Ecommerce accounting basics: The Principles to run a successful store

Running an ecommerce business takes more than just great ideas and products, but also marketing and inventory. You also need an ecommerce accounting system that can track the financials. How much are you spending? What are your profits? Do you have enough money in your budget for your business? Is the government happy with the business you run? Ecommerce accounting uses well-known processes to track your financial records and business transactions and keeping current on tax laws pay, profits, and payroll.

If you're starting your ecommerce store or are already in it for a while, and you realize that require help in tracking your company's budget, this eCommerce accounting guide will get you going in the right direction.

Accounting for Ecommerce allows you to assess the financial health of your business and make better financial forecasts as your business grows.

What does ecommerce accounting involve?

Ecommerce businesses are built on transaction and inventory. It is where you make profits. You deliver items. You purchase inventory and refill it.
The basic principles of ecommerce accounting begin with the system of keeping track of and reporting on your transactions. This includes purchases orders, invoices, expenses and taxation.

But it goes much further than the. Accounting firms will then analyze the information and then use the information to create accounts so that they can evaluate and present the financial condition of your business.Ecommerce companies also require some specialized attention due to their fundamental business model.

Imagine what happens if you make a sale in your ecommerce store. The customer will use their credit card, and then makes payment to your payment processor. Which are the different ways this sale can impact your cash flow?

• The payment processor you used to make the transaction has been paid, however the money isn't in your banking account.
• Taxes on sales are paid, possibly from a different state or country
• Inventory declines
• The credit card or payment processor fees are charged
• The actual income from sales differs from the sales price

No matter the sales channel the single sale has an impact on several aspects of your financial records. And the aftereffects of that one sale will show up in your financial records in the coming months. In the event that your order is to get returned, many of these transactions will need to be reversed or modified.

And that's just one sale.

The tracking of some of this is the task of a bookkeeper, and we'll discuss the distinctions between ecommerce bookkeeping and accounting some time later.

First, let's begin with some basic accounting terminology.

The basics of accounting

These are the top phrases to learn for ecommerce accounting:

Transactions

In the accounting world, a transaction occurs when funds are spent, received, or demanded from a company or a vendor.

The term "transaction" can refer to any of the below:

• A business's owner can invest money into the company
• Sales revenue
• Invoices
• Costs such as salaries, marketing, travel, and building expenses
• Assets purchased, such as automobiles, office equipment properties, materials, etc.

One transaction may comprise multiple elements. If you are paying employees on an hourly basis, for example, you have to know the amount of time they were working, their total wages, deductions for taxes as well as their net earnings. A good accounting program will be able to handle all the above tasks.

Transactions for ecommerce companies can get complicated due to certain factors, particularly taxation and delays in timing caused by the separation between consumer and business.

Do you, for instance, assess sales tax right at the time of purchasing? If yes then what happens to that money if the product gets returned after a month?

Accounting for Ecommerce aims to control the processes and transactions so that these sorts of complications don't affect the financial outlook of your business.

Credits and debits

Each transaction is monitored by the system of debits and credits. Let's first define the most important terms:

Debit A document of the amount taken from your bank account. You'll see debits show up on your statement when you make a purchase.

Credit Record of the amount that was you have added to your account.

Assets property (real as well as intellectual) held by an entity.

Liabilities: Business obligations that are not yet fulfilled. The term "liability" refers to a claim against the assets shown in a balance sheet.

Equity is the sum of the assets that have been accumulated after debits were removed from them.

Let's consider how these terms contribute to what's called the accounting principal equation

    Capital = Assets + Liabilities (Owner's or the Corporation's)  

The debit is added to the left-hand side of the equation. It is an asset. Credits are added on the right.As a simple example for an offer of $500, the $500 is debited from your assets in the business. It is also added to the Owner's Equity through earnings. Whenever something gets debited then something else has to be credited, because this keeps the equation balanced.

It's an extremely simplified explanation that provides a good understanding of what the accounting software is doing when you enter transactions.

Cost of the goods sold (COGS)

Accounting for e-commerce must pay special attention to the cost of selling goods. This refers to all the costs required to sell a product, not counting items like marketing or payroll.

COGS will cover all the costs of inventory, including purchasing, storing as well as managing the shipping. Inventory is the biggest expense you incur when you're an e-commerce retailer and if you do not have a clear accounting overview of the cost of goods that you sell, the profit margin as well as your tax-deductible income could be in error.

Incorrect COGS makes it harder to know the amount to budget for marketing, the prices you should determine, what quantity of inventory you should order, if you should hire employees, and how much storage space to buy.

