Ecommerce Accounting Basics: The Principles to a Profitable Store

Running an ecommerce business takes more than good ideas and products, but also marketing and inventory. You also need an ecommerce accounting system that can track the money. How much are you spending? What are your profits? Do you have enough money in your budget? Are the authorities happy with your business? Ecommerce accounting employs well-known procedures to track the financial information of your business and transactions and keeping current on tax laws pay, profits, and payroll.

If you're creating your first e-commerce store or are already in it for a little while and you realize that need help tracking your business finances, this ecommerce accounting guide will assist you in getting on the right track.

Accounting for Ecommerce allows you to evaluate the financial condition of your company and create more accurate financial projections when the business expands.

What are the implications of ecommerce accounting?

Ecommerce businesses are built on the transactions that happen and also inventory. The company makes the sales. You deliver goods. You purchase inventory and refill it.
The basic principles of ecommerce accounting start with a method of keeping track of and reporting on your transactions. This includes purchases orders, invoices, expenses, and taxes.

It goes further beyond this. Accounting firms will then take that data and use it to produce financial statements so they can evaluate and present the financial health of your business.Ecommerce companies also require some particular attention to meet the fundamentals of the business model.

Consider what happens when you have a sale on your online store. That means the customer uses their credit card to make money to the processor that you use for payments. How do you know that sale affects your finances?

• Your payment processor has been paid, however it's not yet in your bank account yet
• Sales taxes are incurred, possibly from a different nation or state
• Inventory declines
• Payment processor and credit card fees are charged
• The revenue from sale does not match the sale price.

No matter the sales channel any single sale touches on numerous aspects of your financial statements. In the aftermath of this one transaction will show up in your financial records over the next couple months. And if the order does return, the majority of the transactions that were made must be modified or reversed.

This is just one of many sales.

Monitoring some of these is the responsibility of a bookkeeper. we'll discuss the distinctions between accounting and bookkeeping for ecommerce in a moment.

In the beginning, we'll go over the most basic accounting terminology.

Accounting basics

These are the top phrases to learn for ecommerce accounting:

Transactions

In the accounting world, a transaction happens any time cash is transferred, spent, or asked for by a vendor or business.

A transaction could be any of the below:

• A business's owner can invest money into the company
• The revenue from sales
• Invoices
• The expenses include salaries or travel costs, marketing as well as building and maintenance expenses
• The assets purchased include vehicles, office equipment material, property or vehicles

A single transaction can comprise multiple elements. When you pay an hourly employee, for example it is important to determine the amount of time they were working, their net wages, tax deductions as well as their net earnings. Accounting software that is of the highest quality can perform all of these functions.

Transactions for ecommerce companies can get complicated due to specific factors, including sales taxes and timing delays due to the rift between the consumer and the business.

Do you, for instance, charge sales tax right on the day of purchasing? If so, what happens to that cash if your product is returned a month later?

Accounting for Ecommerce aims to control the processes and transactions so that such issues don't cloud the financial picture of your enterprise.

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 concepts:

Debit: A record of the amount taken from your bank account. The debits will show on your account statement each time you purchase.

Credit Record of the money you have added to your account.

Assets: Property (real or 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 on the balance account.

Equity: The sum of assets after debits were removed from them.

Now, we can examine how these concepts contribute to what's called the main accounting equation:

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

A debit is added to the left of the equation. It is an asset. Credits are added on the right.As one simple illustration when you sell a sale for $500, the $500 is debited and added to your business assets. It is also credit as Owner's Equity as revenue. When something is debited then something else has to be added, as it helps to keep the balance.

This is a simplified explanation that will give you an idea of what your accounting software is doing when you enter transactions.

Cost of products sold (COGS)

The accounting for Ecommerce should pay close attention to the cost of selling goods. It is all cost of selling a product, not counting the costs of payroll and marketing.

COGS will cover all the costs of inventory that include purchasing, storing, managing, and shipping. Inventory is the biggest expense you incur as an ecommerce seller If you don't have an accurate accounting picture of the expenses of products sold, your profit margin and tax-deductible earnings will be in error.

An inaccurate COGS also makes it harder to know how much to invest in marketing, which prices to determine, what quantity of stock to purchase, whether hiring employees as well as how much warehouse space to acquire.

