The Guide to Understanding eCommerce Accounting Basics

by Fully Accountable | Oct 11, 2023 | Accounting, eCommerce Accounting

As more companies make the transition to eCommerce, accounting services that are tailored to eCommerce clients have risen as well. Though accounting is an essential component of any business, eCommerce accounting requires an understanding of eCommerce business practices. When a business is dealing with international transactions, sales tax collection for various states, and inventory management across different warehouses, a deft hand is needed. Whether you hire an in-house accountant or outsource to an eCommerce accounting firm, everything you need to know about eCommerce accounting is below. 

What is eCommerce Accounting?

The practice of eCommerce accounting refers to the practice of managing and recording all financial transactions for businesses that operate online. It encompasses a wide range of financial processes, uniquely tailored to the nuances of the online marketplace. 

Here’s a deeper dive into its components:

  • Sales Accounting: All the income generated from the sale of products or services online. This includes not only product sales but also digital goods, subscriptions, and any other source of income.
  • Cost of Goods Sold (COGS): It’s crucial for eCommerce businesses to accurately track the costs associated with producing or purchasing the goods they sell online. This includes costs like raw materials, direct labor, and manufacturing overhead.
  • Inventory Management: Unlike brick-and-mortar stores, eCommerce businesses might store inventory in multiple locations, including warehouses, fulfillment centers, or dropshipping suppliers. It’s crucial to track inventory levels, turnover rates, and valuation (using FIFO, LIFO, or another method).
  • Expenses: Just like any business, eCommerce entities incur expenses. These can range from platform fees (like those charged by Amazon or eBay), payment gateway fees (from entities like PayPal or Stripe), marketing costs, shipping fees, returns, and other operational expenses.
  • Sales Tax Collection and Remittance: Online sales might be subject to various sales taxes, depending on the jurisdictions of the seller and the buyer. Proper accounting ensures the right amount of tax is collected and remitted to the correct authority.
  • International Transactions: For eCommerce businesses that sell internationally, accounting needs to address currency conversion, international tax obligations, tariffs, and import/export regulations.
  • Financial Reporting: eCommerce businesses still need to produce financial reports, like income statements, balance sheets, and cash flow statements, tailored to their unique operations.
  • Reconciliation: With the multitude of payment gateways and methods available (credit cards, digital wallets, bank transfers, etc.), reconciling deposits to actual sales can be more complex for eCommerce businesses.
  • Fraud Prevention and Detection: Due to the virtual nature of eCommerce, there’s an increased risk of fraud, but eCommerce accounting systems often incorporate fraud detection and preventive measures.
  • Integrations: Many eCommerce platforms (like Shopify, WooCommerce, BigCommerce) integrate with accounting software (like QuickBooks, Xero) to streamline the accounting process. This helps in automating many tasks like sales data import, tax calculations, and more.

Just like traditional accounting, the objective of eCommerce accounting is to provide a clear financial picture of the business, ensuring compliance with relevant regulations, and aiding in strategic decision-making. However, due to the unique challenges of online businesses, eCommerce accounting often requires specialized expertise or software solutions.

Cash-Based Accounting vs. Accrual Accounting in Regard to eCommerce Accounting

Companies must choose between either cash-based accounting or accrual accounting. Neither is the objectively best method of accounting, as they both have their own benefits and disadvantages. However, once you pick one, changing to a different method of accounting is a bit more complicated, as it requires filing paperwork with the IRS. 

If you’re not sure which one is best for your eCommerce business, below are breakdowns of each accounting method. 

Cash-Based Accounting

In cash-based accounting, revenue and expenses are recorded when cash is actually received or paid, regardless of when the goods or services were delivered or received.

eCommerce Considerations:

Sales: Revenue is recorded when payment is received from the customer. If a customer buys a product today but pays a week later, the sale is recorded a week later.

Expenses: Expenses (like vendor payments, advertising costs, or platform fees) are recorded when they are paid, not when they’re incurred.

Simplicity: This method can be simpler for small eCommerce businesses, as transactions are straightforward and aligned with bank statements.

Cash Flow: It gives a direct picture of cash flow, which is crucial for eCommerce startups or businesses with tight margins.

