Ecommerce Accounting: A Beginner's Guide for 2024
The path to starting a business is full of milestones. There’s the day your product is market-ready, the day you open your online store to the world, and the day you make your first sale—a major step that calls for celebration. As an ecommerce entrepreneur, few things are more exciting than watching the money start to roll into your bank account. But before you break out the champagne and call it a day, it’s important to have a plan for tracking and managing your income and expenses. In other words, you need an ecommerce accounting system.
What is ecommerce accounting?
Ecommerce accounting is the practice of recording, organizing, and managing all of the financial data and transactions relevant to the operation of an ecommerce company. Think of it as a subset of small business accounting that is specifically set up to handle the unique needs of an ecommerce provider.
What does ecommerce accounting entail?
Like all business accounting, ecommerce accounting includes:
- Basic bookkeeping functions, like managing invoicing, payroll, and balance sheets
- More sophisticated planning and reporting functions, like preparing financial statements and creating a strategic tax plan
Tax management
Tax management can be complicated, and mistakes in filing or interpreting the tax code can have serious consequences for business owners. That’s why tax management (including both tax planning and preparation) is a core service of many accounting firms. Ecommerce tax management includes tracking and remitting all applicable state and local taxes, calculating and filing quarterly estimated taxes, year-end filing, and distributing 1099s to contract workers.
Bookkeeping
Accurate bookkeeping is a baseline requirement for all business planning and operations. This includes tracking and categorizing income and expenses, inventory management, and reviewing balance sheets. It also includes tracking customer returns, a convenience that can both enhance customer loyalty and cause a bookkeeping headache. Improperly tracked, one return can throw off your sales, inventory, expenses, forecasting, and sales tax records all at once.
Planning for growth
Ecommerce accounting can help you analyze:
- What products or services are most profitable for your company
- Your change in profit over time
- Your largest expenses and liabilities
- Opportunities to increase your profit margins
Accounting methods for ecommerce sellers
There are many different accounting providers available—from accounting software platforms to traditional accounting firms. Before getting started with a vendor, however, you’ll need to choose an accounting method.
Cash basis accounting
Cash accounting is a method of accounting that measures the transfer of cash.
Accrual accounting
Accrual accounting, unlike cash accounting, measures a transaction when funds are earned or expenses are incurred, not when payment changes hands.
Best ecommerce accounting software
Let’s look at the top small business accounting software you can use in your ecommerce business.
QuickBooks Online
QuickBooks Online is a comprehensive cloud accounting software that offers automation across your ecommerce store. It integrates with popular online sales channels like Shopify.
Xero
Xero provides cloud-based accounting software for small and medium-sized businesses. It offers a host of money management features including unlimited users, double-entry bookkeeping, and budgeting support. You can also customize your dashboard to review all your ecommerce metrics at once.
Zoho Books
Zoho Books is a comprehensive platform for managing your bookkeeping tasks and organizing your transactions. It provides a single, secure location to handle your company’s bills and invoices, reconcile bank statements, and control spending.
How to choose the right ecommerce accounting software
Choosing the best ecommerce accounting solution for your store is a big decision. As you compare your different options, keep the following considerations in mind:
- Integrations
- Scalability
- Features
- Easy to use
- Customer support
- Security
- Good reviews
Ecommerce accounting best practices
Whether you’re running your first or fifth online store, here are some accounting best practices to follow:
- Prioritize good bookkeeping
- Automate where possible
- Use an ecommerce accounting software
- Regularly reconcile your accounts
- Keep track of inventory
- Monitor cash flow
- Understand sales tax
Ecommerce accounting FAQ
How do you do accounting for an ecommerce business?
Ecommerce accounting involves accounting for online transactions, which are often paid for with credit cards or other digital payment systems. Unlike traditional retail stores, an ecommerce company must track and reconcile sales, returns, refunds, and payments from multiple sources, such as PayPal and Stripe. Additionally, ecommerce companies must account for and track inventory, shipping, taxes, and other transactional data.
What are the accounting issues for ecommerce?
Ecommerce accounting presents several issues, including managing sales tax liability across different jurisdictions due to the “economic nexus” rules. It also involves the complex task of inventory management that requires tracking the status and location of goods across possibly multiple warehouses or fulfillment centers. Other issues include tracking various seller fees charged by ecommerce platforms, handling product returns and ensuring accurate accounting for them, and limitations in accessing to real-time data analytics, which can hinder proactive decision-making.
What are the benefits of ecommerce accounting?
Bookkeeping and accounting are important for ecommerce businesses for many reasons. First, accurate bookkeeping and accounting are essential for tracking cash flow and understanding the financial health of the business. This information can help guide business decisions and ensure the business stays compliant with all applicable regulations. Furthermore, good bookkeeping and accounting practices can identify areas where the business can reduce costs and increase sales. Finally, by tracking financial information, businesses can better plan for taxes, track customer payments, and manage inventory.
Do I need an accountant for my ecommerce business?
It depends on the size of your ecommerce business. If you are just starting out, you may not need an accountant. However, if your business is growing and you need help with taxes and other financial issues, an accountant may be beneficial.
