How to Do Accounting for Your E-Commerce Store

Make informed and profitable decisions with automatically adjusted inventory values. As we’ve said, there are things you should consider when making your choice, but you don’t have to make this decision alone. There are plenty of specialist e-commerce accountants you can ask for as little or as much advice as you like. This also means that processes are constantly being streamlined, meaning you’ll always be saving time. Understandably, being an e-commerce owner often means a busy schedule.

The first-in, first-out (FIFO) rule is a simple method for ensuring inventory ordered first is sold before newer inventory. Many warehouses follow this rule, but you should double-check with your suppliers to ensure that all older inventory is moving out the door first. The trick to good inventory ordering is to not order too much or too little. Order too many items, and you run the risk of having unsold items languishing in a warehouse, costing you precious funds that could be better spent elsewhere.

Many accounting software solutions integrate with ecommerce platforms. These systems can help reconcile and manage your sales, expenses, and inventory. In this system, you’re always tracking your inventory, usually facilitated by the use of automated accounting software. In addition to making estimated tax payments, e-commerce business owners must manage their sales tax compliance duties. First, you need to figure out the states in which you have economic nexus in addition to the state where you’re business resides. Properly tracking your inventory can be one of the most significant accounting challenges for e-commerce businesses, especially if you’re selling your products through multiple channels.

Cash flow refers to the amount of money “flowing” in and out of a business on a monthly, quarterly, or annual basis. When you know exactly how much money is passing through your business, it enables you to maintain a positive profit margin. If you suffer a loss, your cash flow statement pinpoints where overspending occurred so you can strategize to reverse the trend. Make sure you choose an accounting solution that integrates smoothly with any other tools you plan to use, especially your inventory management and invoicing software. Last but not least, make sure to get your e-commerce accounting software in place before you start doing business. Remember, you want your accounting system to be running smoothly from the beginning to avoid having to go back later and fix things.

Tax management

Two primary accounting methods include cash basis and accrual basis. Before you get started entering numbers on the chart of accounts, you have to decide how you’re going to track income and expenses. No matter how you organize your chart of accounts, you want to make sure it’s a real-time updated chart.

Even if accounting isn’t your strong point, there are a few simple guidelines to follow for managing a smooth ecommerce operation. 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. Most retailers with fewer than five locations will fall into this category. However, if a retailer operates one or a handful of large stores, they may be in one of the other two categories.

Track Your Business Transactions

Once again, it’s usually worth paying for tax services from an expert e-commerce accountant. They can confirm that you’re meeting all your obligations and help you develop a plan to minimize your annual tax liabilities. If you find out that you meet the threshold in any given state, you must collect sales taxes on sales to customers there, then remit the amounts and file sales tax returns quarterly. Regularly analyzing your financial statements for improvement opportunities can be surprisingly lucrative. However, it’s another accounting function you may be better off outsourcing to a CPA that offers advisory services. Note that you must use the accrual basis of accounting if your e-commerce business grows large enough that your average gross receipts in the last three tax years exceed $26 million.

• Even if accounting isn’t your strong point, there are a few simple guidelines to follow for managing a smooth ecommerce operation.
• Keep reading to learn about the different processing methods you can choose from.
• E-commerce business owners have a degree of flexibility not afforded those with physical storefronts.
• As you establish your online enterprise, familiarize yourself with the most common accounting issues for e-commerce business owners.
• As you continue to order items to beef up your inventory, older inventory may get relegated to a back of the warehouse shelf.

It’s not when the money is received in hand or sent out for payment. Sage manages all the documentation and processes required in business payments such as price quotes, estimates, statements and invoices. They offer integration with major banks, allowing users to import all payment transactions automatically.

Ecommerce Accounting: Definition, Best Practices & Tools

An invoice will serve as proof of the customer’s requests, and as a receipt that lets the customer see the pricing breakdown for all products. It also serves as a useful record of how your inventory materials are being used. Depending upon the size and complexity of your e-commerce business, you might choose to do periodic inventory annually, quarterly, or monthly.

You can even set up alerts to let you know when a certain type of inventory is getting low, so you will know when to restock. Unlike a sales order, an invoice is an order that is intended for the purpose of requesting payment. It lists the activities performed or the cost of individual materials or components, and gives a total cost for the finished product. Invoices are a little less common in e-commerce business models, but you may use invoices if you produce customized products.

