Running an online store has several obstacles and responsibilities, ranging from calculating taxes on online sales to inventory management to working out delivery procedures. Your accounting software must be able to keep up.
Whether you handle your bookkeeping using accounting software, engage a professional bookkeeper, or use a bookkeeping service, your solution should be capable of dealing with the complexities of ecommerce bookkeeping, such as:
- Merchant Fees
- Third-Party Payment Processors
- Inventory Management
- Alternative Sales
- Multiple Currencies and Foreign Sales
- Sales Tax
As a result, your records and financial statements (such as your Balance Sheet and Statement of Cash Flows) will be accurate and thorough, allowing you to make informed financial choices for your business.
In this blog, we will go over seven crucial aspects of e-commerce accounting. In addition, we discuss three crucial qualities to look for in an e-commerce accounting system.
Important Considerations for E-Commerce Bookkeeping:
E-commerce accounting has issues that other company models, such as providing services or software, do not face. In this part, we’ll look at the most common accounting issues that e-commerce firm owners confront.
Understanding how these e-commerce activities influence your accounting makes it easy to choose the best solution for your company.
Dealing with Merchant Fees
Merchant fees are unavoidable if you run your online business on an e-commerce platform such as Shopify or BigCommerce. Building your business on top of such platforms has several advantages, ranging from faster starting to simple search optimization. To offer such benefits, e-commerce platforms and payment processors must take a tiny percentage of every online transaction. It’s how they earn a living.
This may make accounting more difficult since the deposits in your bank account are net sales rather than gross sales. This is due to the platform taking a cut before transferring the funds into your account.
The proper approach to recording this in your records is to note the gross sale, then record the difference between that figure and your bank’s final deposit as “merchant fees.”
Refunding and Using Third-Party Tools
Aside from e-commerce platforms, third-party solutions such as payment processors (such as Stripe and PayPal) might complicate your record-keeping. This is particularly important for monitoring returns and exchanges.
For example, if you make a sale on Shopify’s platform, the payment is handled by Stripe (remembering that the previous section’s merchant charge will apply). However, what happens if your consumer returns the item a week later? Tracking difficulties may arise when various third-party solutions are used. Is the return documented on Shopify or Stripe? Was it mentioned many times in your books?
Furthermore, many payment processors (including Stripe) do not reimburse your merchant charge just because a buyer returns the goods. As a result, that charge constitutes a loss for your company and must be recorded as such in your records.
Tracking Inventory Across Sales Platforms
Many e-commerce platforms integrate inventory monitoring into their software. That makes it simple to track and manage inventories for online sales via your business.
But if you sell in various locations online example, on your own Shopify website or Amazon your platform won’t monitor any changes to inventory resulting from outside transactions. So your Amazon sales won’t be represented in the inventory that Shopify tracks.
That makes it especially crucial to have one single location to manage inventory, whether or not it automatically updates your books. Then, if you prefer to engage with a bookkeeper, they may utilize that information to generate an accurate record of sales, refunds, and restocks in your books.
Accounting for Alternative Sales
Most of the money you get will be via consumer credit cards vs other means of payment. However, you may still take other payment options (particularly if you also sell in person).
Some e-commerce systems are able to monitor sales that originate via cash, cheques, gift cards, and credit. If you want to provide various payment forms, you’ll want to confirm your solution can manage such sales.
While extra payment forms might make life simpler for your consumers, bear in mind that they’re less clear from an accounting viewpoint. Assume you get payment in cash or by cheque. In such a situation, the sale won’t be completely acknowledged in your books until you transfer that money into your bank account.
If you provide gift cards, a normal sale implies someone pays you, and you give them a gift card at that time. Because you haven’t yet traded items, the cash influx is recorded as unearned income in your records. When the gift card is redeemed, you may report the unearned revenue on your income statement.
E-commerce allows you to sell things internationally, and many e-commerce systems make it simple to sell in many currencies. However, when you sell and export to international locations, your books may require extra information to reconcile those transactions.
For example, you’ll need to know the foreign currency equivalents of the gross sale and merchant fees. Your e-commerce platform’s specific currency conversion rate must be known in order to reconcile the sale with the final payment to your bank account, which will be in your local currency.
