Running an online store comes with a lot of challenges and things to think about, like figuring out how to ship items and how to figure out taxes on online sales. Your accounting system should be able to keep up.
Whether you use accounting software to do your own bookkeeping or hire a professional bookkeeper, your solution should be able to handle the complexities of e-commerce bookkeeping, such as:
- Merchant Fees
- Third-Party Payment Processors
- Inventory Management
- Alternative Sales
- Multiple Currencies and Sales in Other Countries
- Shipping
- Sales Tax
So, your records and financial statements, like your balance sheet and statement of cash flows, will be accurate and complete so that you can make sound financial decisions for your store.
This article discusses seven essential things to remember when keeping books for e-commerce. Plus, we go over three key things your e-commerce business should look for in a bookkeeping system.
We at Countick have a team of expert bookkeepers who use unique tools to handle even the most challenging e-commerce bookkeeping situations. Try Countick Now if you want to keep better books.
things to think about for e-commerce accounting
Some business models, like selling services or software, don’t have to worry about problems with e-commerce bookkeeping. In this section, we’ll look at the most common bookkeeping problems that e-commerce business owners face.
When you know how these parts of e-commerce affect your business’s bookkeeping, it’s easier to choose the right solution.
1. handling merchant fees
If you host your online store on an e-commerce platform, such as Shopify or BigCommerce, you will have to pay merchant fees. Building your store on top of these platforms gives you a lot of benefits, like a faster start-up time and an easier time optimizing your store for search engines.
But e-commerce platforms and payment processors have to take a small cut of every sale you make online so that they can offer these perks. It’s how they get paid.
This can make it harder to keep track of your finances since the deposits in your bank account are net sales and not gross sales. That’s because the platform already cut the money before putting it in your account.
The right way to show this in your books is to write down the “gross sale” and then “merchant fees” for the difference between that number and the amount your bank gave you.
2. using tools from third parties and giving refunds
In addition to e-commerce platforms, third-party tools like payment processors (like Stripe and PayPal) can make keeping records harder. This is especially true regarding keeping track of exchanges and returns.
For example, if you use Shopify’s platform to make a sale, Stripe handles the payment (and recall from the above section there will be a merchant fee). But if your customer sends the item back a week later, how do you track it? You may need help keeping track of things when you use more than one tool from a third party. Shopify or Stripe kept track of the return? Did it get written down more than once in your books?
On top of that, many payment processors, including Stripe, don’t give you back the merchant fee you paid just because a customer returns an item. That fee is a loss for your business, and your books have to show it as such.
3. keeping track of stock on different sales platforms
Inventory tracking is built into the software of many e-commerce platforms. This makes it easy to track and manage your store’s inventory for online sales.
But if you sell online in more than one place, like on your own Shopify website and Amazon, your platform will only be able to keep track of changes to your inventory caused by sales in other places.
So Shopify’s inventory won’t show how many items you sold on Amazon.
Because of this, it’s vital to keep track of your inventory in one place, whether or not it automatically updates your books. If you hire a bookkeeper, they can use this information to make an accurate record of your sales, returns, and restocks in your books.
4. keeping track of other sales
Most of the money you get from customers will be through credit cards, but you can still choose to take other forms of payment (primarily if you also sell in-person).
Some e-commerce platforms can track sales made with cash, checks, gift cards, and credit. If you plan to accept these payment methods, you’ll need to ensure your solution can handle those sales.
Even though more payment options can make things easier for your customers, remember that they are harder to keep track of in your books. If you get paid in cash or by check, the sale will show up in your books once you put the money in your bank account.
If you sell gift cards, a typical sale means someone pays you, and you give them a gift card simultaneously. Because you have yet to exchange goods, that cash flow is counted as unearned revenue in your books. The unearned income will appear on your income statement when the gift card is redeemed.
5. foreign sales
You can sell products worldwide through e-commerce, and many e-commerce platforms make it easy to sell in different currencies. But if you sell things and ship them to other countries, your books might need extra information to keep track of those sales.
