Ecommerce Accounting: A Beginner’s Guide for 2023

ecommerce accounting

The path tostarting a businessis full of milestones.

There’s the day your product is market-ready, the day you open your online store to the world, and the day you make your first sale—a major step that calls for celebration. As an ecommerce entrepreneur, few things are more exciting than watching the money start to roll into your bank account.

But before you break out the champagne and call it a day, it’s important to have a plan for tracking and managing your income and expenses. In other words, you need an ecommerce accounting system.

Tables of contents:

  • What is ecommerce accounting?
  • What does ecommerce accounting entail?
  • What do ecommerce business owners need to keep track of?
  • Accounting methods for ecommerce
  • Best ecommerce accounting software
  • How to choose the right ecommerce accounting software
  • Ecommerce accounting best practices
  • Ecommerce accounting FAQ

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What is ecommerce accounting?

Ecommerce accounting is the practice of recording, organizing, and managing all of the financial data and transactions relevant to the operation of an ecommerce company. Think of it as a subset ofsmall business accountingthat is specifically set up to handle the unique needs of an ecommerce provider.

At its most fundamental, accounting is the practice of tracking and recording transactions and categorizing each one as either income or expense. Pretty simple, right?

Still, it can be easy to get lost in accounting terminology, particularly if you’re new to business finances. To simplify things, here are some of the key components of ecommerce accounting:

  • Purchase order.A purchase order is a legally binding document from a client indicating the quantity and type of items they want to buy, with a commitment to pay a set price for those items. Although a purchase order is not payment, it should include payment details. Your company might use a purchase order to request raw materials for a vendor, or a client might submit one to you requesting a specific volume of goods or services.
  • Sales order.A sales order is a document prepared by the seller (often in response to a purchase order) that outlines all of the details of a sale. A sales order should include client information, description and quantity of goods sold, sale amount, payment information, and delivery address and date.
  • Accounts payable and accounts receivable.These terms refer to outstanding bills and invoices, or to the total amount of expenses not yet paid and revenue not yet received.
  • Cost of goods sold (COGS).This is the total cost of production and distribution of a product. It is frequently calculated to include shipping, warehousing, credit card fees, and any other costs directly related to selling products. It does not include overhead expenses likepayroll, marketing, software licenses, or office space.
  • Ecommerce sales tax.This refers to the tax paid by an ecommerce business to the state in which a purchaser resides. That is, if a sales tax nexus exists between the seller and the state—meaning that the state has the right to tax a business. (It usually does if the business pursues any economic activity in the state.)

What does ecommerce accounting entail?

Like all business accounting, ecommerce accounting includes:

  • Basic bookkeeping functions, like managing invoicing, payroll, and balance sheets
  • More sophisticated planning and reporting functions, like preparing financial statements and creating a strategic tax plan

Tax management, bookkeeping, and growth planning are often three major areas of emphasis.

Tax management

税收管理可以复杂,和错误filing or interpreting the tax code can have serious consequences for business owners. That’s why tax management (including both tax planning and preparation) is a core service of many accounting firms.

Ecommerce tax management includes tracking and remitting all applicable state and local taxes, calculating and filing quarterly estimated taxes, year-end filing, and distributing 1099s to contract workers.

Determining when an ecommerce seller must charge sales tax can be complicated—and is made more so by the fact that different states are governed by different rules. In general, if a seller has significant business in a state (also known as sales tax nexus), that seller is responsible for collecting and remitting state taxes for any purchase made from that state.

An ecommerce company always has a sales tax nexus in the state where the business is headquartered. Other common triggers include having a physical location or warehouse, an employee or a shipping partner in a state, visiting a state for a trade show, or exceeding a certain dollar amount in sales in a particular state.

Bookkeeping

Accurate bookkeeping is a baseline requirement for allbusiness planningand operations. This includes tracking and categorizing income and expenses,inventory management, and reviewing balance sheets.

