Ecommerce Accounting Basics: The Principles for a Successful Store

Running an ecommerce business takes more than just great ideas and products, but also marketing and inventory. Additionally, you need an accounting system that can track the money. How much are you spending? What are your profits? Do you have enough money in your budget? Is the government happy with your business? Ecommerce accounting employs well-known procedures to track your financial data and business transactions, and staying up to date on taxes, payroll, and profits.

No matter if you're only starting your ecommerce store or have been at it for a while, and you realize that have to track your business's finances, this ecommerce accounting guide will get you on the right track.

Ecommerce accounting empowers you to judge the financial health of your business and make better financial forecasts when your company expands.

What does ecommerce accounting involve?

Businesses that are based on e-commerce are built upon transaction and inventory. The company makes the sales. You distribute items. You buy and replenish inventory.
The basics of ecommerce accounting begin with the system of keeping track of and reporting on your transactions. These include purchase orders, invoices, expenses and taxation.

But it goes much further than this. Accounting firms utilize the data they collect and the information to create financial statements so they can evaluate and present the financial health of your business.Ecommerce companies also require some particular attention to meet their fundamental business model.

Consider what happens when you sell a product in your online store. This means that the buyer uses their credit card, and then makes payment to your payment processor. Which are the different ways this sale can impact your cash flow?

• Your payment processor has been paid, however the money isn't in your banking account yet
• Taxes on sales are paid at times, and could be from another region or state
• Inventory declines
• Payment processor and credit card charges are incurred
• The revenue from sale does not match the sale price.

Whichever sales channel you choose, making even a single sale has an impact on many aspects of your financial statements. And the aftereffects of the sale are likely to show up on your financial statements within the next few months. If the purchase does be returned, a lot of the transactions that were made must be reverted or altered.

This is just one of many sales.

The tracking of some of this is the job of a bookkeeper. we'll discuss the distinctions between accounting and bookkeeping for ecommerce a bit later.

Let's start with some basic accounting terminology.

The basics of accounting

Here are the most important words to be aware of for accounting:

Transactions

In accounting terminology, a transaction is when cash is paid, received or asked for by a vendor or business.

An transaction can be one of the following:

• A business's owner can invest money in the business
• Sales revenue
• Invoices
• The expenses include salaries or travel costs, marketing and construction costs
• The assets purchased include automobiles, office equipment material, property or vehicles

An individual transaction could comprise multiple elements. When you pay employees on an hourly basis such as a salesperson you must know the length of time they were working, their gross wages, tax deductions, and net pay. Accounting software that is of the highest quality will be able to handle all these functions.

Transactions for ecommerce companies are often complicated because of certain factors, particularly sales taxes and timing delays caused by the separation between business and consumer.

For example, do you apply sales tax at the time of purchase? If so then what happens to that cash if your product is returned after a month?

The accounting for ecommerce attempts to handle your processes and transactions to ensure such issues don't affect the financial outlook of your company.

Debits and credits

Every transaction is tracked through an accounting system that tracks debits as well as credits. Before we begin, let's look at certain key terms:

Debit A document of money that was that was taken out of your account. It will appear on your account statement each time you make a purchase.

Credit Record of the funds that was deposited into your account.

Assets: Property (real as well as intellectual) that is owned by an organisation.

Liabilities: Business obligations that have yet to be fulfilled. The term "liability" refers to a claim against assets that are listed in a balance report.

Equity: The sum of the assets that have been accumulated after debits are removed from them.

Let's consider how these terms play into what's known as the accounting principal equation

    Assets = Liabilities + Equity (Owner's or Corporation's)  

A debit is added on the left side of the equation as an asset. Credits are added to the right.As an example for a purchase of 500 dollars, the amount is debited from your business assets. It is also credit as Owner's Equity through income. When something is debited and credited, another item must also be credited, because this keeps the equation balanced.

It's an extremely simplified explanation that will give you an idea of what your accounting program is doing when you enter transactions.

Cost of the goods sold (COGS)

Accounting for e-commerce must pay special focus on the price of selling goods. This refers to all the cost of selling the product, but not including items like marketing or payroll.

COGS includes all costs associated with inventory which include purchasing, storage, managing, and shipping. Inventory is your largest expense when you're an e-commerce retailer, so if you don't possess a precise accounting view of the costs of goods that you sell, the profit margin and tax-deductible earnings will be inaccurate.

