Ecommerce accounting basics: Fundamentals for a successful Store

The running of an online business requires more than great concepts and products, but also marketing and inventory. Additionally, you need an accounting system that can track the cash flow. What is your spending? How much are you making? Are you in line with your budget? Is the government happy with the business you run? Ecommerce accounting employs well-known procedures to keep track of your financial data and business transactions, and staying current on tax laws, payroll, and profits.

No matter if you're only starting your ecommerce store or you've been in the business for some time and realize that you need help tracking your business budget, this eCommerce accounting guide will assist you in getting moving in the right direction.

Accounting for Ecommerce allows you to evaluate the financial condition of your business and make more accurate financial projections as your business grows.

What are the implications of ecommerce accounting?

Businesses that are based on e-commerce are built upon transaction and inventory. The company makes the sales. You distribute goods. You purchase and refill inventory.
The basic principles of ecommerce accounting start with a method of recording and reporting your transactions. These include purchase bills, orders, expense and taxation.

However, it is more beyond the. Accounting firms then will analyze the information and then use the information to create accounts so that they can evaluate and present the financial performance of your business.Ecommerce companies also require some specialized attention due to their fundamental business model.

Consider what happens when you make a sale in your online store. That means the customer uses their credit card, and then makes money to the processor that you use for payments. 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.
• Taxes on sales are paid, possibly from a different nation or state
• Inventory declines
• Credit card and/or payment processor charges are incurred
• The revenue from sale does not match the sale price.

Whatever the channel of sales, making even a one sale can impact several aspects of your financial statements. The repercussions from the sale will show up in your financial records within the next few months. If the purchase does get returned, many of these transactions must now be modified or reversed.

This is just one of many sales.

The tracking of some of this is the task of the bookkeeper. we'll discuss the distinctions between ecommerce bookkeeping and account in a moment.

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

Accounting basics

Here are the key phrases to learn for ecommerce accounting:

Transactions

In the accounting world, a transaction happens any time money is paid, received or requested by a vendor or business.

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

• A business's owner can invest money in the business
• Revenue from sales
• Invoices
• Costs such as salaries, marketing, travel, and construction expenses
• Purchased assets, like vehicles, office equipment, property, or materials

One transaction may have multiple components. When you pay employees on an hourly basis such as a salesperson you must know the amount of time they were working, their net wages, tax deductions, and net pay. Accounting software that is of the highest quality can perform all of these functions.

The transactions for companies that use e-commerce are often complicated because of particular factors, such as taxation and delays in timing caused by the separation between consumer and business.

For example, do you charge sales tax right on the day of purchasing? If yes, what happens to that cash if your product is returned a month later?

The accounting for ecommerce attempts to handle the processes and transactions so that the aforementioned issues do not affect the financial outlook of your business.

Credits and debits

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

Debit A document of the money taken from your bank account. You'll see debits show up on your bank statement whenever you purchase.

Credit: A record of the money that was deposited into your account.

Assets: Property (real and intellectual) owned by an organization.

Liabilities Liabilities: obligations of a business that need to be met. Liabilities are claims against the assets shown in a balance report.

Equity Amount of funds after deducts are subtracted from them.

Let's examine how these concepts contribute to what's called the main accounting equation:

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

The debit is added to the left side of the equation as an asset. Credits are added to the right.As an example, if you make a sale for $500, the $500 is debited from your business assets. Also, it is credit as owner's Equity as income. If something gets deducted, something else must be compensated, since it keeps the math balanced.

It's an extremely simplified explanation, however it gives you a basic idea of what your accounting program is doing when you enter transactions.

Cost of products sold (COGS)

Ecommerce accounting must pay particular focus on the price of selling goods. This refers to all the cost of selling the product, but not including the costs of payroll and marketing.

COGS includes all costs associated with inventory, including purchasing, storing as well as managing the shipping. Inventory is your largest expense when you're an e-commerce retailer If you don't have a clear accounting overview of the costs of goods being sold, the margin of profit and tax-deductible earnings will be in error.

A faulty COGS can make difficult to determine how much to invest in marketing, the prices you should determine, what quantity of inventory to order, if hiring 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. The way to calculate margins is this formula:

    Margin = (Revenue - - Cost of Goods) + Revenue  

In essence, it's the net profit you earn as a percentage. If you sell 10,000 worth of goods within a week, and your COGS for those products is $3000, your margin would be 70 percent.

