Ecommerce Accounting Basics: The Principles for a successful Store

The running of an online business requires more than great concepts, products, marketing, and inventory. Additionally, you need an accounting system to follow the money. What is your spending? How much are you making? Are you within your anticipated budget for your business? Is the government happy with your company? Ecommerce accounting employs well-known procedures for keeping track of the financial information of your business and transactions and keeping current on tax laws pay, profits, and payroll.

Whether you're just starting your ecommerce store or you've been in the business for some time and are realizing that you require help in tracking your company's financials, this accounting manual will help you get going in the right direction.

The accounting software for eCommerce lets you assess the financial health of your company and create more accurate financial projections when your company expands.

What are the implications of ecommerce accounting?

Businesses that are based on e-commerce are built upon the transactions that happen and also inventory. The company makes the sales. You deliver products. You purchase and refill inventory.
The basics of ecommerce accounting begin with a system for keeping track of and reporting on your transactions, which includes purchase order, invoices, costs and taxation.

However, it is more than the. Accounting firms will then analyze the information and then use the information to create financial statements so they can examine and provide reports on the financial health of your business.Ecommerce businesses also need specialized attention due to their fundamental business model.

Imagine what happens if you make a sale in 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 the sale impacts your financials?

• Your payment processor has been paid, however it's not yet in your bank account yet
• Sales tax is a cost, possibly from a different region or state
• Inventory declines
• Credit card and/or payment processor charges are incurred
• Actual income from the sale is different from the price of sale

No matter the sales channel the single sale touches on many aspects of your financial records. And the aftereffects of that one sale will be visible in your records of financial transactions over the next couple months. In the event that your order is to return, the majority of these transactions must now be modified or reversed.

And that's just one sale.

Tracking some of this is the task of a bookkeeper. we'll talk about the differences between ecommerce bookkeeping and account in a moment.

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

A transaction happens any time cash is paid, received or demanded by a vendor or business.

An transaction can be one of the below:

• Money the business owner invests in the business
• Sales revenue
• Invoices
• Costs such as wages, marketing, travel, and building expenses
• Assets purchased, such as vehicles, office equipment material, property or vehicles

A single transaction can comprise multiple elements. When you pay an hourly worker, for example it is important to determine the amount of time they worked, the total wages, deductions for taxes, and net pay. Accounting software that is of the highest quality is able to perform these functions.

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

As an example, would you apply sales tax on the day of the purchase? If so then what happens to that money if the product gets return a month later?

Ecommerce accounting attempts to manage the processes and transactions so that such issues don't impair the financial performance of your business.

Debits and credits

All transactions are tracked by a system of debits and credits. First, let's define some key terms:

Debit A document of the amount that was taken out of your account. The debits will show on your bank statement whenever you buy something.

Credit An account of the money that was deposited into your account.

Assets property (real and intellectual) that is owned by an organisation.

Liabilities Liabilities: obligations of a business that need to be met. A liability is a claim against the asset shown in a balance report.

Equity: The sum of funds after deducts have been taken out of them.

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

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

A debit is added to the left side of the equation as an asset. Credits are added on the right.As one simple illustration for a purchase of 500 dollars, the amount is debited from the assets of your company. Also, it is credited as Owner's Equity in the form of revenue. Whenever something gets debited then something else has to be compensated, since it helps to keep the balance.

That's a vastly simplified explanation that gives you a basic idea of what your accounting program will be doing when you input transactions.

Cost of goods sold (COGS)

Accounting for e-commerce must pay special consideration to the costs of selling goods. This includes all expenses required for selling the product, but not including the costs of payroll and marketing.

COGS includes all costs associated with inventory, including purchasing, storing, managing, and shipping. Inventory is your largest expense when you're an e-commerce retailer If you don't have a clear accounting overview of the expenses of products that you sell, the profit margin and taxable income will also be in error.

An inaccurate COGS also makes difficult to determine how much to invest in marketing, what prices to be set, the amount of stock to purchase, whether you should hire employees, and the amount of storage space to buy.

Profit margins

Margins represent the actual income that your company earns when the sale is completed. The way to calculate margins is this equation:

    Margin is (Revenue - Cost of Goods) Revenue  

In essence, it's your net earnings expressed in a 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 margins would be 70%.