Sometimes, the conversion might lead to a difference between the international sale and the final deposit in your account. When that occurs, the difference needs to be reported in your records as a “gain or loss on foreign exchange.”
Good eCommerce accounting procedures take into consideration the difference between what you collect for shipping and what you spend for shipping.
Collecting and Recording Shipping Fees
Shipping prices are another bag of worms for a wide number of reasons. Should you provide free shipping? If not, what should you charge your customers? A set fee?
Some e-commerce platforms make shipping operations simpler by directly interfacing with shipping systems. In that instance, your platform may collect shipping payments from customers and purchase postage from your logistics supplier. However, keep in mind that, although this is one less step for you to worry about, your e-commerce company will almost certainly receive a part of the sale.
Another important thing to note is that the shipping prices you charge clients often do not exactly match what you spend to ship such things. Assuming you provide a fixed charge of $5 shipping – you may spend $2 to ship one item and $10 to deliver another. Those disparities must be accounted for in your records.
There are two primary approaches.
- Maintain a single COGS Shipping Expense Account
The first method of accounting for variances in shipping revenue and expenditure is to maintain everything in a single COGS Shipping Expense account. That is, both flat-rate shipping revenue and payments to shipping suppliers (such as UPS) are sent to the same account. You won’t be monitoring the difference specifically, but it won’t matter since they’re all COGS-related.
- Maintain two separate accounts: shipping income and COGS shipping expenses.
You may also create two accounts: a Shipping Income account and a COGS Shipping Expense account. The former contains flat fees received from customers, whereas the latter includes payments to shipping suppliers. As appropriate, you would compare the discrepancies between the two accounts.
Collecting and paying sales tax is one of the most important components of running an e-commerce company. Some e-commerce platforms will handle both sides of the transaction, collecting and remitting sales tax to your state’s sales tax authority.
However, most platforms will just collect sales tax from consumers. Instead, they transfer it into your bank account, and the remainder of the transaction is your responsibility to get to the appropriate tax department.
From an accounting standpoint, it is critical to understand that tax money is not income. The sales tax becomes the responsibility of the government as soon as the transaction is completed. As a result, the difference between gross sales, sales tax, merchant fees, and the final deposit on your bank account must be reflected in your books.
For example, if a consumer purchases $98 and pays $7.84 in sales tax (8% of the transaction), your e-commerce platform would earn $105.84.
Our Bookkeeping Experts are here to help.
Note: This sales tax % changes depending on where you reside.
The platform will transfer the whole cash received from the consumer ($105.84) into your account, less any merchant costs (often about 3%, or $2.94 in our case). As a result, your books must include the following:
- Gross revenue of $98
- Merchant processing costs of $2.94
- Your local tax authority will charge you $7.84 in sales tax.
What to Look for in a Bookkeeping Solution for E-Commerce?
Because of the complexities of e-commerce accounting, many company owners may hire a bookkeeping service or a professional to guarantee their books are correct and comprehensive. That is definitely what we advise. But, even with software, it’s possible to spend more time than you have trying to finish your books.
If you decide to use a service, there are a few crucial features to look for in an e-commerce accounting solution:
- Inventory Tracking Capability: Not all accounting services maintain track of inventories. This is because inventory necessitates the use of accrual-basis accounting. When you pick an accounting system for your shop, make sure it supports accrual-basis bookkeeping and inventory tracking functionality.
- Integration with Your E-Commerce Platform: The entire objective of outsourcing accounting is to get it off your plate. That implies your solution has to integrate flawlessly with your e-commerce platform. That seems like accurate synchronization, done without your input.
- Support for Multiple Currencies: Unlike brick-and-mortar shopping, your e-commerce business will likely reach consumers using a range of currencies. Your accounting system has to manage numerous currencies and adjust for any disparities they produce.
Complete and Accurate E-Commerce Bookkeeping
Operating an e-commerce shop comes with a range of accounting challenges. Whether your shop is a tiny company or a huge one, there will be problems. You can select how to manage your e-commerce accounting and locate the bookkeeping software or service that’s ideal for your company if you grasp those essential factors and how they effect your books and financial statements.