eCommerce, short for electronic commerce and also called online commerce, has surged in recent years thanks to technological advancement. Even existing legacy businesses have found a way to explore eCommerce. And as it continues to gain traction, eCommerce accounting has become in demand and is considered essential in supporting all eCommerce activities.
What Is eCommerce Accounting?
eCommerce accounting refers to the financial management and record-keeping practices specific to businesses that operate primarily or entirely online. This includes tracking sales and revenue, managing expenses, paying income taxes, creating financial reports, etc. Because of these complex accounting tasks, eCommerce should always have a systematic eCommerce bookkeeping and accounting processes. eCommerce businesses should also consider unique accounting challenges, such as cash basis accounting, dealing with digital goods, handling sales tax for multiple jurisdictions, and even accrual accounting.
What Are the Different eCommerce Accounting Activities?
As the eCommerce accounting system covers a broad range of tasks, here are some of the critical activities involved in its operation;
eCommerce sellers need to accurately track and record all sales transactions, including the date, amount, and customer information. This information is used to calculate revenue and generate financial reports. There are several ways to track the sales of an online business:
Online store platform: Many eCommerce platforms have built-in sales tracking features. These platforms can automatically record sales data and generate reports on revenue, sales volume, and customer demographics.
Accounting software: Accounting software can integrate with an eCommerce platform or payment gateway to automatically import sales data and create financial reports.
Spreadsheets: Some small business owners may prefer to track sales manually using a spreadsheet, such as Excel or Google Sheets. This can be a valuable option for eCommerce companies with a small sales volume or prefer more control over the data.
Custom software: Some eCommerce businesses may need to develop custom software or mobile apps to track sales, depending on their specific needs.
Regardless of the method used, ensuring that the sales data is accurate, complete, and regularly updated and reviewed for discrepancies is vital. Additionally, it is essential to keep records of all sales and cash that goes into your bank account to be able to report on them during tax planning time or for other financial matters.
eCommerce business owners need to track and record all expenses related to running the industry, including website hosting fees, marketing costs, and payment processing fees. This information calculates the cost of goods sold and generates financial reports. Here are steps in managing the expenses of an online business:
Keep detailed records: Keep detailed records of all expenses, including the date, amount, and purpose of each cost. This will make it easier to track expenses and create financial reports.
Create a budget: Develop a budget that outlines projected expenses for the business. Use this budget to compare actual and projected costs and adjust as needed.
Categorize expenses: Categorize expenses by types, such as advertising, rent, and salaries. This will make it easier to track the costs and create financial reports.
Track expenses by project: If your business has multiple projects, track expenses by project to understand the cost of each project.
Establish a purchase approval process: Establish a purchase approval process where all expenses over a certain amount must be approved by management before they can be incurred.
Review expenses regularly: Review expenses regularly to identify any areas where costs can be reduced or eliminated.
Compare prices: When making purchases, compare prices from different suppliers to ensure that the business gets the best deal.
Automate payments: Set up your bank account or card to automate payments for recurring expenses, such as rent or utility bills, to ensure they are paid on time and avoid late fees.
Track travel and entertainment expenses: Keep detailed records of all travel and entertainment expenses. These expenses are subject to special rules and limits.
Any eCommerce seller is responsible to pay income taxes on their income and sales. They need to track and record all income and expenses to accurately calculate their tax liability and file their taxes on time. Here are the general steps in paying taxes for an online business:
Register your business: Register your business with the appropriate state and federal agencies. Depending on your business structure (e.g., sole proprietorship, LLC, corporation) and location, this will vary.
Obtain an EIN: Obtain an Employer Identification Number (EIN) from the IRS if you are in the United States. Other countries may also need similar identification, so it is better to check within your location. This number is used to identify your business for tax purposes.
Keep accurate records: Keep records of all income and expenses throughout the year. Ensure that you keep track of all money that goes in and out of your bank account.
This will be necessary for calculating your tax liability.
Determine your tax liability: Determine your tax liability by calculating your income and deducting any eligible expenses. Depending on your business structure, you may be required to file income, payroll, sales, and other taxes.
File taxes: File your taxes with the appropriate state and federal agencies. Tax filing deadlines vary depending on the type of tax and the agency.
Keep records: Keep records of all tax returns and payments. It’s essential to have these on hand in case of an audit.
Handling Sales Tax
eCommerce companies that sell physical goods may need to collect and remit sales tax to multiple jurisdictions based on where their customers are located. This can be complex and may require eCommerce bookkeeping tools or eCommerce accounting services. Here are the general steps in handling sales tax for an eCommerce business:
Determine your sales tax nexus: A sales tax nexus is a connection between your business and a state that requires you to collect and remit sales tax. Determine which states your company has a sales tax nexus in.
Register for sales tax: Register your business with the appropriate state tax agencies to obtain a sales tax permit.
Collect sales tax: Collect sales tax at the time of sale based on the sales tax rates for the state and local jurisdictions where the customer is located.
File sales tax returns: File sales tax returns with the appropriate state and local tax agencies, typically monthly or quarterly.
Remit sales tax: Remit the collected sales tax to the appropriate state and local tax agencies.
Keep records: Keep records of all sales tax collected and remitted, including invoices, receipts, and sales tax returns.
Update your system regularly: Keep the sales tax rates and rules updated in your eCommerce platform or accounting software to ensure that you collect the correct sales tax amount.
Seek professional advice: Seek professional advice from an accountant or an eCommerce bookkeeper to ensure that you comply with all sales tax laws and regulations.
It is important to note that taxes can vary depending on the type of business, the location, and the income level. Knowing the specific requirements in the states where your company operates is also important. Additionally, seeking professional advice from eCommerce accounting services or an online bookkeeper is recommended to ensure that you comply with all the tax laws and regulations.