It also includes trackingcustomer returns, a convenience that can both enhance customer loyalty and cause a bookkeeping headache. Improperly tracked, one return can throw off your sales,inventory, expenses, forecasting, and sales tax records all at once.

An ecommerce accounting system should take into account customer returns and allow you to accept returns without throwing off your financial reports.

Planning for growth

There are few things as exciting as scaling a business. Thankfully, ecommerce accounting is more than just homework for business owners. It’s also the process of gathering all of the information you need to reach your business goals.

Ecommerce accounting can help you analyze:

  • What products or services are most profitable for your company
  • Your change in profit over time
  • 你的最大费用和负债
  • Opportunities to increase your profit margins

It can also provide you with financial benchmarking you can use to measure the success of new ventures (say, the return on investment, or ROI, for a newmarketing campaign) and to think strategically about your next moves. Can you afford to buy out a competitor? How much are you spending annually on shipping, and would warehousing in another state save costs? When is your next busy season, and will you be ready?

Ecommerce accounting also includes running financial reports such asprofit and loss statementsand cash flow statements. Think of these as the owner’s manual for your business—your financial statements and reports represent everything you need to know about the workings of your company, all compiled in one place.

What do ecommerce business owners need to keep track of?

Business accounting requires keeping track of all of a company’s transactions, inventory, and financial data. This includes metrics like cash flow and gross profits, balance sheets, and profit and loss (P&L) statements.

  • Cash flow.Cash flowis the movement of money into (and out of) your business. Cash flow management can help you meet all of your obligations and avoid incurring unintended debt.
  • Gross profit.One of the key metrics for running your business, gross profit refers to total revenue minus the cost of goods sold. Expressed as a formula, it readsgross profit = revenue - cost of goods sold.
  • Gross margins.Gross margins are calculated using the same data as gross profit, but this metric is expressed as a percentage of total revenue. The formula for calculating gross margins readsgross margins = (revenue - cost of goods sold) / revenue.For example, if your company makes $10,000 selling goods that cost you $4,000, your gross profit is $6,000 and your gross margins are 60%.
  • Balance sheets.Your balance sheet will include three major categories: assets (including cash, accounts receivable, and inventory), liabilities (including accounts payable, wages, and income tax), and the combined equity of all shareholders.
  • Profit and loss.Profit and loss statements provide a comprehensive view of the profitability of your business over a certain period of time. They calculate total revenue minus all costs associated with running your business, including COGS, marketing expenses, payroll, and overhead. If this number is positive, you’ve made a profit over the period of time specified. If it’s negative, you’ve taken a loss.

Accounting methods for ecommerce sellers

There are many different accounting providers available—from accounting software platforms to traditional accounting firms. Before getting started with a vendor, however, you’ll need to choose an accounting method.

The two accounting methods are cash accounting and accrual accounting. An ecommerce company can use either method, but not both at once. Switching methods requires filing paperwork with the IRS.

Cash basis accounting

Cash accountingis a method of accounting that measures the transfer of cash.

Here’s an example of how cash basis accounting works:

cash basis accounting

Seems simple, right? Under this method, you might receive a purchase order for an $800 handmade coffee table, make the table, and then ship the table to your client. Under a cash accounting method, you only record income from the table when the purchaser’s payment lands in your account.

The same goes for expenses. You might owe a videographer $10,000 for a series of product videos to be completed at the beginning of Q2, but because that $10,000 is still in your bank account at the end of Q1, you’ll end up paying taxes on it during the first quarter. For accounting purposes, this debt only matters once the money leaves your account.

Accrual accounting

Accrual accounting, unlike cash accounting, measures a transaction when funds are earned or expenses are incurred, not when payment changes hands.

The accrual method is more frequently used by large companies, and it requires more specialized accounting knowledge and a more hands-on approach to account management than the cash-basis method does.

This method gives a more accurate picture of a company’s financial situation, but it’s also more complex than cash basis accounting. Accrual basis accounting is the method required bygenerally accepted accounting principles (GAAP).