Profit margins

Margins represent the actual income your business acquires after the sale is completed. The way to calculate margins is this formula:

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

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

Accounts receivable and accounts payable

These terms refer to money that is not yet changing hands, yet is scheduled to.

Accounts receivable includes any money that is due to arrive in your bank account. As an example, if for example you send out an invoice, it will be placed to accounts receivable until your customer actually pays the invoice.

Accounts payable works the same method in reverse. If your business makes a purchase from a vendor when that vendor gives you a purchase order, it goes in accounts payable until you actually complete the transaction.

Ecommerce accounting vs bookkeeping -- what's the different?

There's a bit of overlap between bookkeeping and the accounting. But in general, the different is that bookkeepers handle events, and accountants compile the data and then analyze it to create an accurate and valuable picture of the budget for your company.

In the event that a sport analogy aids you understand the role of bookkeepers, they are the play-by-play announcer accountants are similar to the analyst or color commentator. The bookkeeper tracks what happened. The accountant tells you the meaning behind it.

What is an ecommerce bookkeeper do?

The bookkeeping duties focus on the recording of transactions and financial institutions. If you employ employees, your bookkeeper is responsible for payroll. They also do things like:

• Processing invoices
• Send receipts
• Record what comes in and goes out from the business bank account
• Record purchases of inventory
• Check your bank account reconciliation every month
• Create monthly financial statement
• Create year-end statements and tax documents

Accurate ecommerce bookkeeping will aid you in creating a robust and solid business plan.

What does an ecommerce accountant accomplish?

An ecommerce accountant will do things such as:

• Monitor and analyse operational costs as well as business performance
• Conduct financial forecasting
• Study financial statements -- include those provided by your bookkeeper
• Perform tax planning, including the filing of tax returns
• Check the management of your cash flow

The goal of the accountant is to assist e-commerce business 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's the minimum you should be charging for your new product?

Ecommerce accounting in its most efficient form will be able to answer these types of questions.

Methods of accounting for sellers selling e-commerce

There are two main methods of ecommerce accounting -either the cash method or an accrual approach. The accrual method is the most frequent one, and based on the scale and type of your company, it could be required by law.

The main difference between methods is when the transaction is acknowledged.

Cash basis accounting

In cash basis accounting, an event is only recognized once actual money has exchanged hands. If you are able to pay for an invoice, cash basis accounting marks that as an expense. If you get the invoice during January and you settle it in March, cash accounting marks it as a charge in March.

Income works the same way. Suppose you make a sale, and the customer signs for a monthly payment plan that will spread out the payments over a period of four months. With cash accounting, you take this income as a monthly one each month when the cash comes in.

Accrual method accounting

When accounting for accrual it is recognized after the task was completed and the invoice is sent. Let's say you put in an order for a fresh paper for office in January, and then put it on your business credit card. Office paper arrives in a matter of minutes, but aren't able to pay for it until February, after which the credit card balances come in.

In accrual accounting it is when you get the paper. The receipt is taken, store it in your file system, and record the expense. It's an expense for January regardless of the fact that you won't be paying for it until the month of February.

Using the same example, accrual accounting would record the total purchase cost as an income at the time the transaction is completed, however, you will not be able to receive the full amount until the end of four months.

Which accounting method is better to use for companies that deal in e-commerce?

Accrual accounting gives you a clearer picture of your expenses for selling your goods every month. If you buy paper in August, the paper you purchased was part of the cost operating your businessbut in August, not when you actually get around to paying the cost. If you are able to make a sale in May, it was a sale that occurred in May, not in July when the customer finally pays the bill.

It also works better with managing inventory.

Suppose you make $30,000 in new inventory purchases during September, and you are able to sell it in the four months prior to the holiday season. With cash accounting, you would mark the entire purchase of inventory as a cost during the month of September. If you use accrual accounting, you would mark it as an expense when you sell the product.

If you were to use the cash method it would result in a huge expense in September, followed by artificially high profit margins in the months of October, November and December. This is since it appears as if you have no costs of goods sold.

Accrual accounting lets you track the cost of doing business on a monthly basis, which means you know which months had the greatest profit margins.

Three main financial statements

Even if you plan to outsource your ecommerce accounting and bookkeeping, you need to know how to read and understand the financial statements. If you're handling it yourself, using your ecommerce bookkeeping program to input the transaction details will help you to produce three most important financial statements: income statements (also known as the "profit and loss statement" also known as P&L) as well as balance sheets, and cash flows.

