some time later.

Let's start with some basic accounting terminology.

The basics of accounting

Here are the most important words to be aware of for accounting:

Transactions

In the accounting world, a transaction happens any time cash is spent, received, or requested by a business or vendor.

A transaction could be any of the below:

• Money the business owner invests into the company
• Revenue from sales
• Invoices
• Costs such as wages, marketing, travel, and construction costs
• The assets purchased include vehicles, office equipment material, property or vehicles

A single transaction can comprise multiple elements. When you pay an hourly worker like this you must know how long they worked, the gross wages, tax deductions, and net pay. Accounting software that is of the highest quality will be able to handle all the above tasks.

The transactions for companies that use e-commerce can get complicated due to certain factors, particularly taxation and delays in timing caused by the separation between the consumer and the business.

For example, do you charge sales tax right on the day of purchasing? If so What happens to the cash if your product is return a month later?

Ecommerce accounting attempts to manage the processes and transactions so that the aforementioned issues do not cloud the financial picture of your enterprise.

Credits and debits

Every transaction is tracked through the system of debits and credits. Let's first define certain key concepts:

Debit A document of the amount taken from your bank account. You'll see debits show up on your statement when you purchase.

Credit: A record of the money added to your account.

Assets property (real as well as intellectual) held by an entity.

Liabilities are obligations that a company has to meet but need to be met. Liabilities are claims against the asset shown in a balance report.

Equity is the sum of the assets that have been accumulated after debits were subtracted from them.

Let's examine how these concepts are incorporated into the accounting principal equation

    assets = liabilities + equity (Owner's or Corporation's)  

The debit is added to the left-hand side of the equation as an asset. A credit is added to the right.As an example for an offer of 500 dollars, the amount is debited, and then added to your assets in the business. It is also added to the Owner's Equity in the form of earnings. If something gets deducted, something else must be added, as it keeps the math balanced.

That's a vastly simplified explanation, but it will give you an idea of what your accounting program will be doing when you input transactions.

Cost of the goods sold (COGS)

The accounting for Ecommerce should pay close focus on the price of the goods sold. This includes all costs required to sell a product, not counting items like marketing or payroll.

COGS will cover all the costs of inventory which include purchasing, storage, managing, and shipping. Inventory is your largest expense as an ecommerce seller If you don't have a clear accounting overview of the cost of goods that you sell, the profit margin and tax-deductible earnings will be in error.

Incorrect COGS makes it harder to know how much to invest in marketing, what prices to determine, what quantity of inventory to order, if it is necessary to hire employees as well as how much storage space to buy.

Profit margins

Margins represent the actual income the business earns following a sale has been made. The way to calculate margins is this formula:

    Margin = (Revenue + Cost of Goods) Revenue  

In essence, it's your net earnings expressed as a percentage. If you're selling 10,000 worth of goods within a week, and your COGS for the products you sell is $3000, the margins will be 70% percent.

Repayable accounts and accounts receivable

These are terms used to describe money that has not yet changed hands, but is slated to.

Receivables include any cash that's due in your bank account. In the case of an example, for instance, if you mail an invoice, that goes to accounts receivable until your recipient actually pays you.

The process works in the same way it works in reverse. If you make an order with a vendor, and that vendor sends an order for purchase that is deposited in your accounts payable until you actually pay the vendor.

Bookkeeping and accounting for e-commerceWhat's the difference?

There's a bit of overlap between bookkeeping and accounting. However, the main difference is that bookkeepers process the events while accountants collate the data and then analyze it to give a clear and useful picture of your business budget.

If a sports analogy helps, bookkeepers are like the announcer of play-by-play, and accountants are like the analyst or color commentary. The bookkeeper records what has happened. Accounting professionals explain the meaning behind it.

What does an ecommerce bookkeeper do?

Bookkeeping tasks focus primarily on transactions, records, and financial institutions. If you have employees the bookkeeper manages payroll. They also do things like:

• Process invoices
• Receipts must be sent
• Record what comes in and out of the business bank account
• Record inventory purchases
• Consolidate your bank accounts each month
• Generate monthly financial reports
• Create year-end statements and tax documents

An accurate bookkeeping for your online business can help you build a financially robust and solid business plan.

