One of the most complicated tasks for any business that has completed digital transformation involves eCommerce accounting: maintaining its accounts. Irrespective of the type of business, accounting is amongst the most crucial yet difficult aspects of operations.
For small businesses, accounting may be fairly easy. Hence, we see such businesses often take care of the accounting requirements on their own.
However, when the business grows, accounting gets even tougher and more complex.
Growth of a business means increases in the number of sales, purchases, and overall operations. As every penny needs to be accounted for, the task of penning the expenditures and revenues can become quite troublesome. You, as a business, can neither take the risk of skipping or omitting any transaction nor can you allow the data and facts to be misrecorded.
Hence, accurate accounting is a must.
Especially with an eCommerce business, the more you trade and grow, the more complex the finances become. Different orders from online shopping platforms make it tough for businesses to undergo different accounting requirements. But, accurate accounting is very important as it is the base for reliable financial management.
One common misconception is that eCommerce accounting is like accounting for any other business. However, the reality is quite different. eCommerce accounting can never be executed with the help of basic accounting practices and techniques. You need in-depth knowledge of accounting for this task. This task will support you in effective financial management and the overall growth of the business.
The advantages of financial management for an eCommerce business, or any other business, are extensive. With the help of effective financial management, the business can ensure to achieve the desired growth levels. Financial management alone has some amazing capabilities to stimulate the business’s profits. It empowers the business to generate maximum gains by minimizing expenditures.
Financial management allows you to plan ahead and act wisely. Doing so ensures the business’s well-being does not fall into uncertainties.
If your business uses reliable financial management techniques, it helps stimulate the trust of investors and the general public. The entire valuation of the company improves as the investors are willing to invest more and enjoy fewer risks with guaranteed growth.
That’s not all. Cash in hand, cash at the bank, and other forms of liquid assets help the bank to fall safely under any unforeseen circumstances. When eCommerce accounting and financial management pair together, it helps the business monitor cash flow and all other liquid assets. The business can make the best out of this gathered data and use the same to maximize and retain more liquidity in hands.
Similarly, financial management also lays the foundation for finding key performance indicators (KPIs). The business can then either use the analyzed data to enhance the KPIs or rectify the non-performing or low-performing aspects.
All these facts justify the importance of accounting with respect to the effective financial management of an eCommerce business. But how does a business undergo reliable and accurate accounting practices smoothly?
5 Most Important Ecommerce Accounting Tasks
The business and its accountants/bookkeepers can follow some virtues and techniques. These techniques can help the business in determining the flow for accurate accounting. They make for easy and smooth yet accurate accounting for eCommerce businesses.
Using this flow, the business can ensure that the transactions are recorded correctly and aptly. Keeping in mind the requirements of the business.
These tasks or techniques include the following:
Categorization of the Transactions
When all kinds of data are collected and recorded in the same format, it becomes quite difficult for businesses to ascertain the impact of such transactions. In the clutter of transactions, one crucial entry may hide from the eyes of the accountant and pose future problems for the business.
Hence, the first thing that you should do is ensure that you categorize the transactions into income and expenditure.
When you categorize the transactions like this, you can easily estimate the monthly total expenses and revenues recorded by the business. The eCommerce business can later analyze this data to determine various ways to maximize revenue while reducing expenses.
Establish and Follow a Budget
The next step of effective eCommerce accounting is for the business to establish a budget. The business should ensure that all the organization’s departments follow the budget very closely.
With the help of this budget, the business can manage the flow of cash as well as ensure the effective use of expenses.
Such a budget (or groups of budgets) should be set up after extensive research and analysis. The business should devise a budget after analyzing the recurring expenses and revenue fluctuations.
The budget should revolve around such expenditures and incomes and consider unforeseen events. Your budget should neither be as high that there is a wastage of funds nor as low that there is an insufficiency of amounts.
Consider Different Taxes
The next step of the effective eCommerce accounting ladder is the consideration of taxes. There is indeed a defined period when the business has to calculate and pay taxes. However, waiting for such a time can affect the business.