Receivables and accounts payables

These are terms used to describe money which hasn't yet changed hands, but is slated to.

Accounts receivable includes any money that's due on your account in the bank. As an example, if for example you mail an invoice, it will be placed in accounts receivable until the recipient actually pays you.

The process works in the same as it does it works in reverse. When your company makes a purchase from a vendor who then sends you a purchase order that is deposited in your accounts payable until you make the payment.

Bookkeeping and accounting for e-commerceWhat's the difference?

There's a bit of overlap between bookkeeping and accounting. But in general, the difference is that bookkeepers process the events while accountants collate the data and then analyze it in order to provide a precise and useful overview of the budget for your company.

When a sporting analogy can help, bookkeepers are like the announcer of play-by-play accounting professionals are similar to the color or analyst. The bookkeeper records what has happened. The accountant tells you what it means.

What exactly does an Ecommerce Bookkeeper do?

Bookkeeping tasks focus primarily on the recording of transactions, and financial institutions. If you employ employees, the bookkeeper manages payroll. The bookkeeper also handles things such as:

• Invoice processing
• Make receipts available for payment.
• Keep track of what goes in and goes out from your bank account for business
• Purchases of inventory records
• Reconcile your bank accounts every month
• Produce monthly financial reports
• 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 is an accountant who specializes in ecommerce? do?

An ecommerce accountant will do things such as:

• Analyze and track operational costs and performance of the business
• Conduct financial forecasting
• Examine your financial statements- which includes those provided by your bookkeeper
• Tax planning is essential, and includes making tax-deductible taxes
• Check your cash flow management

The goal of the accountant is to help ecommerce business owners make better financial choices.

Are you able to afford new employees? Are you able to expand into new state or country? What is the minimum amount you can charge for a new product?

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

Methods of accounting for sellers selling e-commerce

There are two main ways of accounting for e-commerce -the cash method as well as the accrual method. The accrual method is the most frequent one, and based on the size and nature of your business, could be legally required.

The basic difference between the ways of recognizing transactions is the way in which a transaction is recognized.

Accounting for cash basis

In the cash basis accounting system, a transaction is recognized when actual money has changed hands. If you make a payment on an invoice, cash basis accounting marks that as an expense. If you receive an invoice from January, but you pay it in March, cash accounting marks the invoice as an expense during March.

Income works the same way. When you have a sale, and the customer signs up for a payment plan that will spread out the payments over four months. Cash accounting allows you to consider this to be income every month that money is received.

Accrual method accounting

In accrual accounting it is recognized once the project has been completed and the invoice is sent. If you make an order for a new supply of office paper in January and put it onto your company credit card. The office paper is delivered immediately, but you don't actually pay for it until February, after which your statements on your credit card balances are received.

For accrual accounting transactions, you make the purchase at in the instant you receive the document. You take the receipt keep it in your filing system and then record the cost. It's an expense for January regardless of the fact that you won't be paying for the item until February.

In the same way, accrual accounting will record the entire purchase price as an income at the time the sale is made, however, you will not receive all the money until after four months.

Which accounting method is better for ecommerce businesses?

Accrual accounting provides you with more clarity on your cost of goods sold each month. If you purchase paper during August, the paper you purchased is part of the price operating your business- in August, not when you actually arrive at paying the invoice. If you make a sale in May, it was a sale that occurred in May and not July, when your customer makes the payment.

Additionally, it is more effective in conjunction with inventory management.

Imagine you spend $30,000 on new inventory purchases in September. You then sell it over the next four months before the Christmas season. With cash accounting, you would mark the entire inventory purchase as an expense at the end of September. With accrual accounting, you would mark it as an expense as you sell the product.

With the cash approach that you'd face a significant cost in September as well as artificially high margins of profit in the months of October, November and even December due to the fact that it would appear as though you've no expenses for the sale of your products.

Accrual accounting lets you compare the expenses of running a business each month, so you can see which months had the greatest profits.

Three main financial statements

Even if you plan to contract out your ecommerce accounting and bookkeeping tasks, you'll need to know how to read and understand the financial statements. If you're handling the work yourself, using your ecommerce bookkeeping software to enter the transaction details will help you to prepare the three most important financial statements that are called income statements (also known as the "profit and loss report" (also known as P&L) as well as balance sheets, and cash flows.

