Regardless of where you are in your e-commerce business, bookkeeping and accounting are two of the most critical determinants for your long-term success. Without a solid e-commerce bookkeeping and accounting system in place, things can quickly go awry.
Unclear tax laws and exciting growth possibilities afforded by the internet are just a few reasons why bookkeeping and accounting are vital for e-commerce businesses. This blog discusses how to ensure your e-commerce business’s success with effective bookkeeping and accounting procedures. Implementing the systems discussed in this article lets you drastically reduce the stress you experience as a growing business and ensures you stay compliant with all tax laws.
At Fully Accountable, we believe e-commerce businesses should have access to bookkeeping and accounting services. Having real-time reports, thorough data analysis, and comprehensive financial forecasting is an essential component of your overall success. Our team of financial experts can help you reach your maximum potential.
Difference Between E-Commerce Bookkeeping and Accounting
Ask any e-commerce business owner their least favorite part about running their business. Most will reply with one word: accounting. However, most small business owners try to take on accounting responsibilities by themselves. But what exactly are the differences between bookkeeping vs. accounting?
As your e-commerce business grows, so too do your financial responsibilities. That means, as a business owner, you have an awful lot on your plate. Sales, returns, supplier payments, banking fees, every financial area you can think of, gets more complicated the larger your business grows.
At this stage, bookkeeping is no longer the performance of mundane tasks. It’s much more complicated than that. It includes the following:
- Transaction categorization
- Invoicing
- Account reconciliation
- Balance sheets
- Payroll management
- Account payables and receivables management
Accounting also becomes more difficult as an e-commerce business. Since the internet’s business environment is relatively new and rapidly changing, analyzing financial records and forecasting for the future is more difficult.
Accounting tasks include the following:
- Preparing and adjusting entries
- Financial information audits
- Tax planning and reporting
- Financial reporting and reporting
- Financial forecasting and risk analysis
- Financial statement preparation
As you can see, growing as an e-commerce business is exciting, but it comes with extensive responsibilities. If you don’t have the correct accounting systems in place, growth can quickly turn into a nightmare.
Shopify Accounting
Shopify is one of the leading e-commerce platforms, empowering businesses of all sizes to create online stores and sell products worldwide. However, managing finances on Shopify requires specialized knowledge to ensure your business thrives. Accounting for Shopify involves more than just tracking sales; it includes managing expenses, monitoring cash flow, and ensuring compliance with tax regulations.
Key Components of Shopify Accounting
- Sales Tracking and Reconciliation: Shopify provides detailed reports on sales, but reconciling these with your bank statements and e-commerce accounting software is essential. This ensures that all transactions are accurately recorded and discrepancies are identified and resolved promptly.
- Expense Management: From Shopify subscription fees to advertising costs, managing and categorizing expenses is crucial. Keeping track of these expenses helps in understanding your business’s profitability and areas where you can reduce costs.
- Inventory Management: Properly managing inventory ensures that your stock levels are optimized, reducing the risk of overstocking or stockouts. With accounting software for e-commerce, you can easily track inventory, which affects your cost of goods sold (COGS) calculations and overall financial health.
- Tax Compliance: Shopify accounting must account for various tax obligations, including sales tax, VAT, and income tax. Accurate sales tax compliance, tax reporting, and timely payments are vital to avoid penalties and legal issues.
- Payment Gateway Fees: Understanding the fees associated with different payment gateways (e.g., Shopify Payments, PayPal, Stripe) and how they impact your net income is an essential aspect of Shopify accounting.
- Financial Reporting: Generating comprehensive financial reports, such as profit and loss statements, balance sheets, and cash flow statements, provides insights into your business’s financial performance and aids in strategic decision-making.
Benefits of Effective Shopify Accounting
- Enhanced Financial Visibility: With detailed and accurate accounting practices, you gain a clear view of your business’s financial health, enabling you to make informed decisions and plan for future growth.
- Improved Cash Flow Management: Effective accounting helps in managing cash flow by monitoring income and expenses, ensuring you have sufficient funds to meet operational needs and invest in growth opportunities.
- Tax Efficiency: By accurately tracking all financial transactions and understanding tax obligations, you can minimize tax liabilities and ensure compliance with relevant regulations.
- Strategic Insights: Detailed financial reports and analyses provide valuable insights into your business’s performance, helping you identify profitable products, optimize pricing strategies, and allocate resources effectively.
What Are the Two Types of Accounting for E-commerce Businesses?
There are two primary types of accounting for e-commerce businesses: cash basis accounting and accrual.
Cash Basis Accounting
Businesses do well with cash basis accounting when they start because of its simplicity. Cash basis accounting records transactions whenever they land in your account or leave it as an expense. Then, based on the transactions, an accountant can see how much cash you have at your disposal at any given time.
With cash basis accounting, you also don’t have to pay income taxes on the payments you haven’t received. This bookkeeping method primarily works for the following businesses:
- Smaller e-commerce sellers
- Maker businesses
- Products on-demand businesses
- Dropshipping operations
Cash basis accounting, while easy and convenient, may be too simple for larger corporations. The method of cash basis accounting doesn’t account for future account receivables or accounts payables.