Profit margins

Margins represent the actual income the business earns following a sale has been made. You calculate margins with this formula:

    Margin = (Revenue + Cost of Goods) / Revenue  

In essence, it's your net profits expressed in percentage. If you are able to sell 10,000 worth of goods within a week, and your COGS for the products you sell is $3000, your margin would be 70%.

Receivables and accounts payables

These are terms used to describe money that has not yet changed hands, yet is scheduled to.

Receivables include any cash that is due to arrive on your account in the bank. In the case of an example, for instance, if you mail an invoice, it will be placed to accounts receivable until your client actually makes payment to you.

It works the exact way it works in reverse. If your business makes an order with a vendor who then sends you a purchase order and it is placed in accounts payable until you complete the transaction.

Ecommerce accounting vs bookkeeping -What's the difference?

There's some overlap between ecommerce bookkeeping and accounting. However, the main difference is that bookkeepers process certain events, while accountants collect the data and then analyze it to create an accurate and useful picture of your business budget.

When a sporting analogy can help to understand, bookkeepers are similar to the announcer for play-by-play games accountants are similar to the color or analyst. The bookkeeper records what has happened. The accountant tells you what it means.

What is an ecommerce bookkeeper do?

Tasks in bookkeeping are primarily focused on the recording of transactions and financial institutions. If you have employees the bookkeeper handles the payroll. The bookkeeper also handles things such as:

• Invoice processing
• Send receipts
• Keep track of what goes in and what goes out of your bank account for business
• Record inventory purchases
• Check your bank account reconciliation every month
• Create monthly financial statements
• Create year-end statements and tax documents

A thorough bookkeeping system for e-commerce can assist you to build a robust and solid business plan.

What exactly does an accountant for e-commerce accomplish?

An ecommerce accountant will do things such as:

• Analyze and track operational costs and business performance
• Conduct financial forecasting
• Review your financial statements, which includes those provided by your bookkeeper
• Plan your tax strategy, which includes the filing of tax taxes
• Check the management of your cash flow

The goal of the accountant is to help ecommerce business owners make informed financial decisions.

Are you able to afford a new employee? Are you able to expand into different country or state? What is the minimum amount you can be charging for your new product?

Ecommerce accounting that is at its finest can answer these questions.

Accounting methods for ecommerce sellers

There are two main methods of ecommerce accounting -either the cash method or the accrual method. The accrual method is the most common one, and depending on the nature and size of your business, could be legally required.

The primary difference between methods is when a transaction is recognized.

Accounting for cash basis

In cash basis accounting, an event is only recognized once the actual amount of money changed hands. When you pay an invoice, the cash basis accounting marks that as an expense. If you get an invoice from January but you pay it in March, cash accounting marks it as a charge in March.

Income operates the same way. When you have a sale that is followed by a client signing to a plan of payment that will spread out their payments over four months. In cash accounting, you consider this to be income every month that money is received.

Accrual method of accounting

When accounting for accrual transactions, a transaction is deemed to be completed after the task has been completed and the invoice sent. Let's say you put in an order for a new supply of office paper in January and put it on your business credit card. The office paper is delivered in a matter of minutes, but don't actually pay for it until February, when the credit card accounts arrive.

For accrual accounting, the transaction happens in the instant you receive the paper. The receipt is taken keep it in your filing system and record the expense. The expense is for January, regardless of the fact that you won't be paying for it until the month of February.

In the same way, accrual accounting would record the entire purchase price as income the day the transaction is completed, even though you won't actually receive all the money until four months have passed.

Which method of accounting is best for businesses that sell online?

Accrual accounting gives you an easier understanding of the expenses for selling your goods every month. If you purchase paper during August, that paper is part of the expense of running your business -- in August, not the time you pay the bill. If you sell something in May, then it was a sale that occurred in May, not in July when the customer finally sends the money.

It also works better in conjunction with the management of inventory.

Suppose you make $30,000 in new inventory purchases during September. Then, you decide to are able to sell it in the four months before the Christmas season. If you use cash accounting, you would mark the entire inventory purchase as an expense during the month of September. In accrual accounting, you'd label it as a expense once you have sold the item.

If you were to use the cash method, you'd have a big expense in September, as well as artificially large profit margins during October, November, and even December due to the fact that it would appear as if you have no expenses for the sale of your products.

Accrual accounting enables you to compare the expenses of running a business on a monthly basis, which means you know which months had the greatest profit margins.

Three financial statements that are the primary ones

If you are planning to contract out your ecommerce accounting and bookkeeping services, you'll have to be able to comprehend and read your financial reports. If you're handling this by yourself, using an ecommerce bookkeeping software to enter transactions will allow you to produce three most important financial statements: income statements (also called the "profit and loss statement" or P&L), balance sheets, and cash flow statements.

