Ecommerce Accounting Guide for Business Owners [2024]
Updated on June 29, 2024.
Most sellers don’t start their online businesses with ecommerce accounting in mind, but understanding your numbers is essential to maintaining a profitable, healthy business.
The reality is that ecommerce accounting is tricky, with many added complexities when compared with accounting for a traditional brick-and-mortar retail business. So, even if you’re a capable bookkeeper, there’s plenty more to learn to have clean, precise books for an online store.
This guide is the perfect place to learn the basics!
If you have any questions, don’t hesitate to reach out to the A2X Support Team at contact@a2xaccounting.com. Or, find an ecommerce accounting specialist via the A2X Ecommerce Accountant Directory.
Table of Contents
What is ecommerce accounting, and how is it different?
Ecommerce accounting sits under the umbrella of business accounting, where a bookkeeper or accountant records, enters, and organizes an online store’s financial data, so there is a clear and accurate record of the flow of money into and out of the business.
While ecommerce accounting shares many tasks with accounting for traditional businesses, there are added complexities and differences due to the involvement of sales platforms like Amazon or Shopify, which disrupt the direct flow of cash from customers to retailers.
Here’s a comparison:
In traditional commerce, a customer goes into a brick-and-mortar store, purchases a product, and pays the store directly.
In ecommerce, a customer buys a product, and the store’s payment gateway processes the payment. The payment gateway takes a percentage of the purchase price as a fee for facilitating the sale. Instead of depositing the remaining amount into the retailer’s bank account immediately, it holds the funds and makes a delayed lump sum payment. These lump sum payments often comprise money from multiple sales and could be deposited days or weeks after the transactions occurred.
Because the money from the sales channels is deposited in a lump sum, looking at an ecommerce retailer’s bank account won’t give you detailed information about what took place, e.g., sales, returns, fees, and shipping costs.
All of that information is on Amazon, Shopify, or your sales channel of choice. Skills and knowledge are required to categorize and correctly reconcile what’s in the bank account with the transaction types on the sales channel.
Here’s an example of some of the transactions that might have occurred in a Shopify lump sum payment.
While the actual fees and transactions included in this example may differ for other sales channels (e.g., Amazon), the concept remains the same: The lump sum payment isn’t just sales. It’s actually a combination of sales, fees, refunds, shipping income, etc.
Incorrectly recording the entire lump sum payment as “sales” or “income” could cause you to over or under-report on your actual numbers, which could then cause you to over or under-pay any relevant taxes, and will result in incorrect financial data that could also cause you to make poor business decisions.
For an in-depth overview of ecommerce bookkeeping and how it’s different from traditional bookkeeping, watch this webinar recording.
What does ecommerce accounting involve?
When you think of accounting, your mind probably goes straight to taxes, but that’s only part of what ecommerce business accounting entails. Let’s take a closer look.
Bookkeeping
Bookkeeping and accounting are often used interchangeably, but they cover different tasks that feed to a common goal.
Bookkeeping involves tracking and categorizing business transactions, such as sales, purchases, receipts, invoices, and payments. This means bookkeepers often handle tasks like balance sheet preparation, payroll, and accounts payable and receivable.
Keeping good books means organized, accurate financial records, which accountants can use for their tasks.
There are numerous bookkeeping-only practices if you’re looking to outsource your ecommerce bookkeeping. Many accounting firms also offer bookkeeping services.
Get detailed steps on how to complete bookkeeping by watching the following videos:
- Step-by-step guide to Shopify bookkeeping in Xero
- Step-by-step guide to Shopify bookkeeping in QuickBooks Online
- Step-by-step guide to Amazon bookkeeping in Xero
Tax management and compliance
Understanding your tax responsibilities as an ecommerce business can be difficult, especially when you’re selling into different tax jurisdictions.
Managing taxes for an ecommerce business involves:
- Registering for sales tax and/or VAT in the regions where a company has tax obligations
- Calculating and filing quarterly and year-end taxes/VAT
- Collecting, tracking, and remitting tax and/or VAT
- Managing any international tax/VAT/GST obligations
- Staying informed on any updates to tax law and regulations
- Handling tax audits or disputes
We strongly recommend working with an expert when it comes to managing sales tax and VAT.