For example, you’ll need to know the gross sale and merchant fees in foreign currency. To match the sale with the last deposit to your bank account (which will be in your local currency), you’ll need to know the exact conversion rate that your e-commerce platform used to convert between currencies.
Sometimes, the difference between the foreign sale and the final deposit in your account can be caused by this conversion. When this happens, you must write down the difference as a “gain or loss on foreign exchange” in your books.
6. getting and keeping track of shipping fees
Shipping costs are a whole other can of worms for many different reasons. Should you ship for free? If so, how much should you charge customers? A flat rate?
By connecting directly to shipping systems, some e-commerce platforms make it easier to handle shipping logistics. That means your platform can handle collecting shipping costs from the customer and buying postage from your logistics provider. Keep in mind that even though you don’t have to worry about that step anymore, your e-commerce provider will probably take a cut of the transaction.
Another vital thing to remember is that the shipping fees you charge customers may differ from what you pay to ship those items. Let’s say you offer flat-rate shipping for $5. You may pay $2 to ship one order and $10 to ship another. Your books should be able to explain these differences.
There are mainly two ways to do that.
A. have one account for COGS shipping costs
The first way to keep track of the difference between shipping income and shipping costs is to put everything in one COGS Shipping Expense account.
That means that the money from flat-rate shipping and the money paid to shipping companies like UPS go to the same place. You won’t be keeping track of the difference, but it won’t matter in the end because they all have to do with COGS.
B. set up two accounts COGS shipping expenses and shipping income.
You can also set up two accounts: one for shipping income and one for COGS shipping expenses. The customer’s flat fees go in the first box, and payments to shipping vendors go in the second. When necessary, you would look at the differences between the two accounts.
7. sales tax
Sales tax collection and payment are among the essential parts of an e-commerce business. Some e-commerce platforms will collect the sales tax from customers and send it to your state’s sales tax office.
Most platforms, however, will only collect sales tax from customers. They put it in your bank account with the rest of the money from the sale, so it’s up to you to send it to the correct tax office.
From a bookkeeping point of view, it’s essential to know that tax money isn’t the same thing as income. As soon as the sale is processed, the sales tax becomes a liability you owe to the government. Your books need to show the difference between your bank statement’s final deposit and your gross sales, sales tax, and merchant fees.
For example, if a customer places an order for $98 on your e-commerce platform, they will be charged $105.84: $98 for the item(s) and $7.84 in sales tax, which is 8% of the purchase.
Note: This sales tax percentage varies based on where you live.
The platform will put the total amount collected from the customer ($105.84) into your account, less any merchant fees (usually around 3% or $2.94 in our example). So, your books should show the following:
- Gross sales of $98
- Merchant processing fees of $2.94
- Sales tax of $7.84 owed to your local tax office
what to look for in an online business accounting system
Because bookkeeping for e-commerce businesses is so complicated, many business owners hire a bookkeeping service or a professional to ensure their books are accurate and complete. That’s definitely what we think you should do. Even if you use software, it’s easy to spend more time on your books than you have.
If you do decide to use a service, there are a few key things to look for in an e-commerce bookkeeping solution:
- Inventory Capability: Not all bookkeeping services track inventory. That’s because you have to use accrual-basis bookkeeping for inventory. When choosing a way to keep track of your store’s books, make sure it can do both accrual-based bookkeeping and inventory tracking.
- Integrating with Your E-Commerce Platform: The whole point of giving someone else your books is to get them off your hands. That means that your solution needs to work well with your e-commerce platform. That looks like good syncing that was done without your help.
- Allows for more than one currency: Unlike brick-and-mortar stores, your online store will likely reach customers who use different currencies. Your accounting software should be capable
of handling multiple currencies and taking into account any differences, they cause.
complete and accurate bookkeeping for E-commerce
Keeping the books for an online store is complicated in many ways. No matter how big or small your store is, there will be problems. By understanding these key points and how they affect your books and financial statements, you can decide how to handle your e-commerce bookkeeping and find the right bookkeeping software or service for your business.
At Countick, we have a team of expert bookkeepers who use special tools and can handle even the most challenging bookkeeping situations in e-commerce.
If you want to keep better books, try Countick!
