Accounting for eCommerce business can be an intimidating task if you’re not savvy with accounting tools and software. However, keeping your financial documents in order is an important part of running your business. It is the only way to know how profitable your business is (or isn’t), and the only way to report your income to the authorities at tax time.
If accounting isn’t your strong suit, no worries. We’ve compiled a ton of information for you in this guide to eCommerce business accounting. Take a look and see how your current processes stack up against our recommendations.
eCommerce Accounting Table of Contents
What is eCommerce Accounting?
Simply stated, eCommerce accounting is the process of recording your credits and debits. Anytime your business earns or spends money, it should be recorded in your books. This includes every transaction, regardless of the size. This is often a dauting task for small business owners, especially if you’re doing your own books!
Accounting vs Bookkeeping
Let’s start with the basics. Many small business owners confuse the terms “accounting” and “bookkeeping”. Although they are related, they are not the same thing. Bookkeeping is a part of accounting, but it’s not the whole thing.
Bookkeeping is the practice of keeping accurate records of all transactions in your business. This includes income, expenses, chargebacks, and more. Whether you’re doing your own bookkeeping, or you have an employee or vendor doing it for you, these items need to be included:
- Categorizing transactions (income/expense)
- Invoicing
- Accounts receivable
- Accounts payable
- Bank account reconciliation
- Payroll management
- Balance sheet preparation
Keeping track of all these items is the baseline of what your business needs to be successful. Without a clean book of transactions, it can be difficult to determine your cash flow or profitability.
Accounting is much more complex than just bookkeeping. It includes the collection and analysis of data to build reports that reflect the health of the business (or lack thereof). Here are some of the key elements of a solid accounting process:
- Financial reporting, including income statements, balance sheets, and models
- Financial audits – planning, executing, and reporting
- Preparing adjusted entries
- Tax planning and reporting
- Forecasting and risk analysis
Although bookkeeping is the first step in great accounting practices, it’s not the only piece. Accounting is a complex process of analyzing data to ensure the current and future success of the company.
Types of Accounting for eCommerce
There are two key methods of accounting that you need to be aware of if you’re going to implement a process into your business. These two methods are cash-based accounting and accrual-based accounting. The differences are described in detail here.
Cash-Based Accounting
Cash-based accounting is the simplest method for small businesses. It is a method in which the books are maintained in the exact same way as the bank account. The bookkeeper enters each transaction as it hits your bank account. Because of this, your ledger should mirror your merchant account by reflecting when cash hits your account as income, and when it leaves as an expense.
This method is great for small businesses with a relatively low transaction volume. Every time money moves, you make an entry in your register, and everything stays in order. This process makes it simple for you to know how much cash you currently have on-hand and makes tax reporting easy.
Accrual-Based Accounting
Accrual-based accounting records each sale or expense as it happens, rather than when it hits your bank account. If a transaction is made today, but the cash doesn’t hit your account until two days from now, an accrual-based protocol will record it today. When you compare your ledger to your merchant account statement, the transactions will not line up because they were recorded at different times.
Although this method can be more confusing, it is typically the best choice for businesses with a large transaction volume. Most major financial institutions use this method because it gives a clear picture of the financial health of your business by looking specifically at total income each month, and total expenses. It also accounts for future payables and receivables, which is great for projections and long-term planning.
How to Implement Accounting for Your eCommerce Business
Let’s dive a little deeper into the process of setting up your accounting system. There are several steps you need to take to get the ball rolling. They are simple but can take time.
Tools Needed for eCommerce Accounting
The tools you’ll need to implement an accounting system for your eCommerce business are as follows:
- Tax ID Number – If you already have one, move on to the next step. If not, you need to register your business with the IRS and request an EIN (employer identification number). If you are a sole proprietor, you could use your personal social security number, as well. Talk to your tax or business advisor to decide what’s best for you.
- Bank Account – Mixing business and personal finances is rarely a good idea. Once you have your EIN, you need to open a bank account for your business. Everything you do should be routed through this account instead of your personal accounts. If you make business purchases with your personal account, you can claim them on your taxes as “out-of-pocket” expenses, but it doesn’t work the other way around.
- Software – Many small business owners make the mistake of trying to track income and expenses on a spreadsheet. Do yourself a favor on the front end and just get some software! It doesn’t have to be extremely expensive or robust. Just something simple to help you get started. Here are some of the most popular eCommerce accounting platforms. Check them out and see what works best for you.
- QuickBooks
- Xero
- FreshBooks
- Sage
- Wave
- Time – Don’t underestimate this critical element of accounting! Whether it’s you, or someone else, you need to have time set aside on a daily or weekly basis to make sure the accounting tasks for your business are completed. Don’t make the mistake of waiting until the end of the year and then trying to do it all at once.
First Steps to Implement Your Accounting Process
If you’re ready to get your process implemented, start by following the simple steps below.
- Start by assessing the talent on your team and deciding who will be responsible for accounting in your business. If it’s you, set some goals for yourself to make sure you stay accountable. If it’s someone else, set some parameters and expectations around the accounting role so you can hold them accountable.
- Once that is sorted out, you can move forward with choosing a software system. We recommend doing some online research on some of the platforms we mentioned above, or others that you may be interested in. Once you do your due diligence, setup some calls with the ones you’re most interested in if they offer live calls. Learn as much as you can before implementing.
- Go through any training courses or online learning that is available for your software system. Be sure that you understand what’s available and how it works. If someone else is doing your accounting, be sure they go through the training as well. A tool is only as good as how you use it.
- Decide which metrics are most important to your company and setup your software accordingly.
- Most merchants track cash flow, revenue, and expenses. The expense category is broken down further into things like payroll, software, COGS, and other expense categories specific to their business. The revenue category varies from one business to the next. If you have multiple streams of income, be sure to setup your software to reflect various income categories, as well.
- Create a budget. This may sound scary, but it’s essential to staying on track and reaching your business goals. Your chosen accounting software may have this feature built in. If not, you can download one online, purchase a separate software, or setup a spreadsheet that is divided into months.
How to Analyze Your Accounting Data
Once you have your process implemented and a few months of data recorded, take the time to sit down and go through the data. Run all the reports available in your new software and decide which ones give you the information you want to see about your business. Some key things to look for include:
- Cash Flow: Where does your money come from, where does it go, and how often?
- Refunds: Really dig in here and identify trends for returns and refunds.
- Chargebacks: How often are you getting them and for how much? Try to identify trends here, as well.
- Major Expenses: Did any major expenses hit your account? If so, what were they for? Could they have been avoided?
- Income Trends: What are some of the trends in your income line? Are there certain products that sell better than others? How can you increase your revenue?
Analyzing your data on a monthly basis is an excellent way to keep a pulse on your business and know when to pivot. Waiting until the last minute almost never pays off. As a business owner, it’s your job to protect the business by making good financial decisions. The only way to do that is to have a deep understanding of how your money moves and what can be improved.