The following resources can also help you get familiar with the sales tax/VAT obligations that might apply to you:
- Managing US Sales Tax for Shopify
- The Ultimate VAT Guide for Sellers in UK & EU
- Shopify VAT: How to Do it Right
Financial analysis and growth planning
Keeping good financial records and ensuring tax/VAT compliance are essential tasks for an online business. However, another part of ecommerce accounting is analyzing financial data to plan for expansion and growth, regardless of your current business size.
This aspect of ecommerce accounting involves looking at product profitability, finding opportunities to increase profits, setting and evaluating growth-related metrics, and forecasting cash flow. This analysis helps businesses make better financial decisions, such as when to purchase inventory and if they can afford to hire employees. It also ensures preparedness for periods of slow business, as well as when to seek funding or external investment.
There are a couple keys to effective financial analysis and planning:
- Good data – Ensure your bookkeeping data is correct by using the right tools and ensuring you’re capturing all sales, expenses, and other transactions.
- Ecommerce accounting expertise – Work with a specialist who has experience building and analyzing reports specifically for ecommerce businesses. They’ll know which numbers are most important to reaching your goals.
Here are a few resources that can help you understand what you need to achieve helpful financial analysis, and how it can help your business:
- How to set up your ecommerce accounting to secure loans, investment, and financing
- Holiday ecommerce: Accounting experts explain the financial KPIs you need to know
- Amazon sellers’ guide to cash flow forecasting: Tips from an accounting expert
What tools and information do you need to start ecommerce accounting?
Setting up your finances should be a top priority for an ecommerce business owner, and it’s a good idea to set up your finances properly as you’re establishing your business.
Here are a few key things to get sorted so that it’s easier to do your ecommerce accounting:
Business tax ID number: If you run a partnership or corporation in the US, you’ll need an Employer Identification Number (EIN) from the IRS. Or, if you’re in the UK, you’ll need a Unique Taxpayer Reference (UTR) from HM Revenue and Customs (HMRC), and possibly an Economic Operator Registration and Identification (EORI) number, which is used to track and register customs information in the UK and EU.
Business bank account: One of the biggest mistakes new businesses make is mixing personal and business finances. It can be tempting to use an account you already have, but you’ll live to regret that decision when it comes to untangling your finances. Instead, set up a dedicated business account.
Accounting software: If you’re just getting started, you may get by using spreadsheets to manage your bookkeeping, but as your online business grows, accounting software will help save time as you track sales, expenses, inventory, and taxes and will generate the necessary financial reports for you. Among small businesses and experts, Xero and QuickBooks Online are two of the most popular cloud accounting software solutions.
A2X has also provided a breakdown of the best accounting software for Amazon sellers and the best accounting software for Shopify merchants.
Important note: Most accounting software will require a third-party integration to get your sales and transaction data from Shopify, Amazon, and any other sales channels into your accounting software. It’s important to consider automating this as manual entry can take a lot of time and is prone to human error. Consider using an integration tool like A2X to help – it will make your ecommerce accounting and bookkeeping easier and more accurate!
9 ecommerce accounting tasks to regularly complete
Now that you know what accounting for ecommerce entails and why it’s important to do it properly, the next step is figuring out the regular accounting tasks for an ecommerce business.
Many newer business owners find it handy to use an ecommerce bookkeeping checklist to ensure they remember to do everything. Or, refer to the list below for a brief overview of the tasks needed to maintain a financially healthy and compliant business.
- Track and categorize sales transactions: Ensure all sales transactions are recorded accurately, including sales revenue, sales tax, shipping fees, and discounts.
- Track and categorize expenses: Monitor and categorize all business-related expenses, such as advertising, shipping, inventory costs, software subscriptions, and web hosting or sales platform fees.
- Track and categorize returns, refunds, and chargebacks: Be sure to properly account for these types of transactions so your balance sheets are accurate.
- Reconcile bank and credit card accounts: Do a high-level review of your data, including comparing your accounting records with your bank statements to ensure everything matches. If it doesn’t, then identify the discrepancies and solve them.
- Prepare financial statements: Generate your financial statements using the information you recorded. You will need income statements, balance sheets, and cash flow statements.
- Analyze financial performance: Spend time looking over essential financial metrics. Check gross profit margin, net profit margin, and inventory turnover to identify trends, areas for improvement, and opportunities.