Repayable accounts and accounts receivable

The term "money" refers to cash which hasn't yet changed hands, yet is scheduled to.

Accounts receivable includes any money that is due to arrive into your bank account. For example, if you mail an invoice, that goes into accounts receivable till the recipient actually pays the invoice.

The process works in the same way in reverse. If your business makes an order with a vendor who then sends you a purchase order and it is placed in the accounts payable account until you make the payment.

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

There's some overlap between ecommerce bookkeeping and accounting. In general, however, the distinction is that bookkeepers manage events, and accountants compile the data and then analyze it to give a clear and valuable picture of the budget for your company.

When a sporting analogy can help you understand the role of bookkeepers, they are the announcer for play-by-play games, and accountants are like the analyst or color commentary. The bookkeeper keeps track of what occurred. The accountant tells you what it means.

What does an ecommerce bookkeeper do?

The bookkeeping duties focus on records, transactions and financial institutions. If you have employees the bookkeeper manages payroll. They also do things like:

• Process invoices
• Receipts must be sent
• Record what comes in and what goes out of the business bank account
• Record inventory purchases
• Check your bank account reconciliation every month
• Create monthly financial statement
• Make year-end tax statements and other documents

An accurate bookkeeping for your online business can help you build a financially robust and solid business plan.

What is an accountant who specializes in ecommerce? accomplish?

A ecommerce accountant can do things like:

• Monitor and analyse operational costs and business performance
• Conduct financial forecasting
• Review your financial statements, include those provided by your bookkeeper
• Perform tax planning, including the filing of tax taxes
• Report on the cash flow management

The goal of the accountant is to assist e-commerce business owners make sound financial choices.

Are you able to afford an employee who isn't yours? Are you able to expand into new country or state? What's the minimum price you must charge for a new product?

Ecommerce accounting at its best will be able to address these types of questions.

Methods of accounting for sellers selling e-commerce

There are two basic methods of ecommerce accounting -the cash method as well as that of accrual. The approach of accrual is the more popular one and, depending on the nature and size of your company, it could be required by law.

The primary difference between techniques is in the moment when an event is detected.

Accounting for cash basis

In cash basis accounting, a transaction is recognized when the actual amount of money been transferred. If you are able to pay for an invoice, cash basis accounting declares it as an expense. If you receive an invoice in January and you settle it in March, cash accounting marks it as a charge in March.

Income operates the same way. If you sell something that is followed by a client signing to a plan of payment which spreads the payments across four months. In cash accounting, you count this as income each month that money is received.

Accrual method accounting

When accounting for accrual, the transaction is recognized once the project has been completed and the invoice sent. If you make an order for a fresh supply of office paper in January. You then place 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, after which the credit card accounts come in.

When accounting for accrual, the transaction happens in the instant you receive the receipt. Take the receipt, store it in your file system, and then record the cost. The expense is for January, even though you don't pay for it until February.

Using the same example, accrual accounting will record the entire purchase price as an income at the time the sale is made, however, you will not get the entire amount until the end of four months.

Which accounting method is better for ecommerce businesses?

Accrual accounting gives you more clarity on your cost of goods sold each month. If you purchase paper during August, it is part of the price operating your businessit was in August and not the time you arrive at paying the bill. If you are able to make a sale in May, it was a sale that occurred in May and not July, the month when the client finally pays the bill.

It also works better with managing inventory.

If you have $30,000 worth of purchase of inventory in September. Then, you decide to 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 during the month of September. If you use accrual accounting, you'd declare it an expense when you sell the item.

If you were to use the cash method that you'd face a significant expense in September, followed by artificially high margins of profit in the months of October, November and even December since it appears as though you've 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 will know which months had the greatest margins.

Three main financial statements

Even if you plan outsourcing your accounting for e-commerce and bookkeeping, you need to be able to comprehend and read your financial reports. If you're doing the work yourself, using your online bookkeeping program to input transaction data will enable you to prepare the three most important financial statements that are called income statements (also known as the "profit or loss" statement" or P&L) and balance sheets and cash flows.

