Introduction to Ecommerce Accounting: A Guide for Business Owners

Ecommerce business growth is accelerating at an unprecedented rate. Whether you're new to ecommerce or have been operating one for some time, you need to know how ecommerce accounting works to manage your finances effectively.

Ecommerce accounting is tailored to address your business's specific needs. Therefore, you must choose the correct accounting method, be familiar with your tax obligations, and find the right software for your needs. Before all of that, you will need a strong base - a suitable ecommerce platform. It will be the cornerstone of your business.

Moreover, some licenses and permits will be required of you if you intend to keep your business running smoothly. Additionally, there's a key difference between traditional and ecommerce accounting, and you must not confuse the two. This is especially true if you decide to partner with an ecommerce accountant. They must know what they're doing and have experience in your industry, or they won't be able to help you. That's why you need to know what to look for when hiring them. We will cover all this and more in this guide, so let's begin!

What is Ecommerce Accounting?

Ecommerce accounting is the financial management of your business. It helps you keep track of your financial data to make informed decisions and grow your business. This includes your sales and expenses, managing your inventory, and tracking your cash flow.

Without proper ecommerce accounting, your business could suffer from mismanaged transactions, inaccurate financial insights, and even legal repercussions. Every ecommerce seller needs to know where their money is going and how much they are making.

Ecommerce accounting also involves keeping track of sales tax. It needs to be levied at the point of sale and passed on to the government. Keep in mind that you must be familiar with the varying sales tax rates in each state. Therefore, accurate accounting in these areas is necessary to avoid potentially costly mistakes.

Additionally, ecommerce accounting provides valuable insights into your business operations. This means knowing which products sell the most, which marketing tactics generate the most revenue, and which expenses are eating into profits. It's worth noting that the thorough financial management of your ecommerce business will play a decisive role in reaching all your goals for future success.

With that in mind, we will now explain the features that set ecommerce accounting apart from traditional accounting and how you can benefit by adopting ecommerce accounting practices.

What is the Difference Between Traditional Accounting and Ecommerce Accounting?

The most important difference between traditional accounting and ecommerce accounting is that ecommerce accounting is tailored to the specific needs of online businesses. Traditional accounting focuses on physical transactions, while ecommerce accounting deals with digital transactions.

An ecommerce accounting system gives you a clear picture of your financial data. It helps you manage cash flow and keep track of your online sales and expenses. With ecommerce accounting, you can follow real-time financial data, which can help you make informed decisions about your business.

Ecommerce accounting also addresses the unique challenges faced by ecommerce business owners. For example, it can help you manage sales tax for different states, which can be complex and time-consuming. It also enables you to manage inventory and shipping costs - a significant expense for businesses.

You can choose between two methods of ecommerce accounting to streamline this process further. Each approach offers distinct advantages, and understanding their differences will help you to choose the one that best suits you.

What Methods of Accounting Are Used for Ecommerce Businesses?

The accounting methods used for ecommerce businesses are accrual accounting, cash basis accounting, and hybrid accounting. By deciding on a suitable accounting method, you will effectively manage your finances and make better decisions.

What is Cash Basis Accounting?

Cash basis accounting is a straightforward method of accounting that records transactions when money is received or paid out. In other words, revenue is recognized when it is received, and expenses are recognized when they are paid.

It's a suitable method of accounting for small businesses, particularly those with simple financial records. It is easy to maintain and does not require advanced knowledge or expertise. With cash basis accounting, you do not have to worry about tracking accounts payable and receivable or recording non-cash transactions.

In addition, cash basis accounting makes preparing financial reports easier and quicker. Because you only need to record transactions when cash is received or paid out, you don't need to worry about complex accounting calculations or adjusting entries.

Still, keep in mind that cash basis accounting is generally not recommended for most ecommerce businesses as they usually have to manage multiple sales channels and more complex operations. When you only record cash transactions, it can create a significant gap between your recorded revenue and actual sales.

What is Accrual Basis Accounting?

Accrual accounting is a method of recording business finances that recognizes revenue and expenses when earned or incurred, regardless of when the money changes hands. This means that revenue is recorded when a sale is made, not when the payment is received. In the same manner, expenses are recorded when they are incurred, not when they are paid.

Some people may opt for the cash basis accounting method we've previously explained. However, accrual basis accounting provides a more accurate picture of a company's financial health by reflecting the actual economic activity of the business. It's typically recommended for large ecommerce businesses.

