Ecommerce accounting is a hot topic in the world of business today. It’s become one of if not THE most important aspects for companies who wish to compete well in the market and ultimately succeed as time goes on – which means you need this knowledge!
Okay, so you have just started your own eCommerce business and are focused on ordering inventory and managing it well to keep costs down.
Your business needs some accounting, and you think, how hard can it be?! That information should be easy enough for a beginner like yourself to find. You could find all the answers on Google or by asking friends who are also entrepreneurs – even if they have different experiences from yours, to see what has worked best for them and tweak it for your eCommerce system… perfect!
But what if eCommerce accounting is quite a bit different? What should you do then? The assumptions behind most of these methods are that all businesses have a similar workflow- which isn’t always valid with online retailers!
This type of accounting is a new field, and there are many things that bookkeepers need to learn about this type of business. For example, they should know how different payment methods work on an e-commerce site so it can be accurately recorded in the books as revenue or expenses when clients purchase products from your online store!
eCommerce accounting, the differences
Accounting itself is a complicated subject. It can be even more challenging to keep up with your particular industry’s nuances. Still, it’s imperative that you do so if you want accurate numbers and informed decision-making!
These numbers being precise is one of the most crucial aspects in any company, as it can lead to success or mediocrity. Uncovering secrets for profitability and cash flow through your books will help you grow with eCommerce accounts now more than ever before!
Many bookkeepers will need help navigating the differentiating aspects of this type of accounting.
The four main areas that accountants need to be aware of when working with eCommerce businesses include: Where transactional data resides; understanding inventory levels and COGS so they know if there will ever come the point where more products must go out than what has been already shipped/held in stock; knowing tax rules related both at home AND abroad since many countries have different types -or no-, regulations surrounding these topics specifically; and lastly reducing overseas transaction costs.
This insight dives into each area so you learn about e-commerce financials and how they differ from traditional business practices!
Where does transactional data reside?
One of the main ways that eCommerce accounting is different is that it’s often much more difficult to track everything. With traditional businesses, bookkeepers can look at bank and credit card statements to see what transactions have taken place and then add accrual transactions to get a full picture of the company’s financial health.
However, with eCommerce businesses, so much of the transactional data can reside in different places – such as in online marketplaces, payment processors, or banks – making it difficult to track everything. This means that bookkeepers need to be extra diligent in tracking all of the different revenue and expense sources to have an accurate picture of the company’s finances.
The input tells us that when a bookkeeper sees income in their bank account from Amazon or Shopify, they will record this transaction as “income” on the deposit date. The main problem with this is that the income numbers and the timing of those transactions need to be more accurate.
Inaccuracy of accounting numbers
You might think that when you sell products online, the money is in your bank account immediately and counted as income. But what if those deposits take a few days; what if there are adjustments? The transactions we’re talking about here are called, ‘net deposits.’ Net deposits are the total amount of money that comes into your bank account after all sales and other transactions have been taken care of. These include returns, tax-free customer purchases, chargebacks for items not delivered or sent as ordered, payments on accounts receivable from credit card spending, etcetera!
The back end of your sales channels is where you will find accurate numbers for transactions and all other activities. Luckily, there’s an easy way to get all of that information from your sales channels and smoothly into accounting software. With tools like A2X, it can be done in no time!
Transactional timing is inaccurate
If you’re recording the “net deposit” in your bank account, consider any activity that occurs before or after this date. For example, suppose Shopify deposits money onto our business’ accounts on January 5th. In that case, we’ll see transactions for those deposits during December. Still, it might not be accurate timing depending on how long ago they happened- sometimes people need to remember exactly what came into their wallets, especially when there are many other things going on at once!
Inventory and COGS
Another difference is that eCommerce businesses often have much higher inventory levels than traditional businesses. This is because conventional companies often sell products already in stock at their physical location, while eCommerce businesses may need to order products from suppliers based on customer demand. This can make it more difficult for bookkeepers to track COGS (cost of goods sold) and determine if the business is making a profit on individual products.
You’ll want to brush up on your accounting skills if you plan to do any business in this field. You should understand:
- How to calculate a COGS number for each SKU
- Inventory management processes – which includes knowing when an item is considered ‘available’ or not available due date-ISOs etc.
- Bookkeeping principles behind inventory and cost calculations called “cost of goods sold”
Expensing all of the product immediately when you buy it from your vendor is one common mistake.
The Tax question in online sales
Tax rules for eCommerce businesses can differ from those for traditional businesses. For example, many countries have specific regulations surrounding how digital products – such as ebooks or music – are taxed, while others do not have any specific rules. This makes it difficult for bookkeepers to know precisely how much tax they need to pay on various types of revenue and expenses. Top all of this off with the fact that tax laws are constantly changing!! This is why employing a tax specialist is vital.
International transaction cost reduction
Ecommerce businesses often have a lot of international transactions, which means they’re at risk for higher costs. But with the right tools and experience from an accountant who understands how these networks work in different countries worldwide, you can reduce those expenses to profitability!
On into the sunset..!
eCommerce is a fascinating industry that’s only going to grow in popularity. And with good reason, it provides an opportunity for businesses of all sizes worldwide who want access and exposure without having any overhead costs or employees on their payrolls! To learn more about how ecommerce accounting works, we need something else first–accounting knowledge…
If you have any questions, please feel free to contact us.
We’re always happy to help!
Contact Argento CPA today if you have any questions or looking for expert advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.