Statement of income

Income statement is a report of the profit you earned during a specified period of time, such as a month. This profit is what people mean when they employ the term "bottom line." Your profit is your net profit. In the event that you lose funds during the time then your net loss.

Balance sheet

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

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

If you look back at the fundamental accounting equation that was discussed earlier, you'll see that equity simply is the sum of assets and liabilities. Add liabilities to 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 on how your cash is changing during the time.

Each of the three reports can be produced quickly through your accounting software provided you've been diligent about entering your financial data. If you don't have time to do that, it's the perfect time to employ an online bookkeeper.

Essential financial metrics for ecommerce accounting

Taxjar put out an amazing piece about ecommerce accounting metrics. Remember, accounting isn't just concerned with keeping records of financial transactions. Accounting also tells the story of the financial condition as well as the growth or decline the e-commerce company.

These are the most important accounting measures:

Revenue

Revenue refers to your total receipts, before any expenses are deducted. Revenue is fairly easy to keep track of. By itself, however this gives the wrong image.

Margin for contribution

It is the price you charge for a product 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 does not include operational expenses.

Profit

Profit comes from the results that occur after you have removed all the expenses that you incur from your income, including marketing and operating expenses. If you have a high revenue however your profit margins aren't as high it is either time to increase revenue, or decrease costs.

Rate of conversion for Ecommerce

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

Cost of acquisition for the customer

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

Therefore, if your CPC is extremely high and you're not willing to stop all of 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 just starting out as an eCommerce seller, you'll be having difficulty making this decision for the beginning years. However, with a good accounting program, you'll be able to estimate this amount in the future.

This amount helps justification for your marketing expenditures. Also, if your CAC is high, however, your lifetime value of the customer is higher, then it's worthwhile spending the time to gain the clients.

Average order value

For e-commerce startups that are relatively new, this is a more useful metric than lifetime value. If you invest 10 dollars to acquire a client however they'll spend an average of $25 per order, that's a good deal, provided that your other expenses aren't too expensive. If you're able to ramp that to increase the number of clients, then you'll have a great time.

Cart abandonment rate

This is a shockingly high number for ecommerce stores. In TaxJar's research, about 70% of ecommerce shoppers place items in their shopping carts however they don't purchase them.

The best way to reduce reducing abandonment rates is to mail abandoned cart email messages, which is easy to automate with the right email platform, like EmailPoet.

If you could lower the cart abandonment rate down to 60 or 50 percent, you will see significant revenue growth. All it takes is just a few automated messages, that's a no-brainer.

Customer refund and return rate

Do many customers return products for a refund? This is a sign that something is wrong. Keep track of this and take every step you can to lower it.

Five essential ecommerce accounting issues to take on

If you're at the beginning stage of becoming an online business owner, you need to get a handle on your basic accounting tasks soon to ensure that you do not end with hot water in the future. To be clear"hot water" can mean a lot of different things, including:

• Taxes that are not paid -- income tax, sales tax, or local and state taxes
• False tax returns
• Overspending on inventory
• Hiring employees you can't afford
• Insufficiently withdrawing equity

Here are some actions you could take to get your online accounting system off to a good beginning:

1. Set up a business bank account

Small-scale business owners of Ecommerce often don't think about the issue because they're caught up in many other startup business jobs.

But business accounting becomes very complicated when you mix private and corporate transactions. The business account is the one will be used for all of your business expenditures as well as where you'll deposit income from sales.

For opening a bank for business account, you'll need to have a corporate tax ID.

2. Be prepared for your employees and contractors.

If you're looking to hire employees, it is necessary to set up procedures for withholding tax. Even if you plan to operate the company on your own for now it is likely that you will contract with contractors for specific tasks. Contractors that are paid over the amount they earn per calendar year within the U.S. must be sent a 1099form. Be certain to

• Track who you've paid and the amount you've paid them.
• Request a form W-9 from every contractor
• Make sure you have current addresses in your file for every person you employ

3. Get the accounting software you need.

If you anticipate having hundreds or even thousands of transactions each month, you're going to want accounting software like QuickBooks Online, Xero, or FreshBooks. Smaller businesses can use an Excel spreadsheet, however those with lots of transactions will not be able to keep up with manual entries.