- Stay on top of taxes: Ecommerce businesses need to plan for and file income tax returns while also determining the appropriate sales tax to collect and remit to the relevant tax authorities.
- Keep a business budget: A budget lets you plan for upcoming costs and make it through seasonal lows.
- Keep organized, accurate records: Have accurate and organized records of all financial transactions, receipts, and invoices to facilitate future audits or reviews.
Ecommerce accounting methods: cash, accrual, and modified cash
An accounting method refers to the practices and procedures used to record financial transactions, maintain records, and generate financial statements. Choosing the right method is crucial for making informed decisions about your business’s finances, as it impacts the accuracy of financial forecasting and the data available for analysis.
Let’s explore the most common bookkeeping methods. These methods use double-entry bookkeeping, where each transaction must have at least two general ledger accounts assigned, which balance and offset each other.
Cash accounting
With the cash accounting method, income is recognized when you receive money from a sale, and expenses are recorded when money goes out. With this method, you only account for income or expenses when the cash is exchanged, which makes it easier to understand your cash flow.
Example: Your store receives an order for 500 pairs of summer sandals. The shoes are manufactured and shipped to the customer who pays the invoice 30 days later. If you’re using cash accounting, you would record the income for these sandals when the customer’s payment is in your account, despite being a month since they received the sandals and more than a month since you received and prepared the order.
Accrual accounting
Accrual accounting is more suitable for businesses dealing with inventory. This method requires you to record revenue from sales when they occur, not when the cash is received. A similar process applies to expenses. Accrual accounting helps you understand the long-term impact of inventory purchases and sales on your financial performance.
Example: Your store receives an order for 500 pairs of summer sandals. The shoes are manufactured and shipped to the customer who pays the invoice 30 days later. With the accrual method, the income for the sandals is recorded as the day the sandals were shipped to the customer, as this was the completion of the sale. The income is recorded as an account receivable and will be settled when the customer pays 30 days later. This payment is recorded as a cash inflow.
Modified cash accounting
Modified cash accounting – sometimes referred to as the “hybrid method” – uses both the cash and accrual method for different types of transactions. With modified cash, you would handle operating expense transitions using the cash accounting method and revenue and Cost of Goods Sold (COGS) using the accrual accounting method.
The modified cash method gives you a more accurate view of profitability than cash accounting on its own would, and is less time-consuming and complex than accrual basis. It’s typically best suited to businesses in the $1-25 million revenue range.
What accounting method should ecommerce sellers use?
As an ecommerce seller, using accrual or modified cash accounting is recommended, which provides a more accurate picture of your cash flow and enables better financial forecasting.
Most accounting software and tools, including A2X, organize your books using accrual accounting by default, making it easier to prepare for your business’s financial ups and downs.
Additionally, once a business is doing more than $25 million in annual revenue, it is required by the IRS to use the accrual method. Many lenders and investors will also require financials to be prepared on an accrual basis.
Essential financial metrics for ecommerce accounting
To make informed decisions about your ecommerce business, you need to understand and track various financial metrics.
Cost of Goods Sold (COGS)
COGS is a crucial metric for ecommerce sellers, referring to the direct costs of producing the goods sold by your business. This includes the cost of materials and labor used to create the product but excludes indirect expenses like distribution and marketing costs. Understanding COGS is essential for determining the profitability of your products.
The formula for Cost of Goods Sold (COGS) is:
COGS = Beginning Inventory + Purchases - Ending Inventory
Gross profit
Gross profit is the difference between a company’s total revenue and its cost of goods sold. It represents the initial profit before other expenses such as taxes, marketing, rent, etc.
The formula for gross profit is:
Gross Profit = Revenue - Cost of Goods Sold
Gross margin
Gross margin uses the same data as gross profit to determine the percentage of total revenue retained after covering the cost of goods sold.
The formula for gross margin is:
Gross Margin = (Total Revenue - Cost of Goods Sold) / Total Revenue × 100%
The higher the gross margin, the more capital a company retains on each dollar of sales, which can be used to cover other costs or pay debts. Margins can vary across sellers and products, but generally, aim for higher margins on slower-moving products.