Statement of income

The income statement is a report of the profit you earned during a specified period of time for example, a month. The profit people mean when they refer to the phrase "bottom line." Profit is your net profit. In the event that you lose funds during the time the net loss.

Balance sheet

Balance sheets provide information on the amount of your liabilities, assets, and equity at a particular point in time, typically after the end of a quarter, month or even a year. This is a quick snapshot of your financial health.

Assets are the things you own with worth. Accounts payable, also known as liabilities are debts you have to pay.

When you review the accounting fundamentals that were discussed in the past, you'll find that equity is essentially the difference between assets and liabilities. Subtract liabilities from assets, and you have what's called the "book value" also known as equity, your business.

Statement of cash flow

The cash flow statement provides information what your money is changing during a certain time.

The three statements are easily generated by your accounting software, so long as you've taken care to enter your financial details. If you're not able to make time to do that, it's the perfect time to employ the services of an e-commerce bookkeeper.

Essential financial metrics for ecommerce accounting

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

Here are their most essential accounting metrics:

Revenue

Revenue refers to your total earnings, prior to any expenditures have been deducted. It is relatively simple to track. But by itself, it gives you an incomplete view.

Margin of contribution

This is the selling price minus the cost to sell this product. It is sort of like the COGS figure from before, but for each individual product that you sell. It doesn't include operating expenses.

Profit

Profit comes from the results that occur after you have removed all costs from the revenue which includes operating and marketing expenses. If your revenues are high but your profits are low it is either time to improve your revenue or reduce the costs.

Conversion rate for eCommerce

It is a percentage of visitors to your ecommerce store who buy something.

Costs for customer acquisition

It typically costs much less to sell extra sales to your current customers compared to acquiring the services of a brand new customer.

So, if your CAC is extremely high and you're not willing to stop any of your advertising, you've got two options:

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

Customer lifetime value

If you're only a new eCommerce seller, you'll be having difficulty determining this one for your initial few years. With a good accounting system and a good accounting system, you'll have the ability to estimate this amount in the future.

This number helps you justification for your marketing expenditures. Also, if your CAC is very high however, your lifetime value of the customer is significantly greater, it's well worthwhile spending the time to gain those customers.

Average order value

Particularly for smaller e-commerce companies It's a much superior metric over life-time value. If you pay $10 to get a customer, but they spend around $25 on an average order, then that's an excellent deal as long as your other expenses aren't too excessive. If you are able to scale this to increase the number of clients, then you'll have a great time.

Cart abandonment rate

This number is shockingly high in the case of e-commerce sites. According to TaxJar's sources approximately 70% of shoppers who shop online add items to their carts, however they don't purchase them.

Your single best strategy for reducing abandonment of your cart is to email abandoned cart email messages, which is easy to automate with the right email platform, such as the MailPoet.

If you are able to bring that abandonment rates of carts to 60% or 50 percent, you will see a sizable increase in revenue. All it takes is a couple of automated emails it's an easy decision.

Return and refund rates for customers

Are there a large number of customers who return products for a refund? That's an indicator that something's going wrong. Be aware of it and do your best to reduce it.

Five important ecommerce accounting tasks to be tackled

If you're at the beginning stage of becoming an online company owner, it's important to be able to handle the basics of accounting now so you don't end being in hot water later. And just so we're clear hot water could mean many things, such as:

• Taxes not paid- income tax sales tax, income tax, state and local taxes
• Tax filings that are not correct
• The overspending of inventory
• Hiring employees you can't afford
• Not reserving enough equity

These are ways to get your accounting program off to a successful beginning:

1. Create a separate business bank account

Ecommerce small business owners tend to forget about the issue because they're caught up in all the other business startup activities.

But business accounting becomes very difficult if you're mixing private and corporate transactions. The business account is the one you'll use for all the business costs as well as where you'll deposit income from sales.

To open a business bank account, you'll need to have a Tax ID for your business.

2. Prepare for employees and contractors

If you're looking to hire employees, you'll have establish procedures to collect withholding taxes. Even if you plan to operate the company entirely on your own, you'll probably still contract with contractors for specific tasks. Contractors who are paid above an amount each calendar year within the U.S. must be sent an income tax form, which is why you should be aware of:

• Keep track of who you've paid and what you've gotten for them
• Get a W-9 form from each contractor
• Keep current addresses on file for every person you employ

3. Find the accounting software you need.

If you plan to handle hundreds or thousands of transactions per month, you'll need accounting software like QuickBooks Online, Xero, or FreshBooks. Companies with less transactions may make do with an Excel spreadsheet, however a high-transaction business won't have the capacity to keep up using manual entry.

