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 differs significantly 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!).
Image credit: Unsplash
E-Commerce Accounting vs. Business Accounting
E-commerce accounting is a specialized type of business accounting.
Business accounting, in general, covers a business's finances. It monitors and organizes money in, money out, money owed, taxes, assets, and more.
E-commerce accounting focuses on financial data and transactions related 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 handle multiple time zones, currencies, and tax forms across different governments. Even if you’re running a relatively simple eCommerce operation, you still need to know what you’re doing.
Image credit: Pexels
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. Using a sales tax rate calculator from Omni Calculator, you can manage the problem 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 makes a big difference even at the point of sale.
For example, in the USA, the sales tax is typically excluded from the marked price and added at checkout. In the UK and most of Europe, sales tax is already included in the marked price, and adding it afterward can cause major issues.
To simplify this, many e-commerce businesses integrate tools like Avalara and TaxCloud to manage varying rules across countries and reduce compliance errors.
If you plan to offer services abroad, it’s worth researching the tax protocols of each country you target.
Image credit: Pexels
2. Scalable fast-paced accounting technology
E-commerce is constantly changing. New trends come and go. Technology reshapes the landscape overnight.
Your e-commerce accounting software needs to be fast, flexible, and scalable—an Excel spreadsheet won’t cut it.
Good eCommerce accounting software should:
- Track profit patterns over time
- Pinpoint your biggest expenses
- Flag discrepancies and liabilities
- Provide multicurrency options
- Manage inventory and stock orders
- Adjust to new technologies and commerce models
- Allow financial management from anywhere
- Generate reports like P&L and cash flow statements
3. Confusing inventory management
How you manage your inventory has a massive impact on your business.
Inventory accounting is a large part of inventory management, and it’s complex even for brick-and-mortar stores. In eCommerce, it's even more confusing.
Your level of complexity varies with business size. A small Etsy seller has far simpler needs than a multinational seller with global warehouses.
But even small sellers can quickly get overwhelmed—ecommerce inventory management challenges grow as you scale.
Predicting demand can be incredibly difficult. Past data helps, but the internet is unpredictable.
You’ll need to log stock levels, locations, and movements, plus update prices constantly to match trends and offers.
Fortunately, many modern tools can help. Some software can even automate inventory management tasks. Choose your tools wisely.
4. Handling and preparing for product returns
Returns are a headache for any business—but especially in eCommerce.
Many customers expect free returns, meaning you may pay return shipping costs. You must also consistently track customer returns and reconcile them with sales, expenses, and tax records.
Missing even one return can break your accounting accuracy.
Image credit: Unsplash
5. Poor eCommerce accounting pitfalls
Accounting is vital for any eCommerce business. Done poorly, it can cause severe issues and even destroy a business.
Bad accounting results in:
- Tax problems
- Poor tracking of profits and losses
- Inability to make strategic decisions
Thankfully, there is plenty of great software to help you get things right.
Studying with Becker’s CPA prep materials can also strengthen your understanding. And if your budget allows, you can always hire a professional accountant.
Image credit: Pexels
What Is The Goal Of eCommerce Accounting?
Record transactions
It’s crucial to record every transaction your business undertakes, including returns and subscriptions. This ensures clarity during audits and lets you review history at any time.
Track revenue and expenses
Every penny flowing in or out must be accounted for. Proper accounting tracks both revenue and expenses comprehensively.
Preparing financial statements
Financial statements are critical for evaluating your business and are required for things like getting a business loan.
Reconciling bank statements
Bank accounts don’t always match your internal records. Good accounting reconciles all discrepancies.
Managing tax payments
Taxes are vital for staying compliant and avoiding legal issues. Those in the UK can reference this guide on Making Tax Digital.
US-based companies should understand their obligations regarding sales tax nexus. You can also use a sales tax calculator when necessary.
Takeaways
ECommerce accounting can throw some curveballs, even for seasoned business owners.
If you plan to sell more products and grow your eCommerce business, staying on top of accounting is essential. Good accounting keeps your finances clear, supports better decisions, and keeps you compliant.