What does an ecommerce accountant do?

A ecommerce accountant can do things such as:

• Track and analyze operational expenses and business performance
• Conduct financial forecasting
• Study financial statements -- which includes those provided by your bookkeeper
• Tax planning is essential, and includes making tax-deductible taxes
• Report on your cash flow management

The objective of an accountant is to aid ecommerce company owners make sound financial choices.

Can you afford to hire an employee who isn't yours? Should you expand into a different country or state? What's the minimum price you must charge for a new product?

Ecommerce accounting at its best will be able to address these types of questions.

Methods of accounting for sellers selling e-commerce

There are two primary methods of ecommerce accounting -either the cash method or that of accrual. The accrual method is the most frequent one, and based on the scale and type of your business, could be mandated by law.

The main difference between methods is when a transaction is recognized.

Accounting on cash basis

In cash basis accounting, a transaction is recognized when cash has actually exchanged hands. If you make a payment on an invoice, cash basis accounting makes it an expense. When you receive an invoice from January and you pay it off in March, then cash accounting records the invoice as an expense during March.

Income works the same way. When you have a sale when a customer signs to a plan of payment to spread their payment across four months. With cash accounting, you count this as income each month the money comes in.

Accrual method accounting

In the accounting of accrual transactions, a transaction is deemed to be completed after the task was completed and the invoice has been sent. Suppose you place an order for a new paper for office in January. You then place it on your corporate credit card. You receive the office paper instantly, however you aren't able to pay for it until February, after which your statements on your credit card account arrive.

When accounting for accrual, the transaction happens the moment you receive the receipt. The receipt is taken, store it in your file system, and then record the cost. It's an expense for January even though you don't pay for it until the month of February.

The same scenario applies to accrual accounting. accrual accounting would record the purchase's total cost as income on the day that the transaction is completed, although you may not be able to receive the full amount until after four months.

Which method of accounting is best to use for companies that deal in e-commerce?

Accrual accounting can give you an easier understanding of the expenses for selling your goods every month. If you purchased paper in August, it was part of the cost of running your business -- in August, not until you pay the bill. If you sell something in May, you sold the item in May, not in July, when your customer sends the money.

Also, it works well with managing inventory.

Imagine you spend $30,000 on new inventory purchases during September. Then, you decide to will sell the inventory over the following four months before the Christmas season. With cash accounting, you will mark your entire acquisition of inventory as an expense during the month of September. With accrual accounting, you'd label it as a expense when you sell the item.

If you were to use the cash method it would result in a huge expense in September, as well as artificially large profit margins during the months of October, November and December, due to the fact that it would appear like you don't have costs of goods sold.

Accrual accounting allows you to track the cost of doing business on a monthly basis, which means you can see which months had the greatest profit margins.

Three primary financial statements

If you are planning to outsource your ecommerce accounting and bookkeeping, you need to be able to comprehend and read the financial statements. If you're working on it yourself, using your online bookkeeping software to record transaction data will enable you to prepare the three financial statements that are the most basic which include income statements (also called the "profit and loss statement" or P&L), balance sheets and cash flow statements.

Statement of income

An income statement shows the amount of profit that was earned over an agreed-upon period, such as one month. The profit people mean when they use the term "bottom line." Profit is the net amount you earn. If you've lost funds during the time, your net loss.

Balance sheet

The balance sheets show your assets, liabilities, and equity at a particular date, usually at the close of each quarter, month or even a year. It's a snapshot of your financial situation.

Assets are the things you own which have significance. Accounts payable, also known as liabilities are debts you have to pay.

When you review the accounting fundamentals that were discussed earlier, you'll see that equity is simply the sum of both liabilities and assets. Subtract liabilities from assets, then you've got what's known as the "book value," or equity, of the business you run.

Statement of cash flow

The cash flow statement provides information on how your cash on hand has changed during the time.

The three statements can be quickly produced by your accounting software, so long as you've been diligent about entering your financial details. If you don't have time to do that, it's the perfect time to employ the services of an e-commerce bookkeeper.