Some important tasks may appear at the time of calculation at the end moment, affecting the task and the calculation of taxes. Hence, it’s wise that your business considers all types of taxes levied on every transaction.
Doing this will ensure that the business does not face surprises when filing. Moreover, don’t forget to file taxes as and when required to protect your business from unnecessary attention.
Differentiate Between Returns and Chargebacks
The situations of returns and chargebacks are quite common for any eCommerce business. Sometimes eCommerce businesses assume chargebacks and returns to be the same.
However, the reality is quite different.
A return is when the business gets the sold goods back because the buyer didn’t like it.
Whereas, under chargebacks, the business may not get the goods back. This problem generally appears when the customer claims that he/she didn’t receive the product. Under such a case, the business needs to refund the amount to the customer.
As the goods under a chargeback may not return, it becomes a net loss for the business. Hence, returns and chargebacks are quite different and should be treated as different in the books of accounts.
Categorize the returns and chargebacks as different so that the business can analyze the areas lacking. The business can check the supply chain to know the reason behind chargebacks and reduce them.
For ease, consider the chargebacks as a loss of goods while considering the returns as an addition to stock for effective management and accounting.
Follow Accurate Bookkeeping Practices
Lastly, your business should follow reliable and well-established bookkeeping and accounting practices. Different states have different practices for the recording of transactions. Ensure that your eCommerce business follows everything that’s required and maintains the books of accounts in a way that is descriptive for others and beneficial for the business.
When the books of accounts are complete and concise, the business can easily use this data to make the required decisions for the business. For ease, you should keep as many books of accounts as possible. Statements like transaction journals and ledgers go a long way in recording and differentiating between the types of transactions.
Similarly, financial statements like the profit and loss statement, the cash flow statement, and the balance sheet can help you give a deeper and broader insight into the operations and financial position of the business. Hence, you should try to create such statements for financial analysis.
3 Quick Accounting Best Practices to Remember
Apart from the above tasks, there are certain eCommerce accounting practices as well that can help with the flight of your business. Whether you are an online or offline business, these practices can help you turn the frown upside down when your business is facing problems in financial management.
Forecast All the Major Expenses
When it comes to the big things in the business, the biggest one is major expenditures. Every business can easily or not-so-easily predict or forecast the upcoming huge expenses. These are the expenses that can make an impact on your business, its operations, and funds, if not taken care of properly.
Hence, what you need to do is try to ascertain all types of upcoming or projected expenses, certainly the major ones. Doing this will ensure that you are always ready for such expenses and that they don’t come as a surprise and shake your financial platform.
Save Funds for Taxes
When money leaks out of the business unknowingly, it can trouble its operations and the flow of funds. Hence, what you should try to do is set aside a pool of money for taxes. With the help of this simple practice, you can ensure that your business does not take a major hit during the tax season as you were already prepared.
Moreover, apart from money, set aside some time as well for tax calculations. This will allow you to get enough time to figure out the ways to save taxes as well as file the same in due time. This simple practice can ensure that your tax valuation is accurate and you meet the liability perfectly.
Control the Inventory
Lastly, one of the most beneficial practices for any eCommerce business is to keep an eye on the organization’s inventory.
The level of inventory available with your business should be adequate. It should not be so much that it sits idle in the warehouse or so little that it fails to meet the orders. Hence, ensure that there is an adequate level of inventory at all times.
Moreover, You should also check the inventory regularly to see if it needs to be restocked. Set up the level of maximum and minimum inventory for better feasibility. You can figure out this cap of inventory after analyzing the budget.
Excessive inventory that sits idle can become damaged with time, causing losses.
Moreover, you can channel the funds spent on excessive inventory into other productive requirements.
Two Common eCommerce Accounting Problems To Account For
Numerous eCommerce accounting problems may appear while maintaining your books of accounts.
Your business should take care of all these problems and tackle them smartly. However, there are two common and repetitive accounting problems that you should always take care of.