An inaccurate COGS also makes it difficult to decide how much to invest in marketing, what prices to set, how much inventory you should order, if you should hire employees, as well as how much storage space to buy.

Profit margins

The margins represent the real income that your company earns when a sale has been made. You calculate margins with this equation:

    Margin is (Revenue - - Cost of Goods) / Revenue  

It's basically your net earnings expressed as a percentage. If you sell the equivalent of $10,000 worth of merchandise over the course of a week and the COGS of these products is $3000 your margins would be 70%.

Accounts receivable and accounts payable

The term "money" refers to cash that is not yet changing hands, but is slated to.

The term "accounts receivable" refers to any amount that is due to arrive into your bank account. As an example, if for example you issue an invoice, that goes into accounts receivable till the client actually makes payment to the invoice.

The process works in the same as it does in reverse. If your business makes purchases from vendors, and that vendor sends the buyer a purchase request, it goes in the accounts payable account until you make the payment.

Ecommerce bookkeeping vs. accounting -What's the distinction?

There's some overlap between ecommerce bookkeeping and financial accounting. But in general, the different is that bookkeepers handle events, and accountants compile and analyse those events in order to give a clear and valuable picture of the budget for your company.

When a sporting analogy can help to understand, bookkeepers are similar to the announcer of play-by-play accounting professionals are similar to the color or analyst. The bookkeeper keeps track of what occurred. The accountant explains the meaning behind it.

What is an ecommerce bookkeeper do?

Tasks in bookkeeping are primarily focused on transactions, records, and financial institutions. If you have employees the bookkeeper manages payroll. They can also handle things like:

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

An accurate bookkeeping for your online business can aid you in creating a stable and reliable business model.

What exactly does an accountant for e-commerce accomplish?

A ecommerce accountant can do things such as:

• Analyze and track operational costs and business performance
• Conduct financial forecasting
• Examine your financial statements- which includes those provided by your bookkeeper
• Tax planning is essential, and includes filing returns
• Review the management of your cash flow

The objective of an accountant is to aid ecommerce company owners make better financial choices.

Do you have the money to pay a new employee? Should you expand into a new state or country? What is the minimum amount you can cost for new products?

Ecommerce accounting at its best will be able to answer these questions.

The accounting methods used by e-commerce sellers

There are two main techniques of online accountingeither the cash method or the accrual method. The accrual method is the most frequent one, and based on the nature and size of your company, it could be mandated by law.

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

Accounting for cash basis

In the cash basis accounting system, an event is only recognized once the actual amount of money exchanged hands. When you pay an invoice, cash basis accounting declares it as an expense. If you receive an invoice from January, but you settle it in March, the cash accounting records the invoice as an expense during March.

Income operates the same way. When you have a sale, and the customer signs to a plan of payment that will spread out the payments over four months. With cash accounting, you take this income as a monthly one each month that money is received.

Accrual method accounting

In accrual accounting it is recognized once the project has been completed and the invoice has been sent. Suppose you place an order for fresh supply of office paper in January, and then put it on your corporate credit card. You receive the office paper in a matter of minutes, but aren't able to pay for it until February, when the statements for your credit card account are received.

In accrual accounting it is when you get the receipt. You take the receipt, store 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 the item until February.

In the same way, accrual accounting would record the entire purchase price as income the day the purchase is made even though you won't actually get the entire amount until the end of four months.

Which type of accounting approach is more suitable for ecommerce businesses?

Accrual accounting provides you with more clarity on your costs of selling goods each month. If you purchase paper during August, that paper is part of the price for running your businessit was in August and not until you pay the bill. If you sell something in May, then you sold the item in May and not July when the customer finally sends the money.

It also works better with the management of inventory.

Suppose you make $30,000 in new inventory purchases during September, and you sell it over the next four months leading up to the Christmas season. Cash accounting would mark the entire acquisition of inventory as an expense in September. In accrual accounting, it is possible to declare it an expense once you have sold the item.

By using the cash-based approach that you'd face a significant expense in September, as well as artificially high profit margins in October, November, and December, since it appears as though you've no costs of goods sold.

Accrual accounting lets you track the cost of doing business every month, and you can see which months produced the highest profits.

Three primary financial statements

However, if you do decide outsourcing your accounting for e-commerce and bookkeeping services, you'll have to be able to read and understand the financial statements. If you're working on the work yourself, using your ecommerce bookkeeping software to record transaction data will enable you to prepare the three financial statements that are the most basic which include income statements (also known as "profit and loss statement" (also known as P&L), balance sheets, and cash flow statements.