Important financial metrics that are essential for eCommerce accounting

Taxjar published an excellent article regarding ecommerce accounting statistics. Be aware that accounting is not just concerned with keeping records of financial transactions. Accounting can also inform you regarding the financial health as well as the growth or decline the e-commerce company.

These are the most important accounting parameters:

Revenue

Revenue refers to your total earnings, prior to any expenditures have been subtracted. Revenue is fairly easy to track. But by itself it provides the wrong view.

Margin for contribution

It is the price you charge for a product minus the cost to sell this product. It's similar to the COGS figure from before, but for each individual item you offer. It doesn't include operating expenses.

Profit

Profit results when you take away all your expenses from your revenue that includes marketing and operational costs. If you have a high revenue but the profits are a bit low You either have to increase revenue, or decrease costs.

Ecommerce conversion rate

It is a percentage of people who come to your store who buy something.

Customer acquisition cost

Typically, it costs significantly less to create more sales to existing customers than to acquire a new customer.

Therefore, if your CPC is high, and you'd like to stop your efforts to market, there are two options:

1. Try to improve or optimize your marketing
2. Begin to market more effectively to your current customers

Customer lifetime value

If you're only a new eCommerce seller, you'll be having difficulty in determining the right amount for your initial few years. With a good accounting system, you'll be able estimate this figure as time goes on.

This amount helps to justify the cost of your advertising. In other words, if you have a high CAC, but your customer lifetime value is higher, then it's worthwhile spending the time to gain the customers.

Average order value

Particularly for smaller e-commerce companies It's a much more useful metric than life-time value. If you pay just $10 to attract a new customer however they'll spend on average $25 per order, then that's an excellent bargain if your other expenses aren't high. If you're able to ramp that upwards as you gain more clients, then you'll have a great time.

Cart abandonment rate

The number of people who buy this is alarmingly high for online stores. Based on TaxJar's sources around 70% of ecommerce shoppers add items to their carts, however they don't purchase them.

Your single best strategy for reducing cart abandonment is to send abandon cart emails. This can be automated with the correct email service, for example, the MailPoet.

If you are able to bring that cart abandonment rate down to 60% or 50 percentage, it will result in a sizable increase in revenue. If all you need is a few automated emails then it's no problem.

Rates for refunds and returns to customers

Do many customers are returning products to get a refund? It's a sign that something's going wrong. Make sure you keep track of the situation and do your best to reduce it.

Five important ecommerce accounting tasks to tackle

If you're at the beginning phases of being an e-commerce business owner, you must to master the accounting basics as soon as possible to ensure that you do not end up in hot water later. And just so we're clear, 'hot water' can mean a lot of different things, including:

• Taxes that are not paid -taxes on income sales tax state and local taxes
• Incorrect tax filings
• Inappropriate spending on inventory
• Employers you cannot afford to hire
• Withdrawing too much equity

Below are a few ways to get your accounting program off to a successful start:

1. Create a separate business bank account

Ecommerce small business owners tend to forget about the issue because they're caught up in their other business startup tasks.

But business accounting becomes very challenging if you're combining the personal and business aspects. Business accounts are the ones will be used for all of your business expenses It's also the place where you'll pay your earnings from sales.

For opening a bank for business account, you'll require a business tax ID number.

2. Prepare for employees and contractors

If you're looking to hire employees, it is necessary establish procedures to collect withholding taxes. If you decide to operate the company entirely on your own it is likely that you will hire contractors for particular projects. Contractors that are paid over an amount each year in the U.S. must be sent an income tax form, which is why you should be certain to

• Keep track of who you've paid and the amount you've paid them
• You should request a W-9 form from each contractor
• Keep current addresses on file for every person you employ

3. Find the accounting software you need.

If you anticipate having hundreds or thousands of transactions per month, you'll want accounting software like QuickBooks Online, Xero, or FreshBooks. Businesses with fewer transactions can make do with an Excel spreadsheet, however a high-transaction business won't have the capacity to keep up with manual entries.

Ecommerce accounting software automates most of the accounting essential tasks and simplifies your life. It archives, stores and retrieves data from financial records as well as produces financial statements and reports.

