Get your books in order: A beginner’s guide to e-commerce accounting

There are plenty of rewarding and exciting parts of running a retail business, like connecting with customers, growing a brand, and picking inventory. But accounting, while vital to running a business, can sometimes intimidate new retailers.  

Proper accounting ensures the financial health of your shop, and it can be the difference between thriving and just surviving in commerce. The e-commerce aspect of a business adds a few extra considerations. Don’t worry—even if you don’t love spreadsheets and numbers, this beginner’s guide demystifies e-commerce accounting and lays out how to get started. So dive in below to learn the financial basics you need to propel your brand forward. 

What sets e-commerce accounting apart?

Accounting is the process of tracking, analyzing, and reporting financial transactions for your online business. To break it down further, that means categorizing and tallying up all the money that comes in (known as income) and all the money that goes out (known as expenses). 

Even though e-commerce accounting has many of the fundamental practices as traditional accounting, the nature of being online brings in more complexities. Here are some key differences to take into account.

Sales channels: In e-commerce, business owners have to account for many sales channels that a brick-and-mortar business does not. Instead of just tracking in-store sales, business owners need to reconcile revenue from channels like social media, email marketing, paid search, and various checkout options. They need this data to understand which channels perform the best and where to invest further.

Inventory management: Tracking inventory is also a major difference as owners need to account for inventory virtually across different warehouses, especially for a quickly growing business. This also means accounting for various shipping expenses and factoring them into profitability.

Sales tax: E-commerce businesses have to navigate sales tax in a way that traditional retail does not. Since e-commerce businesses may sell in other states or even countries, part of their accounting is making sure they comply with the tax codes of every place they operate within.

Returned items: E-commerce businesses deal with a greater volume of returns than brick-and-mortar businesses. These returns or exchanges need to be properly documented and accounted for.

Accounting terms and tasks you need to know 

Before you dive in, let’s go over a few of the most common tasks that are part of a healthy e-commerce accounting process:

• Managing invoices: This involves sending invoices to customers for products or services and ensuring that payments are recorded accurately.
• Tracking payroll: This task includes calculating employee wages and distributing paychecks, while also managing withholdings and deductions.
• Preparing a balance sheet: This is a statement that gives a quick snapshot of a company’s financial health and shows assets and liabilities during a designated period.
• Drafting a financial statement: This can get confused with a balance sheet but a financial statement looks at the bigger picture and includes a compilation of your balance sheets alongside income statements and cash flow statements. 
• Creating a tax plan: Tax planning involves strategizing your best use of deductions and credits. 

Here are the most common metrics to pay attention to. These are vital numbers when you plan your retail KPIs.

• Cash flow: The net amount of cash moving in and out of a business.
• Gross profit: The dollar amount of revenue left after subtracting the cost of goods sold.
• Gross margins: The percentage of revenue left after subtracting the cost of goods sold.
• Profit and loss: A summary of revenue, costs, and expenses that reflect profitability. 

What method of accounting should you use?

Before you begin, you’ll need to decide between two primary methods: cash basis or accrual accounting. One isn’t inherently better than the other; it simply depends on what’s best for your business.

Cash-basis accounting: In this system, you record revenue only when you actually receive payment, and you record expenses only when you actually pay a bill. This is the simpler of the two methods, as it matches your income and expenses to the flow of cash in and out of your business. The main advantage of cash-basis accounting is its simplicity. It’s easier to track and record transactions. This can be especially helpful for small businesses.

Accrual accounting: This aims to match your income and expenses to the period they were earned or incurred, regardless of when the cash finally changes hands. With accrual accounting, you record revenue when you’ve earned it, even if the customer hasn’t paid you yet. And you record expenses when you incur them, even if you haven’t paid the bill yet. This provides a more accurate representation of your finances. The main advantage of accrual accounting is that it gives you a better overall picture of your company’s health. By recording revenue and expenses as they are earned or incurred, you can see a clearer trend in your profitability.

Overall, cash-basis accounting is simpler but accrual accounting is clearer. Smaller businesses might prefer cash basis while larger ones prefer accrual. It’s up to retailers to decide which fits their business more. 

What are the three pillars of accounting?

There are key pillars that every business owner should understand in order to manage their accounting: bookkeeping, tax management, and growth planning. Let’s look closer at each one. 

Bookkeeping: Consider this the foundation of your accounting system. As we mentioned above, it involves the day-to-day recording, organizing, and categorizing of all your business transactions–-things like sales, purchases, payments, and receipts. Bookkeeping gives you the financial data you need to make good decisions and understand the health of your company. It lets retailers pinpoint what’s driving higher expenses or eating into their profit. 

Tax management: When it comes to taxes, you want to get it right to avoid headaches down the line. Ensure you’re complying with all federal and local tax requirements and that you are using deductions and credits strategically to reduce your tax liability. Tax-related tasks include calculating payroll taxes, filing business tax returns, and identifying tax-deductible expenses. To keep as much of your hard-earned money as possible and still avoid tax penalties, it could be beneficial to work with a tax accountant. 

Growth planning: This is where all of your meticulous recordkeeping comes into play. Growth planning uses your financial data to inform strategic decisions about the future of your business. This includes forecasting cash flow, budgeting for expenses, and analyzing your profitability. By recognizing trends in your accounting, you can identify opportunities for growth. You might realize you need to change your pricing, hire additional help, or even pivot your entire business model during growth planning. This pillar is all about harnessing the power of your past data to fuel your future goals.

What software should you use?

Accounting, especially e-commerce accounting, means juggling a lot of different numbers at once. But you don’t have to do it completely unassisted. Luckily, there are countless software tools and apps that can automate your accounting and even integrate with your e-commerce store. So no need to struggle with pens and paper in your back office. Check out some of these tools along with these other tools for retailers.

• QuickBooks Cloud: Offers comprehensive accounting features with cloud accessibility for small- and medium-sized businesses. 
• Xero: Known for its user-friendly interface, powerful reporting capabilities, and ability to integrate with many e-commerce platforms. 
• Zoho Books: Great for automation and integration with other Zoho apps as well as detailed financial reports and insights.
• Wave: A more budget-friendly option, Wave has essential accounting tools like invoicing, expense tracking, and basic financial reporting.
• Kashoo: Simple yet effective platform that’s most suitable for business owners new to accounting software.
• Crunch: A great choice for businesses looking for easy accounting software, with chartered accountants on hand to help you save time and maximize your tax savings.

Mastering e-commerce accounting isn’t just smart, it’s essential. You can gain a deeper understanding of your financial performance and make better decisions. So don’t let the complexities of e-commerce accounting intimidate you. Embrace the power of financial management, and let it help you grow your business.

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