Statement of income

The income statement is a report of the profit you earned during an agreed-upon period for example, the month. It is this profit that people refer to when they use the term "bottom line." Profit is the net amount you earn. If you've lost money during that time period then your net loss.

Balance sheet

Balance sheets report the amount of your liabilities, assets, and equity as of a certain date, usually after the end of each month, quarter, or year. They provide a picture of your financial situation.

Assets are things owned with worth. Liabilities, including accounts payable are debts you have to pay.

When you review the basic accounting equation listed in the past, you'll find that equity is simply the difference between the liabilities and assets. Add liabilities to assets and you'll have the "book value" or equity, of your company.

Statement of cash flow

The statement of cash flows provides what your money in your account has changed over a certain time.

The three statements are easily generated through your accounting software as long as you've been diligent about entering your financial details. If you're not able to make time to complete this task, that's another reason why you should hire an online bookkeeper.

The most important financial metrics to use for eCommerce accounting

Taxjar has published an amazing article on ecommerce accounting metrics. Be aware that accounting is not just about keeping financial records. Accounting also tells the story about the financial status as well as the growth or decline of your online business.

Below are the essential accounting measures:

Revenue

Revenue is the term used to describe your gross receipts, before any expenses have been subtracted. Revenue can be fairly simple to monitor. By itself, however it provides an incomplete picture.

Margin for contribution

This is the selling price minus the cost to sell that product. It's similar to the COGS figures from the past however, it is for every single product you sell. This figure does not take into account the operating costs.

Profit

Profit is what results after you have removed all your expenses from your revenue that includes marketing and operational costs. If your revenue is high however your profit margins aren't as high You either have to boost revenue or decrease costs.

Rate of conversion for Ecommerce

The percentage is how many customers who visit your online shop who purchase something.

Customer acquisition cost

In general, it is a lot less to make more sales to existing customers compared to acquiring the services of a brand new customer.

So, if your CAC is very high and you'd like to stop your advertising, you've got two choices:

1. You can improve or enhance your marketing
2. Begin to market more effectively to your existing customers

Customer lifetime value

If you're a relatively new online retailer, you'll face difficulty making this decision for the beginning years. But with good accounting software, you'll be able to start estimating this in the future.

This number helps you to justify the cost of your advertising. If, for instance, you have a high CAC, however, your lifetime value of the customer is significantly higher, then it's worthwhile to spend the money to get these customers.

Average order value

Particularly for smaller e-commerce companies This is an even more useful metric than longevity value. If you pay just $10 to attract a new customer, but they spend around $25 on an average order, that's a good bargain if your other expenses aren't high. If you can scale that to increase the number of clients, then you'll have a great time.

Cart abandonment rate

The number of people who buy this is alarmingly high in the case of e-commerce sites. In TaxJar's research approximately 70% of online shoppers put products in carts but do not purchase them.

The best way to reduce reducing cart abandonment is to send abandoned cart email messages, which is easy to automate with the correct email service, like EmailPoet.

If you could lower the abandonment rate to 60 or 50 percent, you will see significant revenue growth. If all you need is just a few automated messages then it's no problem.

Return and refund rates for customers

Do a lot of customers return products for a refund? It's a sign that something's not right. Keep track of this and do everything you can to keep it low.

Five important ecommerce accounting tasks to be tackled

If you're at the beginning stages as an ecommerce company owner, it's important to be able to handle your basic accounting tasks soon to ensure that you do not end with hot water in the future. Just to be sure"hot water" is a broad term that can refer to a variety of things, such as:

• Unpaid taxes -taxes on income sales tax, income tax, local and state taxes
• Tax filings that are not correct
• The overspending of inventories
• Employees you're not able to afford
• Insufficiently withdrawing equity

Below are a few ways to get your ecommerce accounting process off to a great beginning:

1. Establish a separate bank for business account

The owners of small-sized businesses in the ecommerce sector tend to forget about their business's future because they're involved with all the other business startup tasks.

Business accounting is complicated when you mix personal with business transactions. Your business account is what you use to pay for the business costs as well as the place where you'll pay your earnings from sales.

In order to open a corporate bank account, you'll need a business tax ID number.

2. Be prepared for your employees and contractors.

If you plan to have employees, you'll have establish procedures to collect withholding taxes. Even if you plan to manage the company by yourself for the moment, you'll probably still contract with contractors for specific tasks. Contractors paid more than a certain amount per an year throughout the U.S. must be sent an income tax form, which is why you should be certain to

• You can track who you've billed and what you've gotten for them.
• You should request a W-9 form from every contractor
• Keep current addresses on file for every person you employ

3. Get the accounting software you need.

If you anticipate having hundreds or thousands of transactions every month, you're going to want accounting software like QuickBooks Online, Xero, or FreshBooks. Smaller businesses can make do with the Excel spreadsheet, but businesses with high volume of transactions won't be able to keep pace using manual entry.