Business Bank Account

Whether it’s Shopify, BigCommerce, WooCommerce, or Adobe Commerce, you must keep track of income, outgoings, and any relevant taxes. Once you update your inventory list through a manual count of products, you’re in a good position to update your orders. Keeping inventory in stock proves important because you can lose customers – sometimes forever – if you don’t fulfill their orders. Use your cloud-based inventory software to replenish the stock needed as inventory becomes low, ensuring you don’t run out of your best-selling products. You may prefer to rely on the inventory tracking tools in QuickBooks and use Connex to facilitate communication between your e-commerce site and QuickBooks.

Inventory management typically ends up feeling like you’re walking a tightrope between having too much stock on hand and not having enough. When you have too much stock, it decreases in value as it sits there and takes the place of products that might sell more readily. Plan to have a 30-day supply of inventory, especially for your key products.

Under accrual accounting, when you complete a high-end dining table worth $3,000 for a customer, you recognize the revenue of $3,000 immediately, even if the payment hasn’t been received yet. Scaling a business is an exciting journey, and ecommerce accounting plays a pivotal role beyond being a mere administrative task. It serves as a powerful tool for gathering crucial information to propel your business toward its goals. At its core, accounting involves tracking and categorizing transactions as income or expense. While this may sound simple, accounting terminology can be overwhelming, especially if you’re new to business finances. There is no need to download QuickBooks Online because it is connected to the cloud, which means you can access online accounting from any device with an internet connection.

Par levels fluctuate depending on how much stock you order and how much of it sells at any given time. Ideally, it’s a good idea to set up a system that automatically tracks this information. Here’s a list of the top small business accounting software you can choose for your ecommerce business. It also tracks customer returns, which may at times pose challenges if not recorded accurately.

Apply for financing, track your business cashflow, and more with a single lendio account. Tune in to the Make it Big Podcast — our thought leadership audio series for retailers, entrepreneurs and ecommerce professionals. You’ll get expert insights, strategies and tactics to help grow your business. Whichever route you decide to take, make sure to review your financial documents continually. This task helps to ensure the information is correct and you truly understand the financial wellbeing of your ecommerce company. With that said, it’s essential to know when you can’t do it on your own.

Tracking Cash Flow: Purchases And Inventory

However, it won’t last very long if you ignore your tax obligations. Getting on the wrong side of the IRS is something you want to avoid at all costs. Keep in mind that the complexity of your inventory will change dramatically over the life of your e-commerce business. Because solutions can vary significantly in price, it’s often worth getting Online store accounting less sophisticated software and upgrading only when necessary. In addition, your inventory software should be able to integrate seamlessly with your accounting system and will save you from needing to update financial statements due to inventory changes. Fortunately, the right inventory tracking software can make the process much easier.

Keeping track of inventory cash flow means knowing the overall cost and value of your inventory, which tells you how much net profit you make from the sale of your inventory. In addition to purchase and maintenance costs, you must track your actual sales as well as any inventory losses. Losses can result from theft, spoilage, damage, or other factors that make a piece of inventory unsellable. While of course you want to prevent inventory loss as much as possible, you should nevertheless be prepared to deal with it if and when it does occur. If you produce all the clothing you sell in-house, you might add the cost of raw materials and equipment acquisition/maintenance.

• As a retailer, your inventory is the bedrock of your business and almost everything you do is dependent upon it.
• Last but not least, make sure to get your e-commerce accounting software in place before you start doing business.
• Secondly, it lets the government understand how much money your business is making, allowing it to tax you correctly.
• The trick to good inventory ordering is to not order too much or too little.
• Great, because in this article we’re going to look at why you should use QuickBooks online if you have an online retail business.
• It reveals every cost, such as rent, maintenance, and inventory, as well as every income stream, including every sale your company made during a given period of time.

If you use a cloud-based solution that stops working for even a day, it could be quite costly for your business. To calculate your net income for June using the accrual basis, you’d subtract the $1,500 in expenses incurred from your $5,000 in sales. Contrary to what you might expect, the Internal Revenue Service (IRS) usually lets you account for your e-commerce business in one of two ways. Your financial records and eventual tax liabilities will vary significantly depending on your choice. Managing an inventory is complicated enough with a traditional store-front, but it’s usually even more challenging in e-commerce. If you have employees, you need to keep track of payroll processing and payroll taxes.

After you review this guide of accounting and bookkeeping procedures and best practices, you can decide if you’re able to handle the duties on your own or need some outside help. Before you go online and start searching for ecommerce companies to help you with every step of the accounting and bookkeeping list, try to understand what each concept entails. To make sure you’re paying all your required taxes to the right governmental entities, it’s best to consult with a tax professional or use tax filing software. Either of these methods will help you with this headache of a task and make sure you do it the right way. The balance sheet is what keeps track of your business’ wealth over the lifetime of the company. This accounting document is the bigger picture when compared with the income statement.