Here’s how it works:

accrual accounting example

Although accrual accounting can provide a more accurate picture of your business’s long-term financial picture, it has the potential to mislead business owners about the current state of their accounts. For example, the aforementioned coffee-table maker would “earn” $800 as soon as she finished her table, for example—but her business bank account might still be empty.

Best ecommerce accounting software

Let’s look at the topsmall business accounting softwareyou can use in your ecommerce business.

QuickBooks Online

Image of QuickBooks Online dashboard.
Source: QuickBooks

QuickBooks Online是一个全面的云会计软件吗offers automation across your ecommerce store. It integrates with popular online sales channels like Shopify. This feature eliminates manual entry and the need to cross-check sales and payouts across different stores.

Features include:

  • Seamless integration:Connect your ecommerce platforms and marketplaces with QuickBooks to automatically import sales and payouts, and map them to the correct accounts.
  • Smart matching:QuickBooks automatically breaks down revenue, taxes, and fees across your sales channel and maps the payouts with the bank deposits.
  • Trend analysis:It offers insights into your sales, revenue, and top-selling products. Run detailed reports on your business performance across different sales channels.
  • Tax management:By automating detailed financial breakdowns, QuickBooks helps you maximize your deductions, making tax time easier.

Get the QuickBooks Online Shopify Connector app.

Xero

Image of Xero ecommerce accounting software dashboard.
Source: Xero

Xeroprovides cloud-based accounting software for small and medium-sized businesses. It offers a host of money management features including unlimited users,double-entry bookkeeping, and budgeting support. You can also customize your dashboard to review all your ecommerce metrics at once.

Features include:

  • 800+ integrations:Integrates with various third-party applications, including Shopify and Stripe, to enhance its functionality.
  • Unlimited users:You can have as many software users as you need, with multiple control levels for different accounts.
  • Invoicing and quotes:Provides customizable invoicing template and a feature for creating and sending quotes. It also includes options for automatic reminders, recurring invoices, and the ability to send and receive money from other Xero users.
  • Expense tracking:Connect your credit card and bank account directly into the application, categorize your expenses, split transactions, and remember the previous transaction categories you’ve used.

Get the Xero Shopify app.

Zoho Books

Example of banking dashboard in Zoho Books.
Source: Zoho Books

Zoho Books是一个全面的平台来管理你的书吗keeping tasks and organizing your transactions. It provides a single, secure location to handle your company’s bills and invoices, reconcile bank statements, and control spending.

Features include:

  • Import:The ability to import and organize your existing data to streamline operations.
  • Customization:Allows you to tailor sales and purchase transaction templates to suit business needs and reflect your brand identity.
  • Automation:Facilitates task prioritization and management of multiple tasks with automated workflows. These include email alerts, field updates, and in-app notifications.
  • Document management:Provides a centralized location for all your documents, enabling upload and attachment of documents like receipts to transaction records. Documents can also be emailed directly to your inbox where they are automatically categorized and processed.

How to choose the right ecommerce accounting software

Choosing the best ecommerce accounting solution for your store is a big decision. As you compare your different options, keep the following considerations in mind:

  • Integrations:When you combine the two systems, you can easily automate data transfer, keep inventory levels accurate, and simplify your tax compliance.
  • Scalability:As your business grows, your accounting needs will change. Look for software that offers different pricing plans or packages you can upgrade as your needs increase.
  • Features:Look for time-saving tools like invoicing, expense tracking, sales tax calculation, payroll, and multi-current support that can help streamline your admin tasks.
  • Easy to use:You don’t want to spend a lot of time learning (or training your team) on the software. Make sure it’s intuitive and has a clean interface.
  • Customer support:Good support is a lifesaver if you run into problems. Look for software with strong customer service, including live chat, phone support, and a strong knowledge base.
  • Security:Your financial data is sensitive stuff. Make sure your software has features like two-factor authentication, data encryption, and regular backups to protect your information.
  • Good reviews:Check out reviews from other ecommerce businesses. You can browse sites like G2 or theShopify AppStore to get a good sense of the software’s pros and cons.

