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Ecommerce Bookkeeping 101 For Small Business: A Step-By-Step Guide

ecommerce-bookkeeping-101-for-small-business:-a-step-by-step-guide

You didn’t start your ecommerce business so you could juggle accounts and balance books.

You started it to sell products, serve customers, and make money while you’re at it. But ecommerce bookkeeping is a necessary and important part of keeping your accounts in good shape.

Ecommerce bookkeeping, now seamlessly integrated with online bookkeeping services, is the meticulous process of recording, managing, and analyzing all financial transactions of your business, which includes not only sales, purchases, and payments but also the comprehensive tracking of all costs and income.

By employing online bookkeeping services, businesses can ensure that all financial data is accurately recorded and stored securely in the cloud, facilitating easy access and management. Bookkeepers leverage this data to assist companies in making well-informed financial decisions, ensuring fiscal stability and compliance with relevant regulations.

The goal of bookkeeping is to show you the financial picture of your business, balance your accounts, and improve cash flow management in a strategic way. It helps you understand where your money is going so you can make informed decisions.

Even if you have experience with bookkeeping, there are some important nuances to ecommerce accounting you’ll want to follow. Here, you’ll learn about how to keep books for an ecommerce business, tools to help you, and common mistakes to avoid.

Ecommerce platforms and bookkeeping

The beauty of ecommerce is the wealth of platforms available to sell your products on.   Regardless of your ecommerce platform, you’ll need to balance your books. Whether it’s Shopify, BigCommerce, WooCommerce, or Adobe Commerce, you must keep track of income, outgoings, and any relevant taxes.

Many ecommerce platforms offer features to help you keep track of important information you need for bookkeeping, like inventory and sales taxes. While it won’t file your taxes for you, it can help you track your tax obligations and collect the right amount. This makes tax time a lot easier to manage.

Ecommerce platforms often charge merchant fees, which is a unique bookkeeping element online sellers need to track.

The merchant fee will vary depending on the platform you use, but it’s details like this that you need to keep in mind when using an ecommerce platform. Luckily, there’s lots of bookkeeping software that integrates with ecommerce platforms, making it easier to manage your sales and expenses.

Best practices for bookkeeping on ecommerce platforms

Ecommerce bookkeeping is an integral part of business regardless of the platform you sell your products on. Here are some best practices to consider:

  • Integrate your store with accounting software: Most ecommerce platforms will integrate with dedicated accounting software, or offer plug-ins to assist with tracking. This is helpful when it comes to remitting sales tax, or filing your taxes, as your software and store will align.
  • Configure tax rules: Set up your tax locations in your store, so the platform knows where it needs to add a tax to sales and where it doesn’t. This will help you automate orders and make sure you are collecting taxes when and where you are required to.
  • Reconcile your account regularly: Whatever platform you use will keep a downloadable log of all your sales to date. It’s important to download those reports, review them, and reconcile them on a regular basis.
  • Manage returns and chargebacks: Stay on top of returns and chargebacks, as they’ll have an impact on the figures in your bookkeeping accounts.
  • Keep track of other expenses: The ecommerce platform you use won’t track external expenses like staff costs, manufacturing, or advertising, so it’s up to you to keep track of these elsewhere or add them manually.
  • Automate the workflow: Make your job a whole lot easier by automating the bookkeeping process.

Sales tax and bookkeeping

Sales tax is added to the retail price of every online sale and is settled at checkout.

It’s crucial you collect sales tax if your business operates or has a presence in a US state where sales tax is mandatory, which is most states. The presence of your business in a state is known as nexus, and you must collect sales tax for every nexus you have.

How to handle sales tax in ecommerce bookkeeping

  • Identify where you have nexus: Your ecommerce business is considered to have a presence in a state if that’s where you sell, store inventory, or have employees, or if it’s where you live. You will also have nexus in a state if you hit a threshold of sales to customers within that state. Some states also have regional sales tax that applies to out-of-state sellers.
  • Determine which products are taxable: Products require different levels of taxation in different states. Check the official sites of each state to determine which products are taxable and by how much. Some products aren’t taxable at all, or are only taxed within certain periods or seasons.
  • Register your business: Make sure you’re compliant by registering for a sales tax permit in any state where you have economic nexus. You may also need to purchase a business permit in order to sell to customers in that state.
  • Collect sales tax: Add sales tax to each purchase—your ecommerce platform should apply it automatically at checkout if you set it up.
  • File a return: Create and file a tax return before the deadline in the states you’re required to collect sales tax.

How to calculate sales tax and report it in your bookkeeping records

To determine how much to collect and remit, you must determine your sales tax rate.

Add the sales tax rates for your state, county and city, then multiply the total percentage by your sales amount to get your sales tax amount.

Here’s the formula:

Sale price x Sales tax rate = Sales tax 

Here’s an example of how to use the formula:

You sold an item for $100. If your city sales tax rate is 2% and your state tax rate is 5%, the total sales tax is 7%.

