If you have a product, ecommerce is a must. Whether your main focus is ecommerce or you’re using it as an extension of your core business, selling products online can be an incredible way to reach customers virtually anywhere. Before you launch an online store, you may want to take a minute to get acquainted with ecommerce accounting and the available tools.
Key components of ecommerce accounting
Ecommerce accounting entails all of the standard accounting practices you would use in any other business, plus a few additions. If ecommerce is an extension of your core business, you likely already have some accounting procedures in place and can build on that base with ecommerce-focused processes.
If ecommerce is the core of your business, you will want to set up your books with the ecommerce components right from the start, which will help to ensure you are set up for success and able to grow your business with accurate and relevant data.
Aside from the basics, below are some important concepts to understand when it comes to ecommerce accounting:
- Purchase orders: A purchase order is a legally binding document that outlines the quantity to be purchased and price a client will pay. Although a purchase order is not, strictly speaking, a payment, it should include details of the purchase agreement. Many businesses use purchase orders to buy items from their vendors, such as raw materials, or by a client to purchase a set amount of product at a wholesale price.
- Sales orders: A sales order is the typical response to a purchase order that includes details of the sale along with payment details, customer contact information, and delivery dates.
- Accounts payable and receivable: These accounts represent outstanding bills and invoices for expenses, as well as revenue not yet received. Monitor these two accounts closely—they can tell you a lot about your cash flow. You may need to make adjustments to customer payment terms if you are struggling with cash flow.
- Cost of goods sold (COGS): A business’s cost of goods sold refers to the direct costs associated with the production and distribution of a product. COGS includes all direct costs, but not overhead costs such as payroll, office expenses, or other non-related business expenses.
- Sales tax: Ecommere sellers are legally required to remit sales tax to the state in which the purchaser resides. There are varying rules from state to state that dictate the thresholds that trigger sales tax requirements. We recommend consulting with a CPA or sales tax expert to ensure you are in compliance with the sales tax laws that are relevant to your business. The right accounting app can automate the sales tax process for you, helping to take the guesswork out of tax payments.
- Net profit: Reviewing your net profit on a regular basis will be essential to understanding what products are profitable and identifying areas of opportunity. This is also a great KPI to understand how inflation has impacted your business. If the costs to produce and deliver a product have far exceeded the revenue, it may be time to pause the production of that product or explore lower-cost vendor options.
- Profit and loss (P&L): Your profit and loss statement (often referred to as the P&L) will show you the profitability of your company for a given period of time. If you decide to acquire more capital through investors or a business loan, a bulletproof P&L will be a necessary document to show the overall probability of your business.
Ecommerce accounting methods
If you’re a new business owner, you will need to decide on an accounting method for your ecommerce business. Ecommerce accounting methods can affect your cash flow and taxes at year-end, so it is crucial to choose the method that works best for your business model. Below are the two accounting methods that are important to understand for your ecommerce business.
- Cash-basis accounting. With cash basis accounting, you record income only when the buyer has paid for the order and the money is in your account (i.e. you receive an order, ship the item, and your customer receives it). Even though the buyer has the item, you will not account for the cash until you’ve actually received it.
- Accrual accounting. The accrual accounting method records income when the money is earned, but not necessarily received. In the example above, once the item is ordered, you have earned the income and should record the transaction.
If you start with cash basis accounting and decide to switch to accrual accounting, you must file paperwork with the IRS. We recommend consulting with an experienced business CPA to help determine which accounting method is best for your ecommerce business to avoid having to report the change with the IRS.
If you have a business already and are expanding to offer ecommerce products, we recommend continuing with your current accounting method for business continuity.
Cloud-accounting apps fit for ecommerce
Cloud-based accounting apps are the ideal way to manage your ecommerce business books. Our top recommendations for cloud ecommerce accounting are Shopify, Square, and A2X.
- Shopify: A cloud-based platform that allows you to sell products to anyone, anywhere through your website, social media, and online marketplaces. Shopify provides a custom dashboard with real-time insights into your business finances.
- Square: A great option for businesses operating their ecommerce business as an extension of their core business. Square pulls all information into one place, making reporting from multiple sources simple.
- A2X: We love this option for ecommerce based businesses who want to understand their financials, eliminate guesswork, and save time with automations. If you sell on Shopify, Amazon, Walmart, eBay, or Etsy, A2X is a superior option.
Cloud-based accounting solutions for ecommerce businesses offer incredible time-saving solutions with automations, integrations, and simplified reporting. Insights into key components mentioned above, such as AR/AP, COGS, gross profit, and profit and loss, are readily available in your dashboard. You can see the breakdown of accounts, products, and clients for simplified viewing and reporting. For businesses with multiple sources of income, our top cloud accounting recommendations seamlessly integrate with many other cloud accounting apps.
As cloud accountants that work with all types of businesses, we know that the accounting side isn’t for everyone. Our experienced team has worked with hundreds of small businesses to get their accounting off to the right start with proper procedures, protocols, tools, and methods to ensure the business is set up for success. We have also worked with many business owners to overhaul their bookkeeping by bringing their books to the cloud with the right cloud accounting apps and proper procedures.
When your business back office has a solid foundation, scaling the business has no (accounting) restrictions. Ready to get your ecommerce accounting on the right track with a better understanding and the right tools? Contact our team to schedule a consultation. We offer services to help our clients from an educational standpoint, implementing new technologies, and ongoing full-service accounting.