When you use the accrual method, you will better understand your financial standing. For example, if you record a sale using the accrual method, you'll know exactly how much money you can expect to receive. Therefore, you will be able to plan accordingly. Additionally, this method allows you to identify which costs are most significant. You can use this information to create accurate budgets and forecast future expenses.

Moreover, accrual basis accounting is beneficial for businesses with long-term contracts or projects. This is because it accurately records revenue and expenses throughout the whole project. While the cash basis method is simpler, it can sometimes produce misleading financial statements that do not accurately reflect your business's true financial standing.

But with the expertise of an experienced ecommerce accountant, navigating this becomes much easier.

What is Hybrid Accounting?

Hybrid accounting is a combination of cash basis and accrual accounting. It's a great choice for ecommerce businesses because it allows you to track income and expenses more accurately while keeping things simple.

With hybrid accounting, you can use cash basis for certain parts of your business, like daily expenses, and accrual accounting for others, like inventory, sales or accounts receivable. This approach gives you the flexibility to see both your immediate cash flow and your overall financial health.

We recommend hybrid accounting because it helps you manage the complexities of ecommerce, such as multiple sales channels and payment processors, while still being easy to maintain. It provides a clearer picture of your finances, making it easier to plan, budget, and make informed decisions.

How Can an Ecommerce Accountant Help Your Ecommerce Business?

Let's see how a good accountant can help take your online business to the next level. All the answers are listed below.

Financial tracking and reporting: This is an essential part of effective ecommerce accounting. An ecommerce accountant will help you manage your financial records to ensure they are up-to-date and accurate.

One crucial aspect of financial tracking is keeping a record of your cost of goods sold. This includes all the expenses of producing and delivering your products, such as manufacturing costs and shipping fees. Your accountant will effectively deal with all of this. They will also assist you in preparing profit and loss statements, balance sheets, and cash flow statements. These reports provide insights into your business's financial performance and help you make informed decisions to improve your bottom line.

Tax compliance: An ecommerce accountant will take care of all the accounting tasks for your business. This includes tax planning, tax management, sales tax calculation, and multistate tax matters. Many businesses have a nexus in multiple states, with inventory in various locations and employees spread across different areas. An ecommerce accountant manages all of these.

They will keep track of your financial transactions, help you with income tax, and with everything else regarding your bank account. By analyzing your financials, they can also suggest ways to reduce your tax liability and leverage tax benefits available to you. You will be completely compliant with every tax law, and you won't have to worry about any potential penalties.

Cost analysis: This vital process involves calculating and analyzing the costs of producing and selling products. That's where an ecommerce accountant comes in to help. They will analyze all your sales channels and determine any hidden costs that could affect your profits. They can also prepare a cash flow statement to help you track your money and make the best possible decisions for your ecommerce business.

Moreover, they will assist you in evaluating the financial performance of your online store by examining your profit margins, overhead costs, and pricing strategies. This will help you understand the correlation between costs and revenue, so you can adjust your prices accordingly.

Profitability assessment: This process serves to measure the amount of profit earned compared to the cost incurred by your business. As your business grows, it becomes more difficult to monitor all of this. This is where an ecommerce accountant will be a great help.

They will analyze financial statements, identify the key performance indicators (KPIs), and evaluate the profitability of different products sold on your ecommerce store. They will also monitor your business bank account and transactions to ensure your cash flow is sustainable.

Cash flow management: It refers to the process of monitoring, analyzing, and optimizing your company's cash inflows and outflows. An ecommerce accountant is there for efficient financial management. They will assist with all your accounting needs and do their bookkeeping tasks properly to ensure you maintain a positive cash flow at all times. 

Inventory management: Tracking inventory is necessary for every ecommerce business owner. It helps to prevent stockouts and overstocking, which can lead to cash flow issues and reduced profits. An accountant will help by setting up effective management systems, tracking sales trends, and advising on pricing strategies. They will oversee your bank accounts and monitor everything, ensuring that your business remains financially healthy. 

Business performance analysis: It involves analyzing financial statements, sales reports, inventory, and other data. This is done to evaluate how your business is doing in terms of profitability, efficiency, and growth. An ecommerce accountant will track your financial performance by checking bank statements, comparing revenue and expenses, and identifying areas where costs can be reduced. They will analyze data to help you make better decisions and streamline operations. 

Software and system integration: This is the process of combining different software and systems to work together. An ecommerce accountant plays an important role in making sure these integrations run smoothly.