4. Keep all receipts, invoices as well as payment records

The Reliability Principle of Accounting states that transactions that have supporting documentation must be recorded. If you do not have documentation of a transaction and you're not able to count it as an income or expense. If you attempt to claim tax benefits on an expense that you've no documentation of the amount you made payment for, it could be called tax fraud.

Keep physical receipts. or take pictures of them and save them electronically. Save all invoices and receipts in separate folder for emails, not just your general mailbox.

5. Be aware of tax requirements

Tax regulations vary greatly based on the kind of business and the location in which it is operating. It is important to be aware of sales tax compliance as well as import taxes if you are involved in foreign transactions. You should also know about tax withholding tax withholding for quarterly payments, as well as any other taxes specific to your nation, state city, province, or even region.

The tax will be incorporated into the accounting software you use and your financial reporting. It's always best to consult with a tax professional to ensure you're following the correct procedures.There's many more things to discuss ecommerce tax management. There are two major tax issues you'll have to deal with:

Tracking and paying sales taxes

The sales tax on online purchases has turned out to be extremely complex. In fact, nearly every US state now charges an online sales tax and the EU also has a taxes on sales.

In the U.S., each state charges different rates, and also has its own set of rules for how sales tax should be applied.

Taxes on business that are estimated to be paid quarterly

Business income is pre-tax. Just like a 1099 employee the business you run through ecommerce earns profits before taxes have been paid on that income.

As a 1099 employee and a 1099 employee, you must pay quarterly income taxes. If you do not then the government can penalize you for being late with your tax payment.

What can you do to manage this? It is important to stay clear of getting behind in your tax obligations. The best way to manage your taxes for each quarter is to put the amount you will pay from your monthly income and then use that to pay estimated taxes each quarter.

Your accounting software can easily manage all of this, as well as the sales tax requirements. Software is a must...

The reasons your business should use accounting software

It's worth some moment to rethink this issue and be sure to understand the advantages of employing software for managing your ecommerce accounting tasks.

In the beginning, as you've observed, tax administration has become exceptionally challenging in recent years, particularly with regards to sales tax as well as revenue generated from multiple sales channels. If your online store offers products throughout the US or across a huge variety of states, you will find it difficult to manage everything by yourself. There is a business you must manage.

The software also handles your quarterly tax allocation, which that you'll have to pay for taxes on your income and help speed up preparation of your year-end tax statements. If you're also subject to state and local taxes, that complexity mounts even more. A good accounting program is able to meet all these demands.

Accounting software also helps you track your income and expenses by generating financial statements so you know your monthly profit margin as well as your company's capital.

Third, accounting software helps manage payroll, including contractors. If you're not looking to cover the cost of the bookkeeping and financial management of e-commerce then you'll definitely require accounting software.

Do you need to hire bookkeepers, accountants or DIY?

If you do not have accounting software, or if you do get it but don't want to use it, you'll need to hire a bookkeeper. As your company grows it will eventually be required to look at some of the numerous accounting companies which are knowledgeable of the particulars of businesses that rely on e-commerce.

Many ecommerce business owners enjoy the concept that they can run their own show which includes acting as Chief Financial Officer, and so long as their business is small, you might be able to get away in this way. But let's define "small."

If an online retailer is making up to $100,000 or more annually in net profit this is already likely get way out of control in terms of the accounting system you use when you're selling goods in different states or even countries. Sales taxes on their own get too complex.

You also have to deal with returns, shipping charges, shipping, and all the other stuff. The majority of e-commerce platforms offer lower priced merchandise, and they deal in volume. If yours is not an one of a kind, which implies you'll be dealing with many transactions.

More transactions mean more time it takes to record and track everything. Even an "small" online business that earns just $100,000 in net profits per year selling products which range from $5 to $20 is likely to have lots of transactions.

If your company only sells in one location such as a state, province or nation, your degree of tax complexity is way lower. In this case it is possible to get away with doing it yourself -- if you want the extra effort.

Test your choice to see how it performs. You can always change your mind later.

Does accounting have a cover

recognizes the responsibilities that the business owners are held to each day. The manual process of entering transactions and preparing financial reports can be tedious and tax planning may create a mess Accounting is a crucial aspect of running a successful business.