Procrastination with Accounting
One of the most common problems of eCommerce accounting is procrastination. Too many businesses procrastinate their tasks of accounting and wait until the last minute.
This may not seem like a big deal but doing so can harm the business.
You should not postpone the categorization of expenses later; you may not get a chance to fix it. The business may forget about some transactions, affecting the books adversely. Hence, account for it before it’s too late.
Continuing Omissions and Errors
Another very harmful trait that you should never follow is the mistake of taking omissions and errors lightly. These omissions and mistakes may not seem like a big deal individually, but when summed together, they have the power to change the financial state of the business.
Therefore, don’t involve yourself in the practice of hurried bookkeeping.
Take your time. Record everything. Cross-check the data, and proceed with sureness.
For ease, you can take the help of an automated system for the recording of transactions. Such an automated tool can ease up the tasks of eCommerce accounting for you.
Follow the Set Accounting Standards and Regulations
As you may already know, the business and professional regulatory authorities have set certain regulations and standards for the recording and maintenance of the books of accounts. These standards define the proper format, techniques, and procedures for accurate accounting.
Every business, eCommerce, retail, wholesale, and otherwise, should follow these standards and regulations for bookkeeping.
Moreover, keep up with the new introductions in the world of accounting as well.
The regulatory institutions offer regular updates related to accounting practices. Therefore, you should ensure that your business follows the same standards and their changes accurately.
For the same, you should also keep an eye out for IRS (Internal Revenue Service) guidelines to steer clear of trouble.
Apart from the local regulations, certain regulations are also set internationally for businesses to follow.
The Generally Accepted Accounting Principles (GAAP) are the perfect example of this. GAAPs are set up for all kinds of businesses. The same applies to online businesses or eCommerce accounting as well.
For example, there is a principle that states that the business should follow one technique of accounting throughout the tenure of the organization, every year.
Specifically for eCommerce businesses, there is a principle of permanent methods that states that such a business should follow the same methods of accounting for all the years the business is in existence.
To implement these practices in the day-to-day eCommerce accounts, you can start by going through all these principles, standards, and regulations simultaneously.
Additionally, you should also keep yourself familiar with all the changes and amendments made to these.
For this task, the best way to proceed is to install and use an automated accounting system.
Such an automated system will automatically record the books of accounts after considering the local and global regulations applicable to the business. However, even with such an automated system, you may need to employ personnel who can update the method of transaction recording according to the amendments.
This will allow you to follow all the regulations set for eCommerce accounts. It will also allow you to create well-mannered books of accounts and financial statements. Those are beneficial for all.
However, do you know what’s an even better solution?
Automation of eCommerce Accounting with AI (Artificial Intelligence)
Automation of accounting has taken over the world of manual accounting. More and more businesses are opting for automated accounting to make the process of recording, analysis, and implementation easy.
The concept of automation is quite simple. An automated tool will keep an eye on each and every transaction in the business and record them.
After recording, the tool will then divide or categorize the transactions into different categories, as set up by the business.
The business can then interpret this data into graphs and other visual representations to know the KPIs, low-performing areas, and other crucial data related to the business.
Using this data, the business can protect itself from adversities arising from negligence and plan better for the future. Automated accounting works like a guarantee of business growth and expansion.
Automated systems are revolutionizing the eCommerce accounting front as they offer real-time results. The chances of omissions and errors are nearly zero as all the data is collected from other online sources. Moreover, such automated tools also allow the business to interpret the financial situation of the business and help them with financial planning.
Another added benefit of automated accounting systems is that these systems are highly reliable and safe to use. As the credentials to access the system are available to the business only, the risk of leaks through insider jobs and breaking & entering are reduced.
These tools have built-in parameters for compliance with the existing laws, rules, regulations, and standards of accounting. Hence, the business does not even have to worry about the inaccurate recording of data.
Multiple developmental organizations and firms are launching different automated accounting systems for businesses. Popular automation platforms like NetSuite, QuickBooks, etc. allow different businesses to unlock their full potential using automation.
