Ecommerce Accounting: A Detailed Guide for Merchants
Thanks to technology, Ecommerce businesses are able to spring up overnight. No longer do businesses need to have a large storefront. Some don’t even need warehouses to hold their supplies. However, the one thing all businesses need is a strong understanding of accounting basics. But are accounting efforts different when it comes to Ecommerce companies? Well, the needs of an Ecommerce company are different from a standard company. As such, the accounting process will be different, as well.
If you’re running an Ecommerce company, you’ll need to have an understanding of the Ecommerce accounting process. Keep reading; this is our accounting guide for Ecommerce!
Here’s What We’ll Cover:
What’s the Difference Between Accounting and Bookkeeping?
Maybe you’re familiar with bookkeeping already. Bookkeeping tasks involve recording all of your business transactions. That’s pretty much the extent of it. Accurate bookkeeping is the basis of accounting. Bookkeeping has to be done on a regular basis to make sure that accounting is up to date and accurate. As such, there’s a big difference between bookkeeping and accounting.
Accounting is all of the financial management that’s dependent upon bookkeeping. It includes generating reports, analyzing finances, and planning for growth. All business owners should have a loose grip on accounting. Ecommerce business owners have to be a bit more involved. They’re normally fully responsible for their accounting needs. That, or they enroll accounting services to handle it for them.
When you’re just starting out, there are a number of things you have to do before accounting can start. These may not apply to your business, depending on how far you are in the process. Skip ahead to the parts that you need, if you’ve already taken care of some of these tasks.
Choose a Business Entity
When you start a business, you have to decide on the legal form of your business. Some businesses are easier to set up than others. When running an Ecommerce business, you’re going to be a sole proprietorship or a limited liability company (LLC). If you’re running a larger company, you may need to become a partnership or a corporation. These take more work to set up, but it may be required.
Choose Your Accounting Method
There are two methods of accounting that you can choose from. This is going to determine the way that you do your accounting. Regardless of which method you choose, it’s important to stick with it. You cannot flip between the two on a whim.
The first accounting method available is the cash method. This accounting method is all about recording transactions as they happen. For example, when you order supplies, you can only record the transaction after cash has left your business. This isn’t the most ideal method of accounting, as not many transactions happen in this manner.
The alternative to the cash method is the accrual method of accounting. This method is used by more businesses because of its realistic approach. Each time a transaction occurs, it is recorded. This method does not require cash flow to record a transaction. In this example, an invoice is sent to your business. The expense is immediately recorded, even if you don’t pay it immediately.
Accounting for Your Ecommerce Business
After the two tasks above have been taken care of, you can start accounting for your Ecommerce business. There are a number of regular accounting tasks that you’ll need to do for your accounting to be proper.
Entering and Categorizing Transactions
Whenever a transaction takes place in your business, it must be recorded. Recordkeeping is the backbone of accounting. It is what allows accounting to be a useful practice for your business. The information is recorded in a ledger. This can be done manually, or through accounting software. There are many accounting software options, so you’ll have to do some homework to determine the best one for your business.
Transactions should be categorized when they are recorded. In their most basic form, transactions are recorded as expenses or income. Expenses are any money that flows out of your business. Income, as the name implies, is any money that your business makes. There are many forms of both categories. Business expenses are specifically money spent to keep a business running. This means that rent, utilities, and supplies are all business expenses. Income, especially for an Ecommerce business, is just sales. Sales are what bring money in.
Differentiate Between Returns and Chargebacks
From time to time, Ecommerce business owners will have to deal with returns and chargebacks. These transactions arise when a transaction doesn’t go as planned. Both need to be accounted for in separate manners, though. If you don’t, then it’s likely that your books will be out of balance.
Returns are simple enough. They occur when a customer wants a refund for a product that they’ve purchased from you. When that happens, the transaction being recorded isn’t an expense. Rather, it’s recorded as returns and allowances. Then, the amount that you’re refunding is subtracted from revenue. The money is sent back to the customer, as if the sale never happened. That’s why it is subtracted from revenue rather than added as an expense.
Chargebacks are a little more complicated. They occur when a credit card company asks for funds to be returned to a credit card. You may be asking why this happened. That’s understandable. Chargebacks only occur when a customer tells their credit card issuer that a charge is fraudulent. This may happen if a customer forgets they made a purchase, or if their credit cards are stolen. Money withdrawn for this should be considered returns and allowances, as well. The frustrating part about chargebacks are the fees that come with them. As such, the books begin to trend towards negative cash flow when too many chargebacks occur.
Reconciliation with Bank Accounts
When accounting, a level of reconciliation always needs to take place. This is the act of making sure that bank statements and ledgers match. This should be done on a monthly basis, at a minimum. If bank statements and ledgers don’t match, there may be an error that needs to be taken care of. Reconciling your ledger with your bank accounts prevents overspending from taking place.
Creation of Financial Statements
The practice of accounting is the way that you keep track of your business’s financial position. It only makes sense that the generation of financial statements occurs from accounting. Generally speaking, a company can generate any number of different financial statements. However, there are three that are generated by all businesses. These are the balance sheet, the income statement, and the cash flow statement. Each one of them serves a specific purpose when it comes to financial analysis.