A common observation from A2X’s accounting partners is that ecommerce sellers often need to pay more attention to their expenses, making it difficult to calculate and optimize their margins accurately. For example, a business that wasn’t correctly tracking its heavy discounting could see its gross margins negatively affected, leading to cash flow problems.
In summary, you should understand and track your gross margins, plan and strategize to optimize them, and focus on minimizing expenses to maximize your margins.
Understanding key financial statements for ecommerce sellers
As with a traditional brick-and-mortar business, you’ll want to look at three key financial statements: your Profit and Loss (P&L), balance sheet, and cash flow statement. These reports provide valuable insights into your business’s financial performance and help guide decision-making – and can even help you secure an investment or a loan.
Profit and Loss/income statement
An income statement, also called a profit and loss statement, is a standard business accounting report. It summarizes a company’s revenue, expenses, and costs over a specific period, typically a financial quarter or year. These statements help you evaluate your business’s profitability and compare performance over time.
Learn more about how to set up a P&L for ecommerce.
Balance sheet
Balance sheets provide a snapshot of a business’s financial position at a specific point in time. They track three key components:
- Assets (including cash and inventory)
- Liabilities (including loans or purchases)
- Equity of all shareholders
The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Equity.
Learn more about how to set up a balance sheet for ecommerce.
Cash flow statement
A cash flow statement gives a detailed overview of a company’s cash inflows and outflows over a specific period, categorizing transactions into operating, investing, and financing activities to give a comprehensive understanding of the company’s liquidity and cash management. Cash flow statements work with income statements and balance sheets to reveal a full picture of a company’s financial health. Potential investors or buyers also use them to evaluate whether or not a business is a worthwhile investment.
Looking at all three financial statements – income statement, balance sheet, and cash flow forecast – will help your ecommerce business gain a comprehensive understanding of its financial health, identify areas for improvement, make informed strategic decisions, and ensure sustainable growth and profitability.
Is ecommerce accounting the same for all sales channels?
Accounting for ecommerce is different for all sales channels. It’s common for businesses to sell on multiple channels, and multi-channel sellers must be aware of the differences between them.
For example, Amazon has a variety of fees to account for, such as seller fees or Fulfillment By Amazon (FBA) fees, depending on the services you use.
On the other hand, Shopify is a platform, not a marketplace, so you need to be mindful of taxes, including managing the remittance of your sales tax.
Depending on your channels, whether it’s Amazon, Shopify, or other popular marketplaces like Etsy or eBay, you should educate yourself on the specific fees, transaction types, and any other information needed to maintain accurate records.
Getting help from a professional ecommerce accountant
As detailed in this guide, ecommerce accounting can be challenging, so many online business owners opt for professional assistance.
Do you really need to hire an accountant? At A2X, we recommend working with an ecommerce accountant as soon as possible so that you set up your accounting and bookkeeping correctly and avoid headaches as your business grows.
What type of accountant/bookkeeper should you hire? It’s also really important to work with an accountant or bookkeeper who has specialized experience working with ecommerce businesses. Given all of the complexity that comes along with ecommerce accounting and bookkeeping, it’s important to hire someone who understands tax compliance for online businesses, and how to properly account for specific transaction types.
Where can you find a specialized ecommerce accountant or bookkeeper? The A2X Ecommerce Accountant Directory is a list of accounting and bookkeeping practices that specialize in working with ecommerce businesses. You can either search the directory by filtering based on your business requirements, or request to be “matched” with an accountant or bookkeeper who the A2X team believes will be a great fit for your business.
For more information about what to look for when hiring the right ecommerce accountant/bookkeeper for your business, we recommend the following resources:
- How to find an ecommerce accountant or bookkeeper
- How to find a Shopify accountant or bookkeeper
- How to find an Amazon accountant or bookkeeper
- How to find an eBay accountant or bookkeeper
Wrapping up
Establishing good accounting and bookkeeping practices is critical to run a stable, profitable business. The financial statements produced by recording and categorizing your transactions let you take care of your tax obligations, make predictions, and plan for future growth.
By setting these practices early on, your books will stay neat and accurate and be a solid foundation as the business grows and becomes more complicated.
Using accounting software and automations like A2X will help you keep organized records and reduce the amount of time you spend on your accounting, leaving you to get on with other parts of the business.