The Ecommerce Accounting Software automates the majority of the accounting essential tasks and makes your life easier. It stores, records, and retrieves financial information and uses it to produce accounts and financial reports.

4. Maintain all invoices, receipts and records of payments

The Reliability Principle of Accounting says that transactions that have supporting documents should be documented. If you don't have records of a transaction, you can't count it as an expense or income. If you attempt to claim a tax deduction in the case of an expense for which you have no evidence of having made payment for, it could be considered tax fraud.

Save receipts that are physical. Take photos and save them electronically. Make sure to keep all receipts and invoices in a separate email folder, not just your general mailbox.

5. Be aware of taxes and tax regulations

Tax regulations vary greatly based upon the type of company and its location. It is important to be aware of the compliance of sales tax as well as import taxes if there are any overseas transactions. Tax withholding, tax withholding for quarterly payments, as well as any other taxes that apply to your nation, state or province, city or even region.

Those taxes will figure into the accounting software you use and your financial reporting. Always seek out a tax expert in order to be sure that you're following right procedures.There's many more things to discuss ecommerce tax management. There are two major tax concerns you'll need to be aware of:

Tracking and paying sales taxes

Sales taxes for online sales have become very complicated. The majority of US state is now charging an online sales tax and the EU has also a taxes on sales.

In the U.S., each state is charged at different rates and also has its own set of rules for how sales tax should be applied.

The payment of estimated quarterly business tax

Business income is pre-tax. Similar to a 1099 employee, your ecommerce business makes cash before tax has been paid.

Like a 1099-employee You must pay quarterly income taxes. If you fail to do so tax, the government could penalize you for being late on your tax bill.

How can you handle this? It is important to stay clear of being a long way behind with the tax bill. The best way to manage quarterly taxes is to set the amount you will pay from your monthly income and then use that to pay estimated taxes during the quarter.

The accounting software you use can manage all of this, and also the tax obligations for sales. Software is a must...

The reasons your business should use accounting software

Consider taking the moment to rethink this issue and ensure you understand the benefits of using software to help manage your ecommerce accounting tasks.

As you've discovered, tax management has become extremely challenging in recent years, particularly with regards to the tax on sales and revenues from multiple sales channels. If your online store offers products throughout the US or in a large variety of states, you will not enjoy trying to manage the demands of this by yourself. Your business is yours to manage.

The software also handles your quarterly tax allocation, which the tax payer must pay in taxes on your income and help speed up preparation of your year-end tax reports. In addition, if you're being subject to local or state taxes, this complexity will increase to a higher degree. Accounting software that is of the highest quality can handle all of the requirements.

Second, accounting software makes it much easier to monitor your earnings and expenditures by creating financial statements, to ensure you are aware of your margin for profit each month, and are able to see your company's equity.

Third, accounting software helps manage payroll, including employees on contract. If you're not looking to pay for bookskeeping or accounting for your online business it is a must to have accounting software.

Do you need to hire bookkeepers, accountants or DIY?

If you don't get the accounting program, or if you get it but don't want to be responsible for using it, you'll need a bookkeeper. But as your business grows, you'll eventually also need to research the accounting firms available which are knowledgeable of the particulars of ecommerce businesses.

Some business owners in the e-commerce industry enjoy the concept of running their own show, including acting as the Chief Financial Officer. And in the event that their company is small, you might be able to go with it. But let's define "small."

When an e-commerce business is earning up to $100,000 or more per year in net profits it's likely become out of hand in terms of your accounting systems when you're selling goods in different states or even countries. Sales taxes on their own become too difficult.

You also have to deal with returns, shipping as well as chargebacks and the other stuff. The majority of e-commerce platforms offer lower priced items, and operate in volume. Unless yours is an one of a kind, which is a sign that you'll have lots of transactions.

More transactions mean more time it takes to track and record everything. Even a "small" eCommerce business earning only $100,000 net profit annually selling goods that range from $5 to $20 is likely to have lots of transactions.

In the event that your business does not sell in a specific location or state, province or even a country, the level of tax complexity will go down. In this case it is possible do the tax yourself in the event that you are willing to do the additional work.

Test your choice and observe how it works. It is possible to change your mind later.

Has accounting been covered

recognizes the responsibilities that business owners have each day. Manually inputting transactions and creating financial reports can be tedious and tax planning can create a mess Accounting is essential to managing a profitable business.