Are you searching for an easier way to handle your Shopify bookkeeping?
Selling on Shopify is exciting, but managing the finances of an online store can quickly become complex. Accurate bookkeeping for Shopify is the key here. By implementing the right accounting practices, e-commerce businesses can gain valuable insights into their performance, make smarter financial decisions, and free up time to focus on what they do best: selling. Read on to discover the top e-commerce bookkeeping practices for Shopify stores.
Fundamentals of Shopify Bookkeeping
1) Choosing the Right Accounting Method
Deciding on the right accounting method for managing Shopify store’s finances impacts how finances are tracked and reported.
Ways to calculate:
- Cash Accounting: This straightforward method records income and expenses only when money physically changes hands. It is recommended for small businesses with simpler financial flows.
- Accrual Accounting: This method provides an overview of financial health by recording revenue and expenses when they are incurred, regardless of when the actual payment is received or made. It is best suited for medium to large stores with complex accounting structures.
Similarly, there is a choice between manual and digital bookkeeping:
- Manual Bookkeeping: It is inexpensive but time-consuming and prone to errors. Shopify owners with sufficient staff and a preference for a simpler approach may choose this method.
- Digital Bookkeeping: This leverages accounting software like Xero or QuickBooks for faster and more accurate accounting. With easy integration with Shopify, these tools save time spent on manual work. However, digital accounting requires proper training for effective usage.
2) Separate Business and Personal Finances
Maintaining separate personal and business finances is recommended for accurate record-keeping and protecting assets.
Store owners should set up separate bank accounts for business and personal matters for accurate financial data recording. This delineates business income and expenses from personal finances and thus simplifies bookkeeping and improves financial oversight.
A separate business credit score would also protect personal credit from the risks associated with business ventures.
3) Key Shopify Accounting Functions
There are various accounting functions that Shopify store owners should complete:
- Record vendor bills and payments.
- Track purchases, sales, and expenses.
- Manage accounts receivable and accounts payable.
- Reconcile payments, credit cards, and bank accounts.
- Track inventory movement and adjustments.
- Record sales tax, payments, and filing.
- Prepare financial reports (profit & loss, balance sheet, and cash flow).
Shopify provides businesses with built-in tools, including Analytics and the Payments dashboard to track sales and payouts. However, other external tools are required to leverage their full potential, such as expense tracking, payroll management, and advanced tax preparation.
4) Maintaining Accurate Financial Reports
Understanding Key Financial Statements:
Regularly updating and reviewing financial reports is essential. This should include:
- Income statement: This would help track revenue, expenses, and profit over a period.
- Balance sheet, indicating assets and liabilities at a point in time.
- Cash Flow Statement details cash inflows and outflows for better cash flow management. This also helps identify late-paying customers or overpriced suppliers.
Track Key Metrics:
Shopify businesses must track a few key metrics to understand the areas for improvement.
- Revenue Streams: Identify top-performing products and regions to focus on.
- Cost of Goods Sold (COGS): Represents the direct costs associated with the production and acquisition of goods that a company sells during a specific accounting period. COGS need to be regularly updated for accurate profit calculations.
- Profit Margins: Help analyze gross and net profit margins, thus optimizing pricing and cost-cutting.
- Refunds, Discounts, and Chargebacks: Should be tracked in real-time to improve customer satisfaction and reduce losses.
Best Practices for a Successful Shopify Bookkeeping
1) Financial Records Updating
Updated records are key to accurate Shopify accounting and bookkeeping. Logging financial transactions regularly, including sales, expenses, and inventory changes, aligns the financial statements with the status of the business. This practice simplifies tax preparation and helps identify trends and anomalies early, thus helping in better financial decision-making.
2) Monthly Account Reconciliations
Monthly account reconciliations are essential for financial accuracy. Discrepancies can be identified and resolved early by comparing Shopify sales, payment gateways, and bank statements. Regular reconciliation also provides better cash flow tracking and reliable financial data, especially during tax season.
3) Leveraging Financial Reports
When complemented with professional accounting tools Shopify accounting reports can offer valuable insights and a more comprehensive financial view. Tracking key metrics such as profit margins, operating costs, and cash flow helps decide pricing, inventory management, and marketing strategies.
Quarterly Reviewing
Quarterly reviewing is essential to gain insights into the business’s performance. Partnering with an accountant is recommended for accurate data evaluation and strategic growth planning. An accounting professional will analyze all financial data recorded and provide recommendations on business growth, expense management, borrowing, lending, and other financial matters. This quarterly review is also an opportune time to assess finances, optimize tax strategies, and plan the future of Shopify stores.
Hire a Professional Bookkeeper or Accountant
Hiring a professional bookkeeper or accountant makes sense when an e-commerce business scales. These experts handle complex tax regulations, maximize tax deductions, and help business owners avoid costly audits. Outsourcing accounting and bookkeeping allows Shopify sellers to free up valuable time and focus on core competencies and overall business growth. With entrusted financial management professionals, entrepreneurs can enhance efficiency and ensure compliance with tax and financial regulations.
Frequently Asked Questions
1) Can I automate bookkeeping for my Shopify store?
Yes, you can automate bookkeeping. This can be done by integrating Shopify with accounting software like QuickBooks, Xero, or Wave. These tools can sync sales, expenses, and tax data automatically and reduce the chances of manual data entry errors.
2) What common bookkeeping mistakes should Shopify sellers avoid?
Shopify sellers should be aware of several common bookkeeping errors. Some of them include:
- Failing to separate personal and business finances,
- Neglecting regular account reconciliations,
- Overlooking sales tax compliance, and
- Not properly tracking chargebacks, refunds, or discounts.
Additionally, delaying financial record updates can lead to inaccurate financial reports.
3) How can I simplify my Shopify store’s tax preparation?
As a Shopify store owner, you may leverage tax automation tools to ensure proper tax collection and compliance. Keep digital copies of all receipts and invoices, regularly review tax obligations for different sales regions, and consult a tax professional to maximize deductions and prevent compliance issues.