These tools can improve the accounting for eCommerce businesses and make it super convenient for all. Moreover, these tools are personable as well, providing the required flexibility to the business.
eCommerce Accounting and Cryptocurrencies
The introduction and increasing popularity of cryptocurrencies is also revolutionizing the world of eCommerce. Cryptocurrency is a type of currency that is available to all digitally. Using this currency, anyone can buy and/or sell goods and/or services with ease.
As these cryptocurrencies are encrypted, they are one of the most secure forms of money.
Instead of roaming around with physical forms of money, anyone can buy and keep cryptocurrency with them anywhere they go. This digital currency is stored in digital and password-protected wallets.
Therefore, they offer the utmost security to the bearer.
All cryptocurrencies are created with the help of blockchain technology. Under this technology, a digital ledger of the currency is maintained online.
This ledger is not available with any bank or institution but is controlled by free forces. This ledger reflects the existing ownership of the cryptocurrency. Hence, no one can know who owned the currency before the existing holder.
If you trade in cryptocurrencies by buying and selling them online, then you need to record and show your profits to the tax authorities, just like with any other form of trading.
However, different countries have different regulations related to the treatment of profits arising out of such trades.
As cryptocurrencies make trading more secure and easier, they can be easily converted into general money. Hence, more and more online buyers favor cryptocurrency over any other.
Some of the biggest tech giants and brands have started accepting cryptocurrency for payments. Soon, many other brands will start adopting digital currency for payments.
Hence, today’s eCommerce businesses must prepare and develop themselves for such changes for a better future.
Moreover, as there would be no chargebacks with this form of trading, businesses are inclined towards using this mode of payment for their eCommerce business.
Sustainability and Accounting: The Rise of ESG Reporting
The value of social ethics is increasing in this modern world. Buyers or customers seem to opt for socially compliant businesses for purchases. To figure out whether a company is socially compliant or not, the Environmental, social, and governance (ESG) framework is used.
This framework establishes and compares various social and ethical aspects of the business to know about its compliance. Various business practices and operations are compared closely to determine the performance of the business on the grounds of various ethical issues.
In the present world, it’s very important for a business to adopt ESG reporting. When the ESG reporting factors are taken into account, then the business can ensure that it does business for a longer period.
The framework helps the buyers and investors understand whether a business is well-aligned with their values. However, following this framework does not mean that the business has to let go of its profit-earning virtue.
ESG reporting is viable for all eCommerce and other forms of business. According to a framework, if a business complies with the ESG reporting values, then it means that the organization cares about the economic, social, and governance aspects of the customers.
This implies that the eCommerce business runs its operations while looking out for the environment. It vows not to damage the environment while operating the business.
Similarly, the business also vows to take care of the social prospects of the parties related to the business. For example, according to the ESG framework, the business will not overstaff the workers in its small warehouse.
Lastly, the business also vows to govern the well-being and safety of the parties related to the business. For the same, it vows to keep users’ data safe at all times. The organization, in no way, will share such personal data of the buyers to any harmful parties.
ESG framework also suggests that the business only accepts funds from ESG-promoting investors. This move strengthens the concept and ensures no external forces affect the business’s values.
To implement such an ESG strategy, the business should watch for individuals and groups that center ESG virtues as their own.
Moreover, the eCommerce business should also set up some key benchmarks for all the employees of the business and the business itself to follow.
Set SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) goals that concern economic well-being first rather than personal.
Big business giants like Amazon, Apple, AT&T, GAP, etc., vow to follow the ESG framework and have shown results for the same as well.
Why is Expensing Products Immediately Bad for the Business?
Expensing of products is a very common method used by different businesses to record the purchase of the products. This method may seem helpful as it allows you to record the transactions as and when appearing, but in reality, this method is quite troublesome.
According to this method, the accountant or bookkeeper instantly expends all the purchased products in the books of accounts.