The balance sheet’s purpose is making sure that your business’s assets, liabilities, and equity balance out. It also shows you exactly what your business is worth if you liquidate it at that moment. Having an idea of your business’s worth can give you an idea of its success.
Income statements, as the name implies, display how much money your business is making in an accounting period. Income statements are often used by investors who are considering investing in a business.
Cash flow statements show how much money a business is earning and spending. Cash flow statements are considered to be the least useful financial statement available. However, when you analyze cash flow statements over time, you start to understand your finances better. You know how you’re earning your money, as well as how you are consuming it. Cash flow statements are critical to an Ecommerce business.
All three statements can be viewed as the whole picture for a business. Alone, they only give you a glimpse at financial health. However, when used together they indicate how well or how poorly your business is doing.
Estimate and Pay Taxes
Part of being a business owner means paying your taxes. Accounting provides a great way to keep track of your tax liabilities. All businesses incur some form of sales taxes, and sales tax compliance is required. When you start accounting for your business, most software options will provide a way to track taxes. This means you’ll never have to worry about being off in your estimates, and you’ll always pay the right amount.
Maintain a Budget
An accounting responsibility that is often overlooked is budget maintenance. Budgets are crucial for any Ecommerce business. Often, the Ecommerce business cycle is seasonal. This means that you’ll go from periods of high sales to droughts depending on the time of the year. Accounting lets you keep track of your budget during these times. It helps you identify when you are making money, meaning you can spend money. It also shows you when you need to pinch pennies.
Recordkeeping is a subject we have touched on lightly. However, it’s one of the most important tasks that your business requires. Accounting is a record of transactions. That record needs to have documentation to back it up. There are records that all Ecommerce businesses should keep on hand. These are going to strengthen your accounting, and will ultimately lead you to success.
- Receipts: Receipts for every transaction need to be kept. This is true for both purchases as well as sales.
- Bank and Credit Card Statements: Keep these for reconciliation. Your books need to match these financial documents.
- Bills: All bills you pay associated with your business need to be kept. These are business expenses, and they may be tax deductible.
- Tax Documents: Any and all tax documents must be kept. This is important in case of audits.
These are nearly all of the tasks that you need to understand to get started with Ecommerce accounting. That’s not to say that there won’t be others, though. Accounting involves all financial aspects of a business. As such, if your business expands, then more tasks may be added to the list.
Why is Accounting Important for Ecommerce Businesses?
Because Ecommerce businesses tend to be small or simple, you may wonder why accounting is necessary. Accounting is an important part of any business. Here are the reasons why it should be applied to Ecommerce businesses, too.
Accounting Leads to Stability
The act of accounting leads to a stable business. All businesses are subject to risks. This is especially true of Ecommerce businesses. Market prices fluctuate often, and more Ecommerce businesses populate every day. When you use accounting to understand your business model, you can find some stability. The first step to stability is understanding your finances.
Business Forecasting Comes From Accounting
If you can’t identify trends in your finances, you’ll never know which way your business is heading. Forecasting is important for any business. Knowing when to expect a lull in sales can affect the way you handle expenses. Every little detail counts, especially then a business is just getting started. Know exactly what to expect by using accounting as a prediction tool.
Value Comes From Accounting
Should you ever choose to sell your business, buyers will want to know how it has performed. Accounting is the only way to provide them with an answer. Accounting leads to the generation of financial statements. These can be used to track a business’s success, as well as its downfalls. If you want to sell your Ecommerce platform, you’ll need accounting records to do so. Accounting adds to company value overall.
Accounting Tracks More Than Just Finances
It may be hard to believe, but accounting can help you track more than just money. Of course, it is a tool that should be used for expense tracking, and tracking income. But once you start to get very involved with your accounting, you can use it to keep track of much more. For example, you can keep track of cash flow mentally by reviewing transactions while accounting. Additionally, when you start to understand all of the transactions in your books, you can do inventory tracking. Both of these are invaluable to a business. Being able to visualize these things is a skill most business owners need.
A Successful Ecommerce Business Needs Accounting
If you plan on being successful in Ecommerce, you can set yourself apart with accounting. Having an intimate knowledge of your finances is the first step to success. Using accounting alone you can plan budgets, increase your business’s value, and grow steadily. It also lets you make informed business decisions. This is something that can set your Ecommerce business apart from others.
In the past, all aspects of accounting were done manually. While accounting is still a field that requires financial knowledge, most small business owners can do it themselves. Thanks to accounting software options on the market, accounting has become easier. While you still may need expert assistance from time to time, you can still get acquainted with your own accounting. This is an excellent option compared to what had to be done even a decade ago. If you want to be involved in your business’s finances, pick up accounting software today.
Accounting is important for all businesses. However, when it comes to Ecommerce businesses, it tends to be overlooked. If you want to set your business apart from others, start doing accounting for it today. It’ll strengthen your understanding of your finances, and it will increase the value of your business tremendously. If you enjoyed this article and you’re looking for more information, be sure to visit our resource hub. We have plenty of information to kickstart your business there. Check it out today!