Ecommerce accounting software can automate a lot of the accounting essential tasks and makes your life easier. It records, stores, and retrieves financial information as well as produces financial statements and reports.

4. Maintain all invoices, receipts and records of payments

The Reliability Principle of Accounting states that only transactions with supporting documentation should be recorded. If there aren't any records of an activity that you don't have documentation for, it's not able to be counted as an expense or income. If you attempt to claim tax benefits on an expense that you've no evidence of having spent money on, that might be considered tax fraud.

Save receipts that are physical. Take photos and keep them in a digital format. Keep all emailed invoices and receipts in separate email folder too and not only your regular email inbox.

5. Be aware of tax requirements

Tax requirements vary dramatically depending upon the type of company and its location. There are many things to consider, such as taxes on sales as well as import taxes if you are involved in overseas transactions. Tax withholding, quarterly taxes, and any other taxes that apply to your nation, state, province, city, or region.

The tax will be incorporated into your accounting software and financial reporting. It's always best to speak with a tax professional in order to be sure that you're following correct procedures.There's many more things to discuss ecommerce tax management. Two major taxes you'll have be aware of:

Paying sales tax and tracking the sale

The sales tax on online purchases has turned out to be extremely complex. The majority of US state now charges an online sales tax as well as the EU has also a sale tax structure.

Within 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.

Taxes on business that are estimated to be paid quarterly

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 You must pay your quarterly income tax. If you don't then the government can penalize you for being late in paying your tax bill.

How do you manage this? The idea is to avoid getting behind in your tax obligations. The best way to manage tax obligations for the quarter is to set an amount of your income each month which you can use to cover estimated tax payments each quarter.

Your accounting software can easily manage all of this, along with the tax obligations for sales. And speaking of software...

The reasons your business should use accounting software

It's worth some time to think about this and be sure to understand the advantages of making use of software that can help you manage the accounting and e-commerce tasks.

First, as you've just seen, tax management has become exceptionally challenging in recent years, particularly with regards to sales tax as well as revenue generated from multiple sales channels. If your ecommerce business is selling products in the US or across a vast amount of states, you'll find it difficult to manage the demands of this on your own. Your business is yours to run.

Your program will also handle your quarterly tax allocation, which that you'll have to pay for tax on income, and help speed up preparation of your year-end tax statements. If you're also in the process of paying local and state taxes, that complexity mounts further. The best accounting software can handle all of these requirements.

The second is that accounting software makes it much easier to keep track of your expenses and income by creating financial statements, so you know your monthly profit margin and are able to see your company's capital.

Third, accounting software helps to manage the payroll of contractors. If you're not looking to pay for 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're not using the accounting program, or you do get it but you don't want to use it, you'll need to hire a bookkeeper. However, as your company expands and expands, you'll need to look at some of the many accounting firms that understand the nuances of businesses that rely on e-commerce.

A lot of business owners who run e-commerce love the thought of running their own business and even acting as their Chief Financial Officer, and in the event that their company is small, you might be able to get away in this way. But let's define "small."

When an e-commerce business is earning even something like $100,000 each year in net income, that's already going get beyond the reach of the accounting system you use when you're selling goods in multiple states or countries. Taxes on sales alone get too complex.

Additionally, you must deal with shipping, returns, chargebacks, and all other issues. Many ecommerce platforms provide lower-cost items, and operate with large quantities. Unless yours is an exception to that, that is a sign that you'll have a lot of transactions.

The more transactions, the more time is required to track and record it all. And even the most "small" online business that earns just $100,000 in net profits annually selling goods priced between $5 and $20, will be able to record a large number of transactions.

Now, if your business does not sell in a specific area or state, province or even a country, the level of tax complexity is way lower. In that scenario it is possible to do it yourself -- in the event that you are willing to do the additional job.

You can test your preferred method and see how it goes. It is possible to change your mind in the future.

Has accounting been covered

understands the responsibility every day business owners face. Manually inputting transactions and creating financial statements can be tedious and tax planning can give you a headache however accounting is an essential part of running a successful business.