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

4. Keep all receipts, invoices, and payment records

The Reliability Principle of Accounting stipulates that transactions that have supporting documentation must be recorded. If there aren't any records of an activity and you're not able to count it as an income or expense. If you tried to claim a tax deduction on an expense that you've no evidence of having paid for, that could be called tax fraud.

Maintain receipts in physical form. Take photos and keep them in a digital format. Make sure to keep all invoices and receipts in separate email folder too, not just your general mailbox.

5. Start paying attention to the tax laws

Tax regulations vary greatly based on the kind of business and where it operates. You need to know about taxes on sales as well as import taxes if you have any foreign transactions. You should also know about tax withholding taxes for the quarter, as well as additional taxes that are specific to your nation, state city, province, or region.

The tax will be incorporated into the software for your accounting and financial reports. It is always recommended to seek out a tax expert to make sure you're using the right procedures.There's plenty more to say about ecommerce tax management. There are two major tax issues you'll have to be aware of:

Taxes on sales and trackers

The sales tax on online purchases has become very complicated. Nearly every US state is now charging the tax on sales online, as well as the EU has its own sales tax system.

The U.S., each state has different tax rates and has different requirements for the time when sales tax is applicable.

The payment of estimated quarterly business tax

Pre-tax business earnings are tax-free. Like a typical 1099-employee, your ecommerce business makes money before any taxes have been paid on that income.

And like a 1099 employee and a 1099 employee, you must pay your quarterly income tax. If you do not then the government can penalize you for being late with your tax payment.

How do you manage this? You want to prevent getting behind in your taxes. The most effective method to control quarterly taxes is to set the amount you will pay from your monthly income and then use that to pay taxes estimated every quarter.

Accounting software is able to deal with all of these, and also the sales tax requirements. Software is a must...

Why your ecommerce business needs accounting software

Consider taking the time to revisit this question and ensure you understand the benefits of using software to help manage the accounting and e-commerce tasks.

In the beginning, as you've seen, tax management has become extremely challenging particularly sales tax as well as revenue generated from multiple sales channels. If you run an online business that offers products throughout the US or across a huge number of states, you'll find it difficult to handle everything by yourself. Your business is yours to be running.

Your program will also handle the tax amount that you'll have to pay for tax on income, and help speed up filing your tax year-end statement. In addition, if you're being subject to local or state taxes, this complexity will increase even more. The best accounting software will be able to handle the requirements.

Accounting software also helps you track your income and expenses by generating financial statements so you know your margin for profit each month, as well as your company's equity.

Thirdly, accounting software can help control payrolls, which includes contractors. If you're not looking 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 should you do it yourself?

If you do not have accounting software, or if you get it however don't wish to be responsible for using it, you'll need a bookkeeper. But as your business grows, you'll eventually also need to consider some of the many accounting firms which are knowledgeable of the particulars of ecommerce businesses.

A lot of business owners who run e-commerce love the thought of running their own show and even acting as their Chief Financial Officer. as long as your business remains small, you might have the ability to do it by doing it. But let's define "small."

When an e-commerce business is earning at least $100,000 annually in net profit, that's already going become way out of control in terms of your accounting systems if you're selling products in several states or nations. Sales taxes on their own become too difficult.

There is also the issue of dealing with shipping, returns, chargebacks, and all the rest. Many ecommerce platforms provide lower-cost items, and operate in volume. If yours is not an one of a kind, which is a sign that you'll have many transactions.

The more transactions, the more time it takes to track and record everything. And even a "small" ecommerce business making less than $100,000 of net income annually selling goods which range from $5 to $20, will be able to record a large number of transactions.

In the event that your business does not sell in a specific location, state, province, or nation, your degree of tax complexity goes way lower. In that scenario there is a chance do this yourself, should you wish to take on the extra effort.

Test your choice and observe how it works. It is possible to change your mind in the future.

Has accounting been covered

is aware of the responsibilities the business owners are held to each day. The manual process of entering transactions and preparing financial statements can be time consuming and tax planning may create a mess however accounting is an essential part of managing a profitable business.