eCommerce business owners are familiar with the term eCommerce accounting and its importance. It refers to the financial management of a digital business. You can manage your business like an expert when you have mastered eCommerce accounting. Efficient eCommerce accounting will help you determine your business’s health, make financial predictions, and pay tax liabilities. However, eCommerce can be a complex process, as it involves collecting, organizing, assessing, and reporting the financial data of a business.
Below is a detailed eCommerce accounting guide to help you understand the concept, its types, requirements for starting accounting, and important accounting tasks.
eCommerce accounting can be categorized into two sections based on the accounting time.
This type of eCommerce accounting involves a simple system and is often a beginner’s choice for small businesses. In this system, you will add the record of a transaction when cash enters or an expense leaves your bank account. While doing taxes for your businesses, you will need to pay income taxes only on the payments you have received at that point.
This is the traditional eCommerce accounting method that financial organizations often use. This method requires you to record sales and expenses as they happen instead of waiting for the amount to reach or leave the bank account. It can be a little trickier for beginners, but once accustomed, this will provide a more realistic status of the business’s income.
You will observe three major financial statements in eCommerce accounting.
- Balance Sheet: Displays the performance of a business of a particular time period.
- Income Statement: Displays the profitability of a business of a particular time period.
- Cash Flow Statement: Displays available cash for a particular time period.
You will need three things to start accounting regardless of the eCommerce accounting type selected.
IRS generates unique, 9-digit EINs or Employee Identification Numbers for businesses that must be entered on tax documents. SSN or Social Security Number acts as the EIN for sole traders. Request your EIN (or SSN) before you start accounting for your eCommerce business.
You should open a bank account for your eCommerce business to complete business transactions. Set up accounts on payment apps since digital payments are currently popular. Remember that you should not use your business accounts to make personal transactions.
Keep error-free records, save time, and streamline your accounting process with accounting software and services.
Following are the major eCommerce accounting tasks that you must complete on a weekly or monthly basis.
There are two types of transactions, income and expense. It would be best if you categorized all your transactions accordingly and accurately. This will give you insights into regular and irregular expenses and revenue.
Error-free recordkeeping is essential for all businesses. As you record all data and information, maintain supporting documents like bills, invoices and receipts for a minimum of three years. This is necessary to verify or rectify data and transactions as or when necessary.
You can identify your business expenses, revenue and other financial obligations by creating a proper business budget. This will show you the expenses that can occur and if you have enough funds. Business budgeting will further assist you in avoiding business debts and staying on top of your financial goals.
Tax liabilities of eCommerce businesses include income tax and sales tax. Sales tax further refers to both state and local taxes. You must know which taxes to pay to which authorities and in what amount.
In case of customer returns, the value of the returned items should be subtracted from the revenue and kept under Returns and Allowance. Chargebacks should also be put under Returns and Allowance, but any extra fees or payments associated with chargebacks should be considered business expenses.
Practise the following three tips for the best eCommerce accounting.
- Foresee all your major expenses
- Keep time and money for taxes
- Oversee inventory management
There are two common mistakes that you should avoid while accounting for your eCommerce business.
- Do not delay reviews of financial statement
- Do not rush to complete accounting tasks in a short time, as it can cause errors
eCommerce accounting can be difficult for novices. The easiest approach to accounting for the beginning stage is understanding the basic requirements and tasks. Get familiar with the relevant financial statements and avail of the required documents, accounts and software. Moreover, remember to put in efficient time and concentration to avoid errors.