0.07 x $100 = $7

The amount of sales tax would be $7, which would bring the final price of the item to $107.

It’s important to track sales tax correctly in your chart of accounts, so it’s clear how much of your cash in the bank should be set aside for taxes.

One way to report sales tax in your bookkeeping records is to debit the amount you’ve collected from your cash account and credit it to your sales revenue and sales tax payable accounts.

Inventory management and bookkeeping

Inventory management is a key part of the bookkeeping process because your inventory is considered an asset that holds value.

Staying on top of it gives you a transparent view of how much stock you have, how much stock you need, and any emerging sales trends. It also allows you to predict when you will need to restock, order supplies, and adjust your pricing strategy, if necessary.

How to track inventory in ecommerce bookkeeping

Track your inventory on a monthly or quarterly basis to make sure it’s kept up to date. This is especially important if you process returns or store inventory in multiple locations.

Your inventory will be logged in your ecommerce bookkeeping based on the cost of goods sold (COGS), and can be calculated a few different ways:

First in, first out (FIFO)

The first in, first out method assumes items purchased or produced first are sold or used first. With this system, the oldest inventory items are recorded as sold before newer ones. When calculating the cost of goods sold, the costs of the oldest inventory is used to determine profitability.

Last in, first out (LIFO)

The last in, first out accounting method assumes the inventory acquired most recently was sold first. The last to be bought is assumed to be the first to be sold. When calculating the cost of goods sold, the cost of the newest inventory is used to determine profitability. With the cost of materials rising, it is assumed the most recently acquired items cost more, and so will be less profitable.

Average cost valuation

This method takes the average cost of all inventory items sold, no matter when they were acquired, and applies this average cost to all inventory.

How to calculate the cost of goods sold and reconcile inventory

You can calculate COGS by adding the cost of your inventory to the purchases made during a specific time period. Subtract the cost of inventory left at the end of your timeframe to calculate your COGS.

Here’s the formula for easy calculation:

(Beginning inventory + Purchases) – Ending inventory = COGS

It is important to note that COGS are different from your operating expenses, which are expenditures not directly related to the production of your products. While they are both subtracted from your business’s total sales figures, they should be recorded separately.

Payment processing fees and bookkeeping

Selling online requires you to process payments through an integrated payment provider or external software. There’s often a fee for each payment processed, which needs to be tracked and accounted for.

The payment provider you use should keep a log of the fees incurred for each payment. If you use multiple payment providers for shoppers in different locations, it’s important to reconcile all the fees together to create a total amount.

Note that payment processing fees are a deductible business expense.

How to categorize payment processing fees

Most ecommerce businesses categorize payment processing fees as COGS, because they are directly associated with the costs of sales. You’ll need to deduct these fees from your income to calculate your gross margin.

The formula looks like this:

Income – (COGS + Payment processing fees) = Gross profit 

Financial statements and bookkeeping

Financial statements provide a snapshot of your company’s revenue, expenses, profitability, and debt and are an integral part of ecommerce bookkeeping.

Financial statements are important because they help you understand the financial health of your business.You can see how much money you have available to put back into the business, how much you can pay yourself, and other accounts payable.

They also provide a great resource for potential investors who can see the financials of your business over time.

Ecommerce bookkeeping is a way to store and organize your financial transactions. It provides insight into your debits and credits and the overall health of your business. The information collected and stored can then be turned into key financial statements, like profit and loss statements and balance sheets.

Profit and loss statements highlight the revenues, costs, and expenses your business incurred during a set period, while a balance sheet shows your assets and liabilities at any given moment in time.

Common mistakes in ecommerce bookkeeping

Ecommerce bookkeeping can seem complicated when you start. There’s a lot to remember and complex formulas to use. This often leads to oversights and errors. Some of the most common mistakes small businesses make are:

  • Trying to do it all manually: Manually inputting data can lead to duplicates and inevitable human error. It’s time-consuming and tedious to run all the calculations on a regular basis.
  • Failing to meet international tax standards: Tax laws vary around the world, and many ecommerce businesses fail to check whether they’re compliant because they’re essentially operating online.
  • Keeping inaccurate inventory levels: One mistake in inventory valuation can lead to other problems down the line, affecting your balance sheets, profit and loss statements, and cash flow forecasting.
  • Failing to sync transactions to accounting software: When you don’t sync your ecommerce platform to your accounting software, transactions can slip through the gaps, making it harder to see the bigger financial picture.
  • Mishandling sales tax: Sales tax is one of the most complex parts of running an online business, so it’s no wonder brands struggle to submit the right amount at the right time.
  • Keeping disorganized records: It’s easy for your accounts to become disorganized when you have too many people handling them. It can lead to duplicate entries, oversights, and missed opportunities.
  • Infrequently reconciling accounts: Bookkeeping isn’t a fun task, which is why lots of businesses end up putting it off.