First, they will identify which software and systems are necessary for your business and how they can integrate with each other. They will offer detailed recommendations on the most suitable software to be used. Moreover, they will help in configuring the software and creating a customized setup that is adapted to your needs. An accountant's job is to provide troubleshooting services in case of any issues with the software or system integration. They can find the root cause of the problem and offer solutions to prevent future occurrences. 

Auditing and compliance: An ecommerce accountant will provide guidance in adhering to all the regulations, reducing risks of audits, fines, and penalties. They will ensure accurate financial records, assess internal controls, and spot areas of compliance vulnerability. By implementing effective compliance programs, you will become more trusted and attractive to customers and investors.

Furthermore, ecommerce accountants aid in conducting audits, making sure that financial statements are authentic and complete. They review transactions and procedures and identify any possible errors or inconsistencies. By auditing regularly, they also provide recommendations to enhance the company's financial operations and profitability.

What Should You Look for in an Ecommerce Accountant?

The ideal ecommerce accountant must have experience in business accounting, specifically in the ecommerce industry. They should be knowledgeable about financial forecasting and be able to help you make the right decisions about your finances. They should also know how to reconcile bank statements and provide regular reports on the financial health of your business.

They should have expertise in managing different sales channels like Shopify, Amazon, Walmart, etc. They must be familiar with how the reports from these platforms work, including deductions and sales tax. They have to understand your business's payment processors and know how to reconcile their statements with your sales channel accounts.

They need to be well-versed in income taxes and able to navigate the tax requirements of the ecommerce industry. They should have knowledge of tax deductions and credits that can benefit small business owners.

Furthermore, a good ecommerce accountant should have expertise in handling all the financials. This will help to ensure that all transactions are accurately recorded, and potential errors are identified and corrected promptly.

You should also know the availability and accessibility of your accountant. Will they be available for regular meetings and consultations as needed? Will they provide support and expertise when needed? These are all important factors to consider. Many accounting firms will be more than happy to acknowledge all your concerns, so don't be afraid to ask questions.

Finally, it is vital for an accountant to possess comprehensive knowledge of the software you use for your business. This is because if they are not familiar with the software, they may be unable to offer effective accounting solutions. Therefore, you should hire an accountant who is up-to-date with the latest software trends.

What Different Ecommerce Accounting Software is Available on the Market?

Various excellent ecommerce accounting software is available on the market today, including QuickBooks Online, Xero, NetSuite, Sage Business Cloud Accounting, and Zoho Books.

Let's start with QuickBooks Online. This user-friendly software lets you track sales and expenses, manage invoices, and even pay bills. It offers integrations with many platforms, including Shopify and BigCommerce, and has mobile apps for added convenience.

Next up is Xero, a very popular cloud accounting software among small businesses. It provides real-time access to financial data and can help with tasks such as inventory management and payroll. One of its unique features is its ability to handle multiple currencies, making it ideal for ecommerce businesses that sell internationally.

NetSuite is a comprehensive solution that offers accounting and customer relationship management tools all in one system. It also provides customizable dashboards and reporting, making it easy to track performance metrics.

Sage Business Cloud Accounting, formerly known as Sage One, is another great choice. It offers features such as invoicing, expense tracking, and bank reconciliation. Additionally, it includes a project management tool, which can be helpful for ecommerce businesses that work on multiple projects simultaneously.

Lastly, Zoho Books is an affordable solution that offers features such as time tracking, project management, and inventory tracking. It also provides integrations with other Zoho applications, including Zoho CRM and Zoho Inventory.

The appropriate software can greatly enhance the efficiency of your operations. However, ensuring the software aligns with your ecommerce platform is equally important. Failing to consider this could lead to compatibility issues and, ultimately, hinder your business's growth. Therefore, it's necessary to take that into account before purchasing and implementing it.

What Are the Most Popular Ecommerce Platforms?

In 2023, some of the most popular ecommerce platforms include Shopify, WooCommerce, Wix, Squarespace, and Amazon Marketplace.

According to Statista, ecommerce sales are estimated to rise to nearly 22 percent by 2025. With the growth of ecommerce, choosing the right platform can significantly impact your business's overall success. That said, let's see what each one has to offer before you make a final decision.

Shopify is a popular platform that allows users to easily create an online store and manage their products, orders, and shipments. The platform also offers integrated payment options and marketing tools to drive traffic and increase sales. With a user-friendly interface, Shopify is great for small and large-scale businesses alike.

WooCommerce is another great platform that is specifically designed for WordPress users. As a plugin for the popular website builder, WooCommerce allows users to easily set up and manage their online store. It offers a wide range of features, including order tracking, inventory management, and payment options.