The problem with this approach is that it hides the reality of the business. Because of this approach, it becomes very hard to ascertain whether a business is enjoying profits or facing losses. This happens because when the products are expensed instantly, it creates a huge hole of missing data.
However, the best way to show the products to the business is to put the same in the balance sheet as inventory. There are multiple advantages to using this approach.
With the help of this method, you can ensure that a separate category of purchases is created and the expenses are recorded accurately.
This lets you understand the exact stock value and expenses for any business. As the inventory of any eCommerce business is its asset, the same should reflect in the specific section of the balance sheet.
Moreover, even the tax authorities find this approach to be deceitful. This is because this approach increases the amount of expenditure in the business, thus reducing profits.
Thereby decreasing the total tax liability.
Hence, if your business is ever found to be using this approach, the IRS or any other tax regulatory authority may take you as a fraud, and you may face legal consequences.
The distinction between the techniques of expensing and assets for products is quite complicated and confusing. Therefore, businesses, especially the eCommerce business, take the help of an automated tool for this task.
If you employ automatic software like NetSuite in your business, you can ensure that the tool executes this task of expensing as and when required.
You don’t have to spend your efforts figuring out the tenure for expensing and then expensing when the time arrives. Expensing the products manually can affect data reliability because of increased mistakes and omissions.
Hence, we suggest playing it safe and taking the help of a third-party automated tool for this aspect of eCommerce accounting.
Understanding and Navigating Online Sales Tax
Apart from income taxes, eCommerce businesses also have to take care of sales taxes to operate their business.
In the US, different states levy different sales tax rates on the business. From as high as 9.21% in Washington to as low as 5.34% in Wyoming, the tax rates in different states vary in this range.
So, you need to fulfill your sales tax liability according to the state of your business.
Earlier, eCommerce businesses had the ease of filing the sales tax for a state according to the physical presence of the business in such a state. However, in the past few years, this trait has changed.
Now, such businesses have to take care of the tax obligations according to the operative state, even if they work remotely.
When any business tries to save itself from the sales tax using any legal or illegal technique, such a business comes into the radar of the IRS sooner or later.
The IRS has active officials working to find out about such businesses and get them to justice. If your business is found to be committing sales tax fraud, it can face dire consequences.
The IRS may levy heavy fines and duties on such businesses. Moreover, the managers, owners, and directors of the company may even face some prison time for the wrongful act.
The worst result of such fraud is that the organization’s reputation takes quite a hit. It becomes very hard for customers to trust such businesses afterward.
Therefore, it’s better to file the taxes as and when required to protect the business.
Knowingly or unknowingly, when you fail to pay the sales taxes of your business in due time and accurately, consequences appear. If you want to protect your business from such dire consequences, you can take the help of an automatic tool like NetSuite to calculate tax.
Such automated tools automatically calculate and record the sales tax liability of the business along with each sale.
Moreover, the tool will even notify the business about the due dates of filing taxes for ease.
You can sign in to the portal. Look at the total tax liability, and file the same in due course.
Accounting for eCommerce Businesses: What and How?
Accounting for retail businesses is relatively simple when compared to accounting in eCommerce businesses. This is because the transactions in offline retail businesses are limited and straightforward. But when it comes to eCommerce businesses, the matter becomes complicated.
There are certain aspects of an online business that are calculated uniquely. Hence, the need for eCommerce accounting and eCommerce accountants appear.
What’s unique about eCommerce, you ask?
Irregular Inventory Management
What’s unique about an eCommerce business is the method of inventory management.
Unlike traditional retail stores, the eCommerce business has to manage the inventory for different trading platforms. The business may have an online presence in multiple marketplaces.
It may also use a third-party or personal website for online selling.
Therefore, if the source of sales is multiple, it becomes tough for the business to keep different inventories for different sources.
Hence, the business has to maintain the inventory in a single place for all sources.
Different Sales Taxes for Different States
As stated earlier, in the US, different states levy different sales tax rates on the business. Therefore, if an eCommerce business operates in more than one state, it has to file the taxes for all the states individually and differently.
