A Detailed Guide To Ecommerce Accounting

Nida Bohunr | May 10 2021

Get the Cash Flowing

For many small business owners, accounting for ecommerce is undoubtedly one of the hardest parts of the online business experience, but it is also extremely important.

Proper ecommerce accounting management is the make-or-break factor for any ecommerce business. As your business grows, your finances will ultimately get more complicated to manage. From sales to returns, banking fees, and supplier payments, all the money movement in your business will need to be efficiently categorized and analyzed. Without proper accounting systems in place, you can very easily get overwhelmed with the load of financial data you are up against.

But this is where we step in! In this ultimate, all-in-one ecommerce accounting guide, we will break down the basic systems and processes involved, helping you manage your business’ money without any fear!

What Is Ecommerce Accounting?

Accounting is the practice of analyzing the financial records of your business so that you can create financial reports and models. This is a methodical, organized way of understanding where your business stands financially, and where you need to improve in the future.

Proper ecommerce accounting can help equip you with the financial knowledge you need to make better business decisions. Accounting tasks generally include:

  • – Preparation of financial statements, reports, and models.
  •  Preparation of adjusted entries.
  •  Tax planning and reporting.
  •  Financial forecasting and risk analysis.

Why A Good Accounting System Is Essential For A Financially-stable Business

“Accounting is the language of business.” – Warren Buffet

An efficient accounting system is the foundation of a successful, strong ecommerce business. No matter how big or small your business is, you will need a good system to help keep you manage your finances. Here are some of the main benefits your business can enjoy with a foolproof ecommerce accounting system in place.

  1. It can help you build a financially stable and reliable business model. With a proper ecommerce accounting system for recording all business profits, transactions and expenses, you can get a clear insight into how your business operates at any given time.
  2. It can help you predict your business’ future activity and help you plan ahead. You can easily analyze where your business lacks, and implement methods to ensure you reap better results in the months ahead. Efficient ecommerce accounting helps you plan better and work smarter.
  3. A smooth-sailing bookkeeping process can save you a whole lot of time and stress when it comes to filing your taxes each year. By properly organizing your financial records, you can ensure your business is operating in compliance with all federal and state tax laws, and even plan ahead to save money on taxes.

The 3 Must-Haves for Your Ecommerce Store

No matter which accounting system you choose for your business, these are 3 basic things you will need before you start.

1. Business bank account

Keeping your business and personal finances in the same account is the biggest accounting mistake you can make. It is very important for you to open a separate business bank account for your company to help you keep a track of your business’ income and expenses properly. You can use popular payment apps such as PayPal, and open a dedicated business account on such platforms.

2. Business tax ID number

If you operate as a partnership or a corporation, you will need an Employer Identification Number from the IRS. This will be a 9-digit number unique to your business, which will be used in all your tax documents. If you run your business alone, your Social Security Number can be utilized for the same purpose.

3. Ecommerce Accounting Software

There is a variety of accounting apps and online services that can save you time on expense management and other bookkeeping tasks, so why not take advantage of them?

The best advice we can give you is to ditch the spreadsheets. Cloud accounting software enables you to only have your data accessible online at all times, but they also provide added reliability in comparison with basic spreadsheets. You can even connect them with inventory apps to measure your product quantity or cost, and also use them to understand your tax liabilities.

When choosing accounting software for your business, ask yourself the following questions:

  •  Is it easy to understand and use?
  •  Can you sync it with your business bank account and credit cards?
  •  It is fully secure?
  •  Does the payment fall within your business’ budget?
  •  Can you integrate it with any other business software you already use?

If you are confused about where to start, these are some popular accounting apps you can make use of for your online store:

  •  FreshBooks
  •  Xero
  •  Wave
  •  Sage
  •  QuickBooks Online

The 3 Must-Dos

There are 3 basic but vital accounting tasks you will need to perform on a weekly basis. They will greatly help you in analyzing your business’ cash flow, and ultimately boost the growth of your business.

1. Maintain Your Business Budget

A business budget will tell you how much cash you need to break even or make profits in your business. It is a tally of your business spending and expenses, summed up and compared to your regular earnings. Organizing your business budget can help you monitor your cash flow, set some income aside for taxes, and stay on top of all recurring expenses. It also allows you to understand when you are in a position to splurge and when you might need to hold back on spending. It is the perfect way to reduce or avoid falling into debt and staying focused on your business’ long-term financial goals.

2. Categorize All Your Transactions

One of the basics steps in accounting, categorizing your transactions, involves marking every single transaction as income or expense. Most accounting apps can auto-complete this task for you. Categorizing your transactions helps you estimate your regular expenses compared with monthly revenues. You can then use these assessments to plan for your taxes, get an idea of your budget and analyze your business income statement.

3. Stay Up-to-Date with Taxes

There is no need to emphasize why handling your taxes efficiently is essential for your ecommerce business. You should keep in mind both your income taxes and sales taxes, and make it a priority to ensure you are on top of all your payments.

Some Key Financial Reports You Should Look At Each Month

There are three main reports all business owners should analyze to help them make data-driven business decisions. These include your Profit and Loss Statements, Balance Sheet, and Cash Flow Forecast. You should monitor your business performance, such as any big marketing campaigns, underperforming products, or sales spikes.

Analyzing these reports can give you the ability to review the impact of your past financial decisions, and help you weigh whether prioritizing certain areas has helped or burdened your business. Your cash flow forecast will allow you to think like an investor, helping you make out if your business is on the right track.

See Also: How to Hire An Accountant for Your Business?

To sum it all up, setting up an efficient ecommerce accounting system from the get-go can help grow and scale your business. Accounting for ecommerce is increasingly being employed by all kinds of drop shipping businesses in today’s ecommerce space to automate financial transactions, drive business, and employ the best tax strategies. You don’t need to be an accounting prodigy to manage your finances like a pro – as long as you do your research and don’t hesitate to ask for help if you need it.

Author Bio

A highly skilled accounting professional at Monily, having extensive and diverse experience of working in US healthcare and agriculture industry. Nida is a CA finalist with expertise in Bookkeeping, Auditing, Bank Liaison, Tax Preparation, Accounts Payable, Accounts Receivable.