Ecommerce Accounting

Ecommerce accounting may sound boring, but your business’s profitability depends on getting it right. So, let’s look at how it all works. In this article, we’ll take an in-depth look at accounting and the tools that make the process easier.

Most ecommerce business owners are entrepreneurs who would rather do anything than accounting. But smart entrepreneurs also keep track of the money they spend on their business.

However, ecommerce accounting is complex, especially because brands can now ship products to different countries with different laws and tax systems. In this guide, we’ll explain the key concepts and best practices of ecommerce accounting, including tax considerations, inventory management systems, financial reporting, and accounting software. So, let’s get started!

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What is ecommerce accounting?

Ecommerce accounting is the practice of tracking, recording, and reporting the financial transactions of online brands using specialized tools designed to address the unique challenges of ecommerce sales. Ecommerