Online businesses are different from traditional stores & their accounting must be geared to handle these differences. Find out how to do accounting for your eCommerce business.
For all first-time e-commerce entrepreneurs, the successful launch of their business seems like the final step. However, as any veteran business owner would tell you, that is just the start! Running and growing a business is a daily churn of activities, and one of the most critical of these is accounting.
Learning and mastering the ropes of accounting is vital for the success of any business, and e-commerce is no different. While the basics of accounting remain the same, online enterprises have certain requirements that need special attention to ensure accurate financial planning and aid business growth.
Here we deep dive into accounting principles for eCommerce companies:
(First, some basics. What are bookkeeping and accounting? Are they the same?
The short and simple answer is NO. However, the confusion is understandable as the two terms are often used interchangeably. Bookkeeping is limited to tracking and recording daily financial transactions, while accounting is the next stage of financial working which builds on bookkeeping records to analyse a business’s financial state.
Bookkeepers record transactions while accountants provide insights from this information. Accountants also help with filing tax returns and other financial reporting.)
Recording Transactions for E-commerce Businesses
In general, there are two ways to record your transactions:
a. Cash-based accounting system:
Under this system, you enter the amount in the books when the cash enters or exits your bank account. For example, if a customer has ordered an item, you will only enter the amount when the money reaches you.
b. Accrual based accounting system:
This system takes the exact opposite approach to recording transactions. Here you don’t wait till the money actually comes in, but you record the amount when the transaction takes place. For example, an e-Commerce concern would record transactions at the point of sale even if the money reaches their bank at the end of the month. Similarly, for expenses, the amount is accounted only when it is due, even if it is an annual figure, such as a yearly subscription for 12 months.
An accrual-based system might seem complicated, but for growing businesses, it is an excellent way to consider financials holistically and can help in making more meaningful long-term decisions.
Critical Points To Keep In Mind While Setting Up Accounting For Your E-commerce Business
One of the main differences between e-commerce stores and their brick and mortar peers is that they are open 24/7. People can buy at any time, from anywhere on the globe; your accounting backend needs to be geared for this always-open ecosystem.
- Record transactions at the backend
You should be using your point of sale channel to record your transactions instead of bank debits and credits, as bank transactions will not accurately reflect your profit or revenue. Many transactions such as sales, returns, sales tax, chargebacks, and shipping impact your overall profit, and it is easier to make sense of these details on an item to item basis via the backend of your selling platforms.
- Transactional timings
Follow the time of sale to reflect the actual date of sales even if the eCommerce platform deposits the money later into your bank account.
- Manage and track your inventory
When you are selling 24×7, running out of stock can seriously dent your business. It is important to have complete control over your inventory, and for this, you can use either of the two popular inventory tracking methods mentioned below.
Periodic inventory tracking
for smaller concerns with limited inventory, this method of periodically counting and checking inventory manually can be a simple way to record each item’s cost or sale value.
Perpetual inventory tracking
This is an automated software backed method that tracks and refreshes your inventory count, purchase account and overall cash amount every time a product is scanned for purchase or reaches your inventory. It’s an excellent approach for bigger businesses or companies with a vast range of products.
Tracking COGS (Cost of Goods Sold) Accurately
We recommend breaking down your expenses (direct and indirect) into a per-unit cost for eCommerce businesses. This will allow you to accurately and quickly understand how much you are making per item, which works well with the eCommerce model where you sell the same product to hundreds of individuals.
Challenges of Accounting for an eCommerce business
The eCommerce business structure has some unique challenges, mostly due to the nature of the online sales lifecycle and the customer or platform engagement policies. Here are a few you will encounter while accounting for your online sales business.
1. Sales Tax Liability
First and foremost, you need to understand whether you are liable for VAT registration. If your annual turnover reaches £85,000, you have to register for Value-Added Tax (VAT). Once registered, you have to add tax on your goods (as per the VAT tax rate your business falls under. This is usually 20%). You can check your VAT tax rate on the HM Revenue & Customs (HMRC) page.
With VAT registration comes the mandatory requirement of filing VAT returns and providing customers with VAT invoices. Thankfully, most marketplace platforms have automated VAT reports which has made keeping track of business tax liabilities much easier.
2. Inventory management
Making sure that your online store shows product availability 24×7 requires continuous inventory tracking and management. This can be a bit more complex for e-commerce stores as you have to collate information such as stock in production, in transit to you, in a shopper’s cart or pending returns.
As your business expands, you will have to manage this on a global scale across various currencies, custom regulations, languages, etc. It is advisable to integrate an inventory management system that can serve you in the long run.
3. Build-in scalable accounting
Online businesses can expand quite quickly, and many also have big seasonal spikes in sales. To manage these changes, you need to establish a flexible accounting system that can adjust to the demands of your business volume.
Need help setting up the right accounting system for your e-commerce store?
Amazon statements have over 150 types of charges. Facebook sales run on Shopify. Stripe sends receipts in their special format. And VAT is everywhere!
As a business owner, you don’t have to get bogged down by all these details. After all, with running and growing your business, you have plenty on your plate already. It is best to outsource your financial systems to experts – like us!
At Osome, our team can help you set up, track and manage your financial systems. We can also help you file your VAT returns! Our services come in a variety of plans that align with various stages of business growth. Choose the plan that works for you and scale as you grow. Chat with us now!
Storfund accelerates your marketplace payouts across multiple geographies and allows you to manage your finances in one place. Storfund helps e-commerce sellers drive sales and increase profitability by shortening their cash cycle, thus allowing them to purchase additional inventory and never run the risk of being out of stock. Our clients receive their sales the same day, irrespective of the marketplaces’ actions, be it rolling reserves or 14- or 30-day payment cycles. Storfund is available in 17 Amazon marketplaces and in the French marketplace Cdiscount. We work with companies registered in the European Economic Area (EEA), the United Kingdom, the United States, Canada, Australia and New Zealand.