Ecommerce Accounting: How to Manage Your Finances in 2023

What’s the least fun part of running your business? We’re willing to bet it’s accounting. Unless you’re some kind of math genius, doing the books can be complicated and tedious—and ecommerce accounting is more complex still.

But if you want to ensure the success of your business, you can’t avoid accounting. In this post, we’ll explain what’s involved in ecommerce accounting and show you some effective methods for managing your finances.

What is ecommerce accounting?

First, let’s clear up the difference between accounting and bookkeeping. Bookkeeping is part of accounting and involves maintaining a record of financial transactions. Accounting involves analyzing those financial records in order to understand your present situation and make decisions for the future.

Ecommerce accounting, then, is the practice of managing financial transactions in an ecommerce business. Online sellers need to keep track of all sales, purchases, inventory, and returns, as well as produce real-time reports and carry out financial forecasting.

To get started with ecommerce accounting, you’ll need a dedicated business bank account, a business tax ID number (in the US), and an online accounting solution.

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Why is ecommerce accounting important?

Ecommerce is a relatively new phenomenon and the online business environment is prone to rapid changes. This means it’s more important for ecommerce companies to keep on top of their financial records and make accurate forecasts.

You’re probably selling on multiple channels: Amazon, Shopify, Magento, your own website, and perhaps a physical store too. Selling online means potentially selling to a global audience and handling transactions with foreign currency. You’ll also need to track customer returns, which is a particular challenge in ecommerce.

As well as helping you to manage large amounts of financial data, ecommerce accounting ensures that you stay tax compliant by negotiating the specific regulations that apply to ecommerce.

The two types of ecommerce accounting

There are two main types of accounting for ecommerce: cash basis accounting and accrual accounting.

Cash basis accounting

This method measures the transfer of cash, as you only record income from a sold item when the buyer’s payment arrives in your account. You can see how much cash is available to spend at any given time, and you don’t have to pay income taxes on payments you haven’t yet received.

This simple system is favored by smaller ecommerce businesses. It’s not so useful for growing businesses with multiple suppliers and large inventories, as it doesn’t recognize future account receivables or accounts payables. Plus, in the US, only companies with an average annual growth receipt of $5 million or less are permitted to use cash basis accounting.

Accrual accounting

The accrual method records transactions as they occur—that is, when revenue is earned, or expenses are incurred—rather than when the money goes into or out of your account. It provides a more realistic representation of your monthly income and enables more accurate predictions.

However, it requires more specialized accounting knowledge because you have to consider the money you haven’t earned yet (account receivables) and remember to subtract costs you are yet to incur (account payables). This can give a false impression of profitability.

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What’s involved in ecommerce accounting?

Now we’ll go through some of the main aspects of effective ecommerce accounting.

Bookkeeping

As we mentioned, basic bookkeeping is a key function of accounting. This includes managing tasks like invoicing and payroll, as well as keeping a record of transactions.

Track transactions and expenses

It’s vital that you record all your business transactions, and categorize them as either income or expense. It’s also helpful to keep a list of your regular expenses, such as:

• Inventory purchases
• Employee salaries
• Website hosting
• Packaging and shipping
• Software subscriptions
• Payment processing fees
• Marketing
• Taxes

This will enable you to predict monthly incomings and outgoings, and use these figures to create a budget. You should also factor in and forecast for the possibility of unplanned or one-off expenses.

Track inventory cash flow

In an ecommerce business, you need to keep a close eye on your inventory cash flow. A specific inventory cash flow report will tell you how much you’ve paid to suppliers and how much of the stock has been sold.

If your business manufactures its own products, you need to include raw materials, maintenance, and equipment acquisition in your accounting. You can also track and record inventory losses, such as spoilage, damage, or theft.

Track returns and chargebacks

Customer returns and chargebacks are also important financial transactions. For returns, you should record the original transaction as an expense and add it to the accounts payable list—but as soon as the returned item is received, you should list the transaction in the Returns and Allowances section and deduct it from your revenue.

Chargebacks are when a customer files a dispute with their bank in the event of non-delivery of the goods or services they paid for. These should also be filed under Returns and Allowances.

Reporting and forecasting

Reporting—or preparing financial statements—is another important aspect of ecommerce accounting. It shows you the current status of your finances and gives you the data you need to make informed decisions. Here are three statements to be aware of:

Income statement

This is a financial statement that reports your business income over a certain period, showing total revenue minus all costs associated with running the business. It’s also called a profit and loss statement, or a statement of revenue and expense.

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Balance sheet

The balance sheet reports on your assets (such as cash, accounts receivable, and inventory), liabilities (accounts payable, wages, and income taxes), and the combined equity of your shareholders.

Cash flow statement

A cash flow statement summarizes the cash (and cash equivalents) that enter and leave your company. It shows the sources of cash, and the amount you have available to pay for your business activities and debts.

Reporting on your financial activities helps you see fluctuations in profit, analyze your expenses and liabilities, discover which products or services are most profitable, and spot opportunities to improve your margins. You can then think strategically about the future.

Tax management

Most business owners dislike accounting, but the least appealing part of the process has to be tax management. It’s time-consuming, and getting the math wrong can land you in hot water.

In the US, ecommerce businesses have to consider the “sales tax nexus”, which means that if your business has a presence in a particular state, you must comply with sales tax laws in that state. In ecommerce, this is typically the state where your HQ is based—but it could also include having a physical location or warehouse, an employee, or a shipping partner in a certain state, or exceeding a certain dollar amount in sales in that state.

In the UK, online marketplaces are liable for the VAT on goods of any value that are located in the UK at the point of sale and sold by an overseas business through an online marketplace. There are specific rules covering the sale of goods between Northern Ireland and the EU.

It can always seem a little daunting, but HMRC aims to simplify life with digital taxation, and there are Making Tax Digital resources for accountants that are also really useful.

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Top tips for ecommerce accounting

Be super-organized

If your financial records are all over the place, you won’t be able to keep a watchful eye on your incomings and outgoings, and you won’t know where to find the relevant documents when tax season rolls around.

Ecommerce sales volumes and revenue often fluctuate due to changes in demand, seasonality, and other market conditions. You need to be able to find and analyze the data as soon as possible, in order to make informed financial decisions.

Don’t leave it to the last minute

It can be tempting to leave your bookkeeping—or certain tasks like expense categorization—until the end of the month, or even the end of the financial year. Don’t do it! You’ll end up doing the whole thing in a rush, which is when errors will occur.

It’s good practice to take a couple of hours each month just to sit down and review all your financial records, organize them, and do a bank account reconciliation.

Hold on to your records

As well as being organized, you need to make sure you’re holding on to financial documents for the right length of time—three years is a good rule of thumb. You might need to look at them again.

You should be keeping revenue records from your ecommerce platform, receipts, bills, invoices, and any canceled and bounced checks. Hang on to debit/credit card statements, and definitely keep your previous tax returns in case of any dispute.

Use accounting software

Very small businesses may keep manual records, but as you grow, things become more complex. Simple accounting software helps you keep on top of it by automating tedious tasks and reducing human error.

Many accounting software platforms are geared specifically toward ecommerce companies, so they’re designed to streamline processes like handling returns, and will usually integrate directly with your ecommerce platform and bank account.

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Final thoughts

Ecommerce accounting is crucial to the success of your online business. It helps you keep track of transactions across multiple channels and meet future demand by making accurate forecasts. Plus, it gets you prepared for tax season.

If you put a robust accounting system in place—preferably using software created for ecommerce companies—you’ll find it easier to manage your finances in 2023 and beyond.