Income statement

An income statement reports profit earned over a specified period of time like a month. It is this profit that people refer to when they refer to the phrase "bottom line." Your profit is the net amount you earn. In the event that you lose funds during the time, your net loss.

Balance sheet

The balance sheets show your assets, liabilities, and equity as of a certain period of time, which is typically at the end of the month, quarter, or year. It's a snapshot of your financial health.

Assets are items owned by a person that have value. Liabilities, including accounts payable, are things you owe.

If you go back to the accounting fundamentals that were discussed previously, you'll discover that equity simply is the difference between the liabilities and assets. Add liabilities to assets then you've got what's known as the "book value," or equity, for your business.

Statement of Cash Flow

The cash flow statement provides information on how your cash is changing during a certain time.

All three of these statements are easily generated by your accounting software, as long as you've taken care to enter the correct financial information. If you're too busy to do that, it's one reason to hire an online bookkeeper.

The most important financial metrics to use for eCommerce accounting

Taxjar published an excellent article on ecommerce accounting metrics. It's important to remember that accounting isn't only about keeping financial records. Accounting also tells the story about the financial status as well as the growth or decline the e-commerce company.

Below are the essential accounting parameters:

Revenue

Revenue refers to your gross income, even before expenses have been deducted. Revenue can be fairly simple to monitor. By itself, however, it gives you an incomplete picture.

Margin of contribution

It is the price you charge for a product less the price to market this product. This is similar to the COGS figure from before but it applies to each item you offer. This figure does not take into account operational expenses.

Profit

Profit is what results after you subtract all of costs from the revenue which includes operating and marketing expenses. If your revenues are high but your profits are low You either have to boost revenue or decrease expenses.

Ecommerce conversion rate

This is the percentage of visitors to your ecommerce site who make a purchase.

Costs for customer acquisition

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

So, if your CAC is extremely high and you don't want to stop your advertising, you've got two options.

1. Make an effort to enhance or improve your marketing
2. Start marketing more to your existing customers

Customer lifetime value

If you're only a new ecommerce seller, you'll have difficult time determining this one for your beginning years. However, with a good accounting program it will be possible estimate this figure as time goes on.

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

Average order value

For e-commerce startups that are relatively new This is an even better metric to use than the life-time value. If you pay just $10 to attract a new customer and they pay around $25 on an average purchase, it's a great bargain if the other costs aren't high. If you're able to ramp that upwards as you gain more 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. Based on TaxJar's sources, about 70% of online shoppers put products in carts but don't buy them.

The best way to reduce cutting down on abandonment rates is to mail abandoned cart emails, which can be automated with the right email platform, like EmailPoet.

If you are able to bring that abandonment rate to 60 or 50%, that will produce an impressive increase in sales. All it takes is a couple of automated emails then it's no problem.

Return and refund rates for customers

Do a lot of customers have to return items for refunds? That's an indicator there's something not right. Be aware of it and do everything you can to reduce it.

Five important ecommerce accounting tasks to be tackled

If you're at the beginning stages as an ecommerce business owner, you need to master your basic accounting tasks soon to ensure that you do not end being in hot water later. Just to be sure"hot water" is a broad term that can refer to a variety of things, such as:

• Taxes not paid- income tax sales tax state and local taxes
• False tax returns
• Inappropriate spending on inventory
• Employees you're not able to afford
• Withdrawing too much equity

These are ways to get your ecommerce accounting system off to a good beginning:

1. Create a separate business bank account

The owners of small-sized businesses in the ecommerce sector typically don't consider their business's future because they're involved with their other business startup jobs.

Business accounting is challenging if you're combining personal with business transactions. Business accounts are the ones you'll use for all your business expenses It's also where you'll deposit income from sales.

For opening a bank for business account, you'll require a corporate tax ID.

2. Prepare for employees and contractors

If you plan to have employees, you'll have establish procedures to collect withholding tax. Even if you plan to run the business entirely on your own, you'll probably still contract with contractors for specific tasks. Contractors that are paid over an amount each year in the U.S. must be sent a 1099form. Be sure to:

• You can track who you've billed and the amount you've paid them.
• You should request a W-9 form from each contractor
• Maintain current addresses for everyone you hire

3. Find accounting software

If you expect to have hundreds or even thousands of transactions per month, you'll want accounting software like QuickBooks Online, Xero, or FreshBooks. Smaller businesses can use an Excel spreadsheet, but businesses with high volume of transactions won't have the capacity to keep up by manually entering data.