Handling Digital Goods
eCommerce businesses that sell digital goods such as e-books or software may need to consider accounting and bookkeeping tasks challenges such as handling refunds and chargebacks to your bank account. To assist in your operation, here are some techniques in your eCommerce accounting method when handling digital goods.
Use a digital delivery service: Use a digital delivery service to handle the delivery and distribution of digital goods. These services can automatically deliver digital goods to the customer after payment and handle refunds and chargebacks.
Use a payment gateway: Use a payment gateway like PayPal or Stripe to handle digital goods delivery. Payment gateways can provide detailed transaction reports that include information on sales, refunds, and chargebacks.
Use a content delivery network: Use a content delivery network (CDN) to securely deliver digital goods to customers. CDNs can handle digital goods’ storage, delivery, and protection and help prevent unauthorized access and downloads.
Use DRM: Use Digital Rights Management (DRM) technology to protect your digital goods from unauthorized use. DRM can control access to digital goods, limit the number of times they can be downloaded, and prevent copying.
Keep track of customer information: Keep track of customer information, such as their name, email address, and purchase history. This will be useful in case of a refund or chargeback and for future marketing or customer service purposes.
Provide clear instructions: Provide clear instructions and guidelines on how to access and download the digital goods, and inform the customers about the terms and conditions of use.
Include a digital signature: Include a digital signature to the digital goods to prove authenticity and protect against fraud.
Have efficient customer service: Have an efficient customer service system to handle any issues that may arise with digital goods.
It is important to remember that digital goods may have different rules and regulations than physical goods, and it is vital to comply with them. Additionally, it is important to have a clear refund and chargeback policy and ensure it’s accessible to customers.
eCommerce businesses need to keep proper inventory levels records, including tracking the cost of goods sold, inventory purchases, and inventory value. eCommerce businesses can record inventory using the following steps:
Track inventory levels: Keep track of the quantity on hand, including the number of items received, sold, and returned. You can do this manually using a spreadsheet or inventory management software.
Record inventory costs: Record the cost of each item, including the purchase price, freight, and other costs related to acquiring the item.
Calculate inventory value: Calculate the total value of the inventory by multiplying the number of items on hand by the cost of each item. This value can be used to generate financial reports such as balance sheets.
Track inventory movement: Track the movement of inventory from when it is received to when it is sold. This includes recording the date of each transaction and the customer or vendor information.
Use inventory management software: Many eCommerce businesses use inventory management software to automate the process of tracking inventory levels, costs, and movement. This software can integrate with eCommerce platforms, accounting software, and point-of-sale systems.
Monitor stock levels: Regularly monitor stock levels and reorder items when stock is low to prevent stockouts and ensure that the business can fulfill customer orders.
Track inventory by location: If you are a business owner who operates multiple warehouses or store locations, track inventory by location to know where the inventory is located and how much is available.
Update inventory: Regularly update inventory information to ensure that the information is accurate and up-to-date.
Proper inventory management is important for eCommerce businesses because it helps to ensure that products are available when customers want to purchase them, and it provides valuable information for financial and tax reporting.
eCommerce businesses need to create various financial statements such as balance sheets, income statements, and cash flow statements to track the performance of the business and make informed decisions about the future. eCommerce accounting can perform financial reporting by using the following steps below.
Collect financial data: Collect financial data from various sources, such as accounting software, eCommerce platforms, and payment gateways. This data should include revenue, expenses, and sales tax.
Organize the data: Organize the data into categories such as income, expenses, and taxes. This will make it easier to create financial statements.
Create financial statements: Use the collected and organized data to create financial statements such as income statements, balance sheets, and cash flow statements. These statements will provide a snapshot of the business’s financial performance and position.
Analyze the financial statements: Analyze the financial statements to gain insights into the business’s financial performance and identify any areas for improvement.
Share the financial statements: Share the financial statements with stakeholders such as investors, lenders, and the management team.
Prepare for audits: Prepare for audits by ensuring that the financial statements are accurate, complete, and in compliance with accounting standards.
Use financial reporting software: Use financial reporting software to automate collecting, organizing, and creating financial statements.
Seek professional advice: Seek professional advice from an accountant or financial advisor to ensure that the financial statements are accurate and compliant with accounting standards.
Financial reporting is an important aspect of eCommerce accounting as it provides a clear picture of the business’s financial performance and position, which is essential for making informed decisions.
Why Is eCommerce Accounting Important?
There are several reasons why eCommerce accounting is crucial in online businesses. Here are some of them:
eCommerce businesses are subject to the same financial reporting and tax laws as brick-and-mortar businesses. Proper accounting can help ensure compliance with these laws and avoid penalties.
Accurate financial records are essential for making informed business decisions and understanding the financial health of the company. eCommerce accounting can provide insights into revenue, expenses, and profitability.
eCommerce businesses need to accurately track and report income and expenses to the government for tax purposes. Proper accounting can help ensure that taxes are calculated correctly and filed on time.
eCommerce businesses may be subject to audits by government agencies or financial institutions. Having accurate and organized financial records can help ensure a smooth audit process.
Accurate financial records are crucial when seeking funding from investors or applying for a loan. eCommerce accounting can provide a clear picture of the business’s financial position and potential.
Commerce businesses that want to grow need to make sure they are profitable and have a good handle on their finances. eCommerce accounting can provide the insights necessary to make strategic decisions that support growth.
eCommerce Accounting Can Make or Break Your Business
No matter what type of industry your business is in, eCommerce accounting is essential to operate seamlessly. As an eCommerce business owner, it saves you time, and effort in tracking your sales, managing your expenses, paying your tax obligations, and much more.