Income statement

Income statement is a report of the profit you earned during a specified period of time like a month. The profit people mean when they use the term "bottom line." Your profit is the net amount you earn. In the event that you lose money during that time period then your net loss.

Balance sheet

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

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

When you review the accounting fundamentals that were discussed earlier, you'll see that equity is simply the sum of the liabilities and assets. Subtract liabilities from assets, and you have what's called the "book value" or equity, of your business.

Statement of Cash Flow

The statement of cash flows provides what your money on hand has changed during the time.

Each of the three reports can be produced quickly by your accounting software, provided you've diligently entered the correct financial information. If you're too busy for that, this is one reason to hire an online bookkeeper.

The most important financial metrics to use for eCommerce accounting

Taxjar put out an amazing piece about ecommerce accounting metrics. It's important to remember that accounting isn't only concerned with keeping records of financial transactions. Accounting also tells the story about the financial status and growth, or decline the e-commerce company.

Below are the essential accounting measures:

Revenue

Revenue is the term used to describe your gross receipts, before any expenses have been taken out. Revenue is fairly easy to keep track of. However, by itself this gives an incomplete image.

Contribution margin

It is the price you charge for a product plus the costs to sell that product. This is similar to the COGS number from earlier however, it is for every single product that you sell. This figure does not take into account operational expenses.

Profit

Profit comes from the results that occur after you have removed all your expenses from your revenue, including marketing and operating expenses. If your revenue is high but your profits are low You either have to improve your revenue or cut the costs.

Rate of conversion for Ecommerce

The percentage is how many people who come to your store who buy something.

Costs for customer acquisition

Typically, it costs significantly less to create additional sales to your existing customers than to acquire an entirely new client.

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

1. You can improve or enhance your marketing
2. Get started marketing to more of the existing customers

Customer lifetime value

If you're a relatively new eCommerce seller, you'll be having difficulty making this decision for the initial few years. But with good accounting software, you'll be able to start estimating this in the future.

This amount helps justify your marketing expenses. If, for instance, your CAC is very high yet your customer's lifetime value is much greater, it's well worthwhile spending the time to gain these clients.

Average order value

Particularly for smaller e-commerce companies, this is a superior metric over life-time value. If you pay just $10 to attract a new customer, but they spend on average $25 per order, then that's an excellent deal, provided that your other expenses aren't excessive. If you're able to ramp that up as you reach more clients, then you'll have a great time.

Cart abandonment rate

The number of people who buy this is alarmingly high for online stores. According to TaxJar's sources around 70% of ecommerce shoppers place items in their shopping carts but do not purchase them.

Your single best strategy for decreasing cart abandonment is to send abandon cart emails. This is simple to automate using an appropriate email platform like the MailPoet.

If you can lower that abandonment rates of carts to 60% or 50 percentage, it will result in an impressive increase in sales. And if all it takes is just a few automated messages, that's a no-brainer.

Rates for refunds and returns to customers

Do many customers are returning products to get a refund? This is a sign that something's not right. Keep track of this and take every step you can to lower it.

Five essential ecommerce accounting issues to be tackled

If you're still in the initial stage of becoming an online business owner, you need to get a handle on the basics of accounting now to ensure that you do not end with hot water in the future. Just to be sure hot water could mean many things, such as:

• Taxes not paid- income tax sales tax local and state taxes
• Incorrect tax filings
• Overspending on inventories
• Hiring employees you can't afford
• Insufficiently withdrawing equity

Below are a few actions you could take to get your online accounting process off to a great starting point:

1. Establish a separate bank for business account

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

However, business accounting can be difficult if you're mixing personal with business transactions. Business accounts are the ones you'll use for all the business costs as well as the place where you'll pay your earnings from sales.

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

2. Prepare for employees and contractors

If you're looking to hire employees, you'll need to set up procedures for withholding taxes. If you decide to operate the company on your own for now it is likely that you will employ contractors on specific projects. Contractors who are paid above the amount they earn per year in the U.S. must be sent a 1099form. Be aware of:

• Track who you've paid and what you've gotten for them
• Request a form W-9 from each contractor
• Make sure you have current addresses in your file for all employees you have

3. Get Accounting software

If you anticipate having hundreds or even thousands of transactions each month, you'll want accounting software like QuickBooks Online, Xero, or FreshBooks. Companies with less transactions may use the Excel spreadsheet, but those with lots of transactions will not be able to keep up by manually entering data.