                Overall, the best software for you depends on your specific circumstances. Before committing to one, take a free trial to see if it has everything you need.

                Ecommerce accounting best practices

                Accounting rules and tax regulations differ by country and state, so staying up to date is crucial to your success. Even if accounting isn’t your strong point, there are a few simple guidelines to follow for managing a smooth ecommerce operation.

                Whether you’re running your first or fifth online store, here some亚柯unting best practicesto follow:

                1. Prioritize good bookkeeping:Keeping your books balanced is the key to effective ecommerce accounting. Accurately record all financial transactions, including sales, purchases, income, and expenses. That way, you’ll have a clear understanding of your financial health.
                2. Automate where possible:Technology makes it easy to automate many accounting tasks. You can use software to track sales, calculate tax, and even send invoices on your behalf. This reduces the risk of human error and saves you time.
                3. Use an ecommerce accounting software:There are many accounting software solutions for online businesses that integrate with your ecommerce platform. These systems can help manage and reconcile your sales, inventory, and expenses.
                4. Regularly reconcile your accounts:Make a habit of frequently comparing your financial records with your bank statements to make sure everything matches. This can help you spot and correct any errors before they become serious problems.
                5. Keep track of inventory:Excellentinventory managementis vital for ecommerce businesses. You need to know what you have in stock, what’s selling, and what isn’t. Your accounting software may offer inventory tracking features, or you may want to use a specializedinventory managementsystem.
                6. Monitor cash flow:Keep an eye on your cash flow—how much money is coming in and going out of your business. Positive cash flow means money is coming in and your business is financially healthy, but if more money is going out than coming in, you’ll need to address this quickly.
                7. Understand sales tax:营业税是复杂的电子商务企业,especially if you’re selling to customers in different states or countries. Understand your obligations and make sure you are collecting and remitting the right amount of sales tax.

                Take the stress out of sales tax with Shopify Tax

                With Shopify Tax, you can oversee your current sales tax obligations from Shopify admin, collect the right amount at checkout with product and location-specific accuracy, and let Shopify automatically apply rate and regulatory changes whenever they happen.

                Explore Shopify Tax

                Ecommerce accounting FAQ

                How do you do accounting for an ecommerce business?

                Ecommerce accounting involves accounting for online transactions, which are often paid for with credit cards or other digital payment systems. Unlike traditional retail stores, an ecommerce company must track and reconcile sales, returns, refunds, and payments from multiple sources, such as PayPal and Stripe. Additionally, ecommerce companies must account for and track inventory, shipping, taxes, and other transactional data.

                电子商务会计问题是什么?

                Ecommerce accounting presents several issues, including managing sales tax liability across different jurisdictions due to the “economic nexus” rules. It also involves the complex task ofinventory managementthat requires tracking the status and location of goods across possibly multiple warehouses or fulfillment centers. Other issues include tracking various seller fees charged by ecommerce platforms, handling product returns and ensuring accurate accounting for them, and limitations in accessing to real-time data analytics, which can hinder proactive decision-making.

                What are the benefits of ecommerce accounting?

                Bookkeeping and accounting are important for ecommerce businesses for many reasons. First, accurate bookkeeping and accounting are essential for tracking cash flow and understanding the financial health of the business. This information can help guide business decisions and ensure the business stays compliant with all applicable regulations. Furthermore, good bookkeeping and accounting practices can identify areas where the business can reduce costs and increase sales. Finally, by tracking financial information, businesses can better plan for taxes, track customer payments, and manage inventory.

                Do I need an accountant for my ecommerce business?

                It depends on the size of your ecommerce business. If you are just starting out, you may not need an accountant. However, if your business is growing and you need help with taxes and other financial issues, an accountant may be beneficial.
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