How to avoid these mistakes and keep your bookkeeping records accurate

  • Use dedicated accounting software: Integrating software that automatically collects, stores, and reports on your financial health will save hours of time and reduce the chance of error.
  • Get an accountant: If numbers aren’t your thing, hire someone to do it for you. A trusted accountant will be on hand to answer your questions and keep your bookkeeping current.
  • Reconcile regularly: Make sure your books are up to date on a regular basis—quarterly, if not monthly.
  • Understand sales tax: It’s a complicated topic, but getting your head around sales tax will ensure you stay compliant and avoid fines and fees.
  • Use a chart of accounts: Chart of accounts is a system for organizing your accounting files. It’s the basis of efficient recordkeeping and will help you stay on top of your budget, which is particularly important as your business grows.
  • Be consistent with your bookkeeping: Whether you use the double entry system or the single entry system, make sure you keep it consistent.

Tools for ecommerce bookkeeping

There are a wealth of ecommerce bookkeeping tools available to help you balance your books and stay on top of your finances, regardless of your experience.

The best tools for ecommerce bookkeeping

If you’re looking for ways to make online bookkeeping easier, there are a number of tools to consider, depending on the needs of your business:

  • A2X: This app automatically posts Shopify store sales to Xero or QuickBooks and reconciles your payouts so you can see everything has been accounted for correctly. A2X is trusted by hundreds of leading ecommerce accounting firms.
  • FreshBooks: This cloud bookkeeping software helps you manage Shopify orders in FreshBooks based on three objects: items, invoices, and payments. It also uses your Shopify inventory for all inventory management, updating financial information automatically.
  • QuickBooks: When you integrate Shopify with QuickBooks, your orders, inventory, customers, and shipping are updated and accurate automatically. You can use QuickBooks to post ecommerce order information as batch journal entries or granular order level posting and sync with other ecommerce marketplaces, such as Etsy and Amazon.
  • Bench: Bench offers affordable outsourced bookkeeping services for your Shopify store. The app syncs directly with your merchant and bank accounts. Then, a virtual bookkeeping team balances your monthly books and prepares financial reports.

Bookkeeping is key for small business growth

Whether you do bookkeeping yourself or decide to hire a certified bookkeeper, understanding how money flows through your business is vital.

Even if you have little bookkeeping experience, you now have firsthand knowledge of and access to all your financials, which puts you in a powerful place to make informed decisions about your business’s future.

While there’s value in getting expert help and advice, make sure you have a solid understanding of your numbers, no matter who you have managing your finances.

Take the stress out of sales tax with Shopify Tax

Oversee your current sales tax obligations from Shopify admin, collect the right amount at checkout with product and location-specific accuracy, and let Shopify automatically apply rate and regulatory changes whenever they happen.

Explore Shopify Tax

Ecommerce bookkeeping FAQ

What is ecommerce bookkeeping?

Ecommerce bookkeeping is the process of recording and managing all financial transactions for your online store. This includes sales, purchases, and payments.

 

How do I do bookkeeping for my ecommerce business?

  1. Connect your bookkeeping software to the ecommerce platform you use.
  2. Sync your transactions with your accounting software.
  3. Categorize your transactions.
  4. Reconcile your bank accounts at the end of each month or quarter.
  5. Create and review your financial statements.

 

What are the best bookkeeping practices for ecommerce businesses?

  • Use a dedicated accounting software that integrates with your chosen ecommerce platform.
  • Partner with an accountant who’s knowledgeable of ecommerce and online retail.
  • Reconcile your accounts regularly—quarterly or monthly is ideal.
  • Get your head around sales tax (the most complicated part of bookkeeping).
  • Use a chart of accounts to stay on top of your budgeting.

 

How do I handle sales tax in ecommerce bookkeeping?

  • Identify which states you need to pay tax in (known as nexus).
  • Determine which of your products are taxable and how much sales tax they incur.
  • Register to pay sales tax in every location where you have nexus.
  • Collect sales tax from customers at the point of checkout.
  • File your tax returns before the deadline.

What are the most common mistakes in ecommerce bookkeeping?

  • Trying to do it all manually.
  • Failing to meet international tax standards.
  • Keeping inaccurate inventory levels.
  • Failing to sync transactions to accounting software.
  • Mishandling sales tax.
  • Keeping disorganized records.
  • Reconciling accounts infrequently.

How do I track inventory in ecommerce bookkeeping?

Start by determining how you’ll log your inventory and whether you’ll use the FIFO, LIFO, or average cost valuation method. Then use an inventory management system to accurately track your inventory, and make sure you audit it on a regular basis.

How do I reconcile payments in ecommerce bookkeeping?

Reconcile your payments by comparing the payments recorded and reported in your financial records with the payments shown on your ecommerce platform or through the payment provider you use to collect payments.

What are the best tools for ecommerce bookkeeping?

 

This originally appeared on Shopify and is made available here to cast a wider net of discovery.
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