The Ecommerce Accounting Software automates the majority of the most important accounting chores and simplifies your life. It records, stores, and retrieves financial data as well as produces accounts and financial reports.

4. Make sure to keep all receipts, invoices as well as payment records

The Reliability Principle of Accounting stipulates that only transactions supported by documentation should be recorded. If you don't have records of a transaction, you can't count it as income or an expense. If you attempted to claim tax benefits on an expense that you've no evidence of having spent money on, that might be called tax fraud.

Keep physical receipts. Take photos and keep them in a digital format. Save all invoices and receipts in separate email folder in addition to your normal inbox.

5. Start paying attention to tax requirements

Tax regulations vary greatly based on the kind of business and its location. You need to know about taxes on sales, import tax if you have any foreign transactions. You should also know about tax withholding quarterly taxes, and any other taxes that apply for your country, state city, province, or area.

The tax will be incorporated into the accounting software you use and your financial reports. Always consult with a tax professional in order to be sure that you're following proper procedures.There's a lot more to discuss ecommerce tax administration. Two major tax concerns you'll need to deal with:

Tracking and paying sales taxes

Ecommerce sales taxes have become very complicated. The majority of US states now has an online sales tax, as well as the EU has also a sale tax structure.

The U.S., each state charges different rates, and each state has its own rules when sales tax applies.

Taxes on business that are estimated to be paid quarterly

Business income is pre-tax. Similar to a 1099 employee E-commerce businesses earn cash before tax has been paid for that revenue.

And like a 1099 employee, you need to pay your quarterly income tax. If you fail to do so then the government can punish you for not paying on your tax bill.

What can you do to manage this? It is important to stay clear of getting behind in the tax bill. One of the best ways to handle quarterly taxes is to set the amount you will pay from your earnings each month, which you can use to pay estimated taxes each quarter.

Your accounting software can easily handle all this as well as the sales tax requirements. In terms of software...

Why your ecommerce business needs accounting software

Consider taking the moment to rethink this issue and be sure to understand the advantages of employing software for managing the accounting and e-commerce tasks.

First, as you've just seen, tax management has become extremely challenging in recent years, particularly with regards to the tax on sales and revenues from multiple sales channels. If you run an online business that is selling products in the US or across a huge number of states, you will find it difficult to keep up with the demands of this on your own. Your business is yours to be running.

Your software will also manage the quarterly tax allotment you'll need to pay income taxes, and will assist in the processing of year-end tax statement. In addition, if you're in the process of paying local and state taxes, this complexity will increase to a higher degree. A good accounting program is able to meet all the requirements.

Accounting software also helps you keep track of your expenses and income by creating financial statements, so you know your monthly profit margin and can see your business capital.

The third benefit of accounting software is that it helps manage payroll, including contract workers. If you do not want to cover the cost of bookskeeping or accounting for your online business, you will definitely need accounting software.

Should you hire bookkeepers and accountants, or do it yourself?

If you do not have accounting software, or if you decide to purchase it, but you don't want to be responsible for using it, you'll need a bookkeeper. As your company grows it will eventually be required to look at some of the accounting firms available which are knowledgeable of the particulars of businesses that rely on e-commerce.

Many ecommerce business owners like the idea of running their own show and even acting as their Chief Financial Officer, and as long as your business is small, you might be able to go in this way. But let's define "small."

With an ecommerce company making up to $100,000 or more per year in net profits, that's already going get way out of control in terms of your accounting system if you're selling products in several states or nations. Taxes on sales alone get too complex.

You also have to deal with shipping, returns charges, shipping, and all the rest. Most ecommerce platforms sell lower-priced items, and operate in volume. Unless yours is an one of a kind, which means you will have lots of transactions.

The more transactions, the more time it takes to record and track it all. Even an "small" online business that earns only $100,000 net profit per year selling products that range from $5 to $20 is likely to have lots of transactions.

In the event that your business only sells in one area or state, province or nation, your degree of tax complexity will go lower. If that's the case it is possible to get away with doing this yourself, in the event that you are willing to do the additional effort.

Test your choice and observe how it works. You can always change your mind later.

Does accounting have a cover

understands the responsibility business owners have each day. The manual process of entering transactions and preparing financial reports can be time consuming and tax planning can cause you to be overwhelmed Accounting is a crucial aspect of operating a business that is successful.