Accrual Accounting

With accrual accounting, revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid.

eCommerce Considerations:

Sales: Revenue is recorded when the product is sold (or service is provided), even if the customer hasn’t paid yet. If a customer buys on credit or through a delayed payment mechanism, the revenue is still recorded at the point of sale.

Expenses: If an eCommerce business incurs an expense (like a platform fee or advertisement cost), it’s recorded when the service is provided, even if the bill will be paid later.

Accounts Receivable and Payable: Accrual accounting requires eCommerce businesses to track amounts they are owed by customers (receivables) and amounts they owe to vendors (payables).

Revenue Matching: This method gives a clearer picture of financial health, as it matches revenue with the related expenses. For instance, if an eCommerce business sells a product in January (and records the revenue) but doesn’t pay the supplier until February, both the revenue and cost are accounted for in January.

General Differences

Accrual accounting is typically more complex than cash-based due to the need to track payables and receivables. Also, some jurisdictions or financial institutions might require businesses (including eCommerce) to use accrual accounting, especially as they grow in size.

While cash-based accounting reflects cash flow, accrual accounting provides a more comprehensive view of a company’s financial health, as it accounts for future cash inflows and outflows.

Ultimately, the choice between cash-based and accrual accounting will depend on the nature and scale of the eCommerce business, regulatory requirements, and the owner’s preference. It’s advisable to consult with an accountant familiar with eCommerce to determine the best approach.

Why It’s Smart to Hire an Outsourced eCommerce Accounting Firm

Hiring an outsourced eCommerce accounting firm can offer several benefits to online businesses. Primarily, eCommerce accounting firms specialize in the nuances and complexities specific to online businesses, such as multi-channel sales, international transactions, and sales tax in different jurisdictions. They are equipped to handle unique eCommerce challenges efficiently.

Cost Effective

Outsourcing can be more affordable than hiring a full-time, in-house accountant or team, especially for small to medium-sized businesses. You pay for the services you need without incurring costs for benefits, office space, and other overheads associated with full-time employees. By outsourcing, you can focus on core business activities, such as product development, marketing, and customer service.

As your eCommerce business grows, your accounting needs will change, causing you to spend more money to hire additional accountants, which can be a time-consuming process. Instead, outsourced firms can easily scale their services to match your growth trajectory, ensuring you always have the right level of support. Moreover, since many eCommerce accounting firms leverage cutting-edge accounting and financial software, you indirectly get the benefit of these tools without having to invest in them directly.

Taxes and Compliance 

Doing your business’ taxes can be stressful, but eCommerce accounting firms ensure taxes are done correctly by staying up-to-date with the latest in tax laws, financial regulations, and reporting standards. This ensures that your business remains compliant, reducing risks of penalties or financial discrepancies.

Business Strategy 

These firms often provide more than just transactional accounting services. They can offer financial insights, budgeting, forecasting, and advice on financial strategy, helping eCommerce businesses make informed decisions. 


Even if your primary operations are disrupted for any reason (e.g., local holidays or unforeseen events), an outsourced firm, especially if located in a different region or time zone, can ensure that your accounting functions continue without interruption. More importantly, data stored by an outside accounting firm is a lot more secure. Reputable eCommerce accounting firms invest in secure data storage and encryption technologies, ensuring that your financial data remains confidential and protected.

Fully Accountable is Your eCommerce Accounting Partner

While there are many benefits to outsourcing eCommerce accounting, it’s essential for businesses to conduct thorough research and due diligence when selecting a firm. It’s crucial to ensure that the firm’s services align with the business’s needs and that there’s clear communication and trust between both parties.

Fully Accountable is a top-rated outsourced accounting and Inc. 5000 honoree, a list that tracks the top 5,000 privately held companies in the country. We offer outsourced accounting services for eCommerce, as well as outsourced CFOs and controllers, who can provide you with high-level financial reporting and business strategies. If you’re ready to rein in your finances through accurate accounting that will take that pressure off your shoulders, contact us or give us a call at (877) 330-9401. 

Owner at Fully Accountable | Website | + posts

Fully Accountable is an outsourced accounting and fractional CFO firm that specializes in ecommerce accounting for online businesses. As a Inc 5000 fastest growing companies award winner, our diverse team of accountants, bookkeepers and CFOs can help you improve your cashflow and effectively manage and grow your bottom line.


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