The calculator of taxes in such a case becomes very complicated and lengthy.
Different Taxes and Currency Exchange Rates for Different Countries
If your eCommerce business is operating internationally, then problems become even more dire. Just as states, different countries levy different taxes on goods and services as well.
Therefore, the business has to calculate the tax liability for individual cases.
Moreover, the currency exchange rates differ as well, which makes it tough for the business to operate from a single source.
This, in turn, complicates eCommerce accounting practices as well.
Calculation of COGS
For a retail business, the money spent on procuring and retaining the product is the total cost of goods sold (COGS). However, this is not the case with eCommerce businesses.
For an online business, the business also needs to consider the shipping costs, costs of the marketplace, and various others to calculate the COGS.
The best solution for all such problems related to accounting for eCommerce businesses is to use automated, reliable, and extensive accounting software. Tools like QuickBooks and NetSuite are some of the most trusted ones that can help you tackle all the accounting requirements of your eCommerce business.
The tool alone can easily manage the inventory of the business, calculate and pay the taxes for you, as well as help you make effective financial decisions in no time.
Another viable solution is to hire a permanent accountant who can take care of all such eCommerce accounting requirements for you, manually. Such an accountant will also handle the automated system if you install one. But this appears to be a bit tiring task, especially if the accountant has zero experience with eCommerce businesses.
Choosing the Right eCommerce Accountant
If you decide to hire an account for eCommerce business accounting, this task is not easy.
The accountant for an offline reality business can be a fresher or inexperienced individual.
However, for the eCommerce business, you need an experienced individual who can handle all the unique requirements. You may even need to hire an individual who has done extensive certifications and courses for eCommerce accounting alone.
However, this depends on the scale of your business.
Moreover, if you have installed an automated ERP or accounting tool on the business, then you need someone who has the knowledge and experience to run and handle such a tool as well.
He/she should be capable of handling the software functionalities and delivering the required information in a timely manner.
Another must-have trait of such an accountant for eCommerce accounting is that he should be familiar with the different sales tax rates prevailing in the country. He/she should know how to handle and record the different tax rates promptly. So that the accurate tax liability can be ascertained and paid whenever necessary.
For such tasks, taking the help of third-party accounting professionals is the best way to proceed. Such professionals, just like those at The LedgerLabs, have experience working with different eCommerce businesses.
Moreover, they also have immaculate experience using professional eCommerce accounting tools like NetSuite. They can install the tool for your business as well as manage an existing one for you with ease. Try connecting with The LedgerLabs for exclusive eCommerce accounting services.
Conclusion: Preparing for the Future of eCommerce Accounting
eCommerce accounting is a daunting yet unavoidable task for any online business. The broadness of the business domain and its compliances, legal and otherwise, can scare some businesses.
However, with the right accounting tool and a smart accounting professional(s) like ourselves at The Ledger Labs, this task can smoothen. You can relax knowing that eCommerce accounting is always done correctly for your business.
The advantages of eCommerce accounting are vast and never-ending. By analyzing the results, facts, and statistics derived from eCom accounting, you can unlock new levels of growth for your business.
Such accounting practices help the business in analyzing, quite accurately, what the future holds, as well as plan for it accordingly.
Moreover, with the increased popularity and usage of cryptocurrency in online trades, effective accounting is the need of the hour and will soon be an inevitable part of the business.
Hence, opt for smart eCommerce accounting today and prepare for a healthy and prosperous tomorrow.
Hi, I am Gary Jain & I help business owners in taking control of their business finances by being a one-stop solution for all their accounting, taxation & CFO advisory needs.
Being an entrepreneur myself, having built and scaled businesses in a variety of domains, has helped me think from the perspective of the business owners and thus bringing in the clarity of the practical problems and their equally practical solutions.
Being from a humble background, I have always valued the importance of conserving resources & I dont like overspending businesses. I advise and work towards tightening the cash outflow tap and making business owners take a very different approach to managing their finances.