At first glance, accounting may not seem like the most exciting topic, but you need to know about it to scale your ecommerce business and make it a success.
E-commerce accounting has significant differences from other forms of accounting. For example, eCommerce accounting software needs to be fast, flexible, and scalable to keep up with the pace of the eCommerce economy. Run-of-the-mill business software just won’t cut it.
Similarly, eCommerce accounting can get very complicated quickly if you’re unprepared. There are a lot of plates to juggle, from inventory management to foreign transactions.
However, if you know what you’re doing, avoiding the worst complications is easy.
To give you a head start, here are our top five things you may not know about eCommerce accounting (but should!)
E-Commerce Accounting vs. Business Accounting
E-commerce accounting is a type of business accounting—a very specialized type of business accounting.
Business accounting, in general, covers the finances of a business. It monitors and organizes money in, money out, money owed, taxes, assets, etc.
E-commerce accounting narrows in on financial data and transactions relating to an online business. It covers things like
- Purchase orders
- Sales orders
- Accounts payable
- Accounts receivable,
- Cost of goods sold (COGS),
- Sales tax.
Because eCommerce is not limited to brick-and-mortar sales times or locations, eCommerce accounting may have to deal with multiple timezones, currencies, and tax forms for different governments.
Even if you’re running a relatively simple eCommerce operation, you still need to know what you’re doing.
5 Things You Might Not Know About eCommerce Accounting
- Complicated sales tax for foreign transactions
- Scalable fast-paced accounting technology
- Confusing inventory management
- Preparing and handling product returns
- Poor eCommerce accounting pitfalls
1. Complicated sales tax for foreign transactions
One of the great things about eCommerce is that it can open up the whole world for your business. You can even trade with customers in other countries without mailing inventory overseas with drop shipping.
However, foreign trade comes with foreign taxes. And foreign taxes can be complicated.
Generally, the seller is responsible for charging, collecting, and remitting sales tax. The problem is that sales taxes differ from nation to nation and even state to state.
If trading with multiple countries, interpreting and filing for each tax code can be confusing.
It isn’t just the case when it comes to tax returns. It even makes a big difference at the point of sale.
For example, in the USA, it is common to exclude the sales tax of an item from the marked price and add it at the end of the transaction.
However, in the UK and most of Europe, sales tax is always the marked price of a product, and you could run into severe problems if you try to add it to the price at the point of purchase.
If you plan to offer services abroad, it’s worth researching the tax protocols of the countries you’re targeting.
2. Scalable fast-paced accounting technology
E-commerce is constantly changing. New trends come and go all the time. Advances in tech can happen quickly and change the e-commerce landscape overnight.
Your e-commerce accounting software needs to be fast, flexible, and scalable. An Excel spreadsheet won’t cut it.
You need something that can move with the times and accommodate both the growth of your business and the fast-changing world of eCommerce.
Good eCommerce accounting software should be able to:
- Track profit patterns over time.
- Pinpoint your most significant expenses.
- Flag up discrepancies and liabilities.
- Provide the option to trade in multiple currencies.
- Manage your inventory and stock orders.
- Adjust to new technologies and modes of commerce.
- Allow you to manage your finances from anywhere in the world.
- Generate analytics and statements (such as profit and loss and cash flow statements).
3. Confusing inventory management
How you manage your inventory can have a massive impact on your business. Inventory accounting is a significant part of inventory management, and it’s complex even in a brick-and-mortar situation. In eCommerce, keeping up with your inventory can be very confusing.
Of course, the complexity of any eCommerce inventory depends on the nature of your business. Suppose you’re a small Etsy seller with only a few available products.
In that case, inventory management will be much simpler than if you’re an international seller with inventory distributed across the globe.
However, ecommerce inventory management can be confusing no matter how small your business is.
For a start, it’s hard to predict when there will be a rush on a specific product or when interest in another product will decrease.
While you can use past sales trends to predict future sales patterns, the caprice of the internet means that this kind of accounting isn’t always reliable.
To manage your eCommerce inventory, you must be constantly on your toes. You need to log everything you have, its location, where it went, and more.
You will also have to alter the price frequently to keep up with pricing trends, special offers, etc.
Luckily, the right accounting software can do much of this for you. The best accounting software can even automate mundane inventory management tasks. So, do your homework when choosing which software to invest in!
4. Handling and preparing for product returns
Returns are a headache for any business, but they can be especially so for eCommerce.
For a start, many customers expect a free returns policy on their eCommerce purchases. You have to factor in the potential cost of paying postage costs for each product.
You also need to track customer returns in your accounts consistently and then cross-reference those returns with your sales, inventory, expenses, and tax records.
If you fail to do this just once, you can throw off your entire eCommerce accounting process
So, track your returns closely, and don’t let any slip through the cracks!
5. Poor eCommerce accounting pitfalls
Accounting is a vital aspect of any eCommerce business. Failure to do it correctly can have serious ramifications for your business. Ultimately, it can even sink your whole business.
Bad accounting is terrible for businesses if you fall foul of the authorities for failing to account for your taxes properly or are simply unable to track your business’ progress, profits, and patterns.
So, being diligent and conscientious with your eCommerce accounting is very important.
If you feel like the task is too much for you, don’t worry. There is plenty of great software out there which can help a lot.
Seeking competence in accounting? Utilizing Becker's materials for the CPA exam prep can greatly boost your eCommerce business financial management.
And if you can afford it, you can always hire an accountant to take care of it!
What is the goal of eCommerce accounting?
It’s imperative to note every transaction your eCommerce business undertakes, including returns and subscriptions. It allows you to quickly query any transaction and give a complete record of everything if you are the subject of an audit.
Track revenue and expenses
Every penny that comes in and goes out of your business must be accounted for, regardless of purpose or destination. E-commerce accounting should track all your revenue and your expenses in full.
Preparing financial statements
Financial statements are essential for monitoring your progress, demonstrating your financial situation, and more. You will be called upon to produce a financial statement, such as getting a business loan or selling your business.
Reconciling bank statements
It’s not always as simple as you think to make the information in your business accounts match the information in your bank statements. Good accounting can balance it all out.
Managing tax payments
Taxes are vital. Correct them to maintain your business’s pristine reputation and governmental record. Not to mention that you could go to jail for failing to do your taxes properly! Luckily, good eCommerce accounting makes it easy to manage your tax payments.
If you do business in the UK, this Making Tax Digital guide covers everything you need to know about filing a digital tax return and keeping your eCommerce business compliant.
As well as being aware of all federal taxes, US-based companies must fully understand the sales tax nexus and how it applies to them.
Your eCommerce accounting should factor in all your tax obligations to keep your business on the right side of the law.
ECommerce accounting can throw some curveballs for even the most experienced business owner. If you plan to sell more products and for your eCommerce business to succeed, it’s vital to be on top of your accounting.
Good accounting can help take your eCommerce business to the top. It will give you control of your finances and help you stay on the right side of the law.