Ecommerce accounting software can automate a lot of the essential accounting tasks and makes your life easier. It archives, stores and retrieves financial data and uses it to produce financial statements and reports.

4. Keep all receipts, invoices and records of payments

The Reliability Principle of Accounting states that transactions that have supporting documents should be documented. If you don't have records of an activity that you don't have documentation for, it's not able to be counted as income or an expense. 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.

Maintain receipts in physical form. Take photos and store them digitally. Keep all emailed invoices and receipts in separate folder for emails, not just your general mailbox.

5. Pay attention to taxes and tax regulations

Tax requirements vary dramatically depending upon the type of company and where it operates. There are many things to consider, such as the compliance of sales tax, import tax if there are any international transactions, tax withholding taxes for the quarter, as well as other taxes that apply to your nation, state or province, city or region.

These taxes are incorporated in the software for your accounting and financial reports. It's always best 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 taxes you'll have be aware of:

Paying sales tax and tracking the sale

Sales taxes for online sales have turned out to be extremely complex. In fact, nearly every US states now has the tax on sales online, as well as the EU also has a sales tax system.

Within the U.S., each state charges different rates, and also has its own set of rules for the time when sales tax is applicable.

The payment of estimated quarterly business tax

The business income is tax-free. Similar to a 1099 employee the business you run through ecommerce earns money before any taxes have been paid for that revenue.

Like a 1099-employee and a 1099 employee, you must be able to pay the quarterly tax. If you fail to do so, the government will punish you for not paying with your tax payment.

What can you do to manage this? You want to prevent being a long way behind with your tax obligations. One of the best ways to handle tax obligations for the quarter is to set an amount of your earnings each month, and use it to pay estimated taxes each quarter.

Your accounting software can easily handle all this as well as 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 be sure to understand the advantages of using software to help manage the accounting for your online business.

As you've discovered, tax management is becoming extremely difficult in recent years, particularly with regards to sales tax and revenue from multiple sales channels. If you run an online business that sells products across the US or across a huge variety of states, you will find it difficult to manage the demands of this by yourself. There is a business you must run.

Your software will also manage the tax amount the tax payer must pay in taxes on your income and aid in the filing your tax year-end reports. And if you are also being subject to local or state taxes, that complexity mounts further. A good accounting program can handle all of these requirements.

The second is that accounting software helps you track your income and expenses by generating financial statements which will let you track your monthly profit margin and are able to see your company's equity.

The third benefit of accounting software is that it helps to manage the payroll of contract workers. If you do not want to spend money on the bookkeeping and financial management of e-commerce, you will definitely need accounting software.

Are you better off hiring bookkeepers and accountants or DIY?

If you do not have the accounting program, or if you decide to purchase it, but don't want to take on the responsibility of using it, you'll need a bookkeeper. But as your business grows and expands, you'll need to look at some of the numerous accounting companies which are knowledgeable of the particulars of ecommerce businesses.

Many ecommerce business owners love the thought of running their own business which includes acting as Chief Financial Officer, and in the event that their company isn't too big, you may be able to get away in this way. But let's define "small."

With an ecommerce company making at least $100,000 annually in net profit, that's already going become way out of control in terms of your accounting system if you're selling products in several states or nations. Taxes on sales alone become too difficult.

Additionally, you must deal in return shipping as well as chargebacks and the other stuff. Most ecommerce platforms sell lower-priced items, and operate in bulk. Unless yours is an exception to that, that is a sign that you'll have a lot of transactions.

More transactions mean more time it takes to keep track of it all. Even an "small" online business that earns just $100,000 in net profits each year, selling items which range from $5 to $20 is likely to have lots of transactions.

Now, if your business does not sell in a specific area such as a state, province or country, your level of tax complexity is way down. If that's the case it is possible to get away with doing the tax yourself in the event that you are willing to do the additional work.

You can test your preferred method to see how it performs. You can always change your mind in the future.

has accounting covered

recognizes the responsibilities that the business owners are held to each day. Manually inputting transactions and creating financial reports can be time consuming and tax planning may give you a headache, but accounting is a crucial aspect of operating a business that is successful.