Accrual Method
Accrual accounting records transactions as they occur, not when the money reaches or leaves the account. Most financial institutions use this method.
Accrual accounting can seem confusing at first glance. However, accrual accounting provides a more realistic representation of your monthly business income and allows more accurate financial projections when you account for present and future obligations.
The downside to this method is that it shifts the focus from how much money you have to how much money you move. Including future payments and expenses using accrual accounting carries the danger of making your finances look more encouraging than they are, which means you must monitor them more closely.
Despite the pitfalls of accrual accounting, it makes sense to use this method as an e-commerce entrepreneur. The reason is that cash basis accounting is only permitted for companies with an average annual growth receipt of $5 million or less. So, if you plan on expanding your business, the accrual method lies in your future.
Why Are Bookkeeping and Accounting Important for E-commerce?
Whether you sell via Etsy, Amazon, or Shopify, you need a stable system for your finances. The following represents a few of the main benefits of having a reliable e-commerce accounting system in place from the start.
E-commerce Accounting Helps You Build a Stable Business Model
Bookkeeping and accounting maintain your business’s financial integrity. They provide a reliable system for all records and can help you glean insight without disrupting processes such as payroll and tax audits. e-commerce accounting ensures you stay up-to-date and prepared for the logistical aspects of your business.
E-commerce Accounting Helps You Financially Forecast
Without thoroughly understanding your numbers, you can’t project your business’s future success. Having an e-commerce accounting system in place enables you to plan for the future confidently.
E-commerce Accounting Ensures Proper Tax Compliance
It takes a lot of time and focus away from your business’s core principles when you handle all of your bookkeeping tasks, including tax compliance. As an e-commerce business owner, you can’t afford that distraction. E-commerce bookkeeping procedures ensure you stay tax compliant so you don’t have to divert any attention away from what’s most important: sustainable business growth.
What Does Effective E-commerce Accounting Look Like?
Successful e-commerce businesses have a few bookkeeping and accounting principles in common:
Organization
When your e-commerce bookkeeping and accounting are disorganized, you won’t know how to locate financial records and financial reports. You will also inconsistently generate KPIs and benchmarks because you don’t understand how to accurately measure your financial success.
An organized accounting system keeps track of everything, so all of your financial records are easily accessible. Having an organized system in place eliminates the stress of pesky detractors such as tax audits and payroll. Everything is where it needs to be whenever you need it.
Well-Defined Roles
Effective e-commerce accounting systems have well-defined roles. If your in-house bookkeeper tries to perform accounting responsibilities while you’re in growth mode, details that grow into larger issues quickly get lost in the shuffle.
An easy way around this common issue is by outsourcing your e-commerce accounting responsibilities. As shown, bookkeeping and accounting are different positions. When expanding rapidly, a bookkeeper should focus on keeping tightly organized records. At the same time, accounting should fall to someone who can focus solely on financial forecasting and analyzing financial data.
Strategic Resource Allocation
Well-researched resource allocation is another clear marker for effective e-commerce accounting procedures. For example, using a scalable outsourced accounting firm ensures that you don’t overpay for services you don’t need.
Most bookkeeping and accounting procedures don’t require yearly salaries. Scalable outsourced accounting firms let you take advantage of bookkeeping and accounting services when you need them.
Accounting Reports Are the Root of Great Decision-Making
Businesses, irrespective of their operation domain, must maintain various accounting reports to track financial health, make informed decisions, and comply with regulatory requirements. Principal among these reports is the Profit and Loss (P&L) statement, which provides a summary of the revenue, costs, and expenses over a period, highlighting the net profit or loss. This is crucial for e-commerce businesses, which often have fluctuating revenue streams and need to monitor margins closely.
Another essential report is the Balance Sheet, which presents a snapshot of a company’s assets, liabilities, and equity at a specific point in time, offering insights into its overall financial position. For e-commerce enterprises, understanding liabilities such as refunds or chargebacks, and assets such as inventory, can be particularly significant. Other reports, like cash flow statements, can also be vital, especially for e-commerce businesses to manage their liquidity and ensure they have sufficient funds to cover operational expenses.
What Is E-Commerce Accounting and Why Is It Important?
As an e-commerce business owner, you’re venturing into somewhat uncharted territory. With rapidly changing tax laws, ample growth opportunities, and unique business models and structures, you need an equally adaptable e-commerce accounting firm that’s familiar with the latest regulations, practices, and cutting-edge cloud accounting software for e-commerce, such as QuickBooks online.
Fully Accountable is a team of accounting professionals who understand the rapidly changing atmosphere e-commerce businesses face. Whether you need a controller to monitor your finances and ensure tax compliance or a fractional CFO to offer consulting services as your business grows, our team is here to help.
If you’re looking for accounting for online businesses and e-commerce, contact us today to take advantage of comprehensive e-commerce accounting services.