Wix is a website builder that also offers a comprehensive ecommerce platform. Wix's intuitive drag-and-drop interface supports a variety of integrations, allowing for customization and scalability. The platform offers various payment options, automated tax calculations, and shipping settings to streamline the shopping experience.

Squarespace is an all-in-one platform that allows users to create a website along with a fully functional ecommerce store. The platform offers customizable templates, advanced analytics, secure checkout, and payment processing options.

Lastly, we have one of the most dominant players in the ecommerce industry - Amazon Marketplace. Founded as an online bookstore, Amazon has evolved into a global marketplace. In fact, in 2022, Amazon hit almost 514 billion U.S. dollars in net sales revenue worldwide. Its popularity as an ecommerce platform is primarily attributed to its vast customer base and exceptional convenience. However, Amazon accounting differs from ecommerce accounting in several ways.

What is the Difference Between Amazon Accounting and Ecommerce Accounting?

The main difference between Amazon accounting and ecommerce accounting is that Amazon accounting is specific to Amazon Marketplace, whereas ecommerce accounting is used for all your online sales channels. This includes your own website, social media, and other marketplaces.

Amazon accounting is great for businesses that solely rely on Amazon as their sales channel. The platform provides reports and insights on your Amazon sales to help you better understand your business's profitability. It's even better if you're considering starting the Amazon FBA platform to streamline your operations even further. It can also help you with tax preparation and understanding your Amazon fees.

However, for ecommerce companies, ecommerce accounting is a better choice. It gives you the ability to track and analyze your sales data across all platforms, including Amazon, allowing you to make better business decisions. With ecommerce accounting, you can see which sales channels are bringing in the most revenue, what products are selling the best on each platform, and what your overall profitability looks like.

In conclusion, Amazon accounting and ecommerce accounting serve different purposes. You need to understand these distinctions, especially when considering all your tax obligations.

What Ecommerce Tax Obligations Should You Be Aware of?

No matter how small or large your ecommerce business is, you need to know how to keep up with your taxes. We've listed the essential obligations that you should pay attention to below.

Knowing Your Sales Tax and Use Tax Requirements

A sales tax is a tax on the sale of goods and services, while a use tax is a tax on the use of goods and services in your state. It's important to note that sales tax rates vary by state, so it's essential to research the rates for each state where you plan to do business.

Tracking your accounts receivable and gross profit can help you ensure you are collecting the appropriate amount of sales tax. You should track them regularly to stay compliant with your state's regulations. It's also important to keep in mind that failure to comply with sales tax and use tax requirements can result in expensive fines. That's one more reason to consider working with a tax professional, as they will help you manage all your tax obligations.

Learning About Business Licenses and Permits

Every ecommerce entrepreneur should know which documents are required by law to operate their business legally.

The first step is to determine where your business is located and what state and local licenses are required. This can include a general business license, a seller's permit if you plan to sell tangible goods, and a tax registration. It's also important to know the regulations and compliance requirements for your industry. Depending on what you're selling, you may need specific permits like a food handling permit or a health inspection certificate or else.

To stay up to date with all the permits or licenses, check with your local government office or small business association. Be aware that these documents are necessary to keep your business legal. If you fail to comply with regulations, you may be fined, penalized, or even shut down. So it's important not to overlook this step.

Filing Taxes According to Your Business Structure

It's essential to do proper ecommerce bookkeeping throughout the year. To do that, you need to know how to file taxes according to your business structure.

If you are a sole proprietor or a single-member LLC, you must report your ecommerce income on your personal tax return. This means filling out Schedule C (Form 1040). It allows you to deduct your business expenses from your income and then pay income taxes on your net profit.

If you have a partnership or multi-member LLC, you need to file a separate tax return for your business using Form 1065. This allows you to report your business income, expenses, deductions, and credits separately from your personal return.

For corporations, there are two different options. If you have a C corporation, you must file Form 1120 to report your business income and pay corporate income taxes on your net profit. If you have an S corporation, you can instead file Form 1120S to pass your business income and deductions through to your personal tax return.

No matter your business structure, it's important to understand your tax obligations and file your taxes correctly. By doing so, you can avoid penalties and keep your ecommerce company in good standing with the IRS.

Remember, accurate and effective accounting is the core of your ecommerce venture. It serves as the support that keeps your business upright. We hope this guide helped you to make informed decisions, drive growth, and ultimately soar your profits to new heights. We wish you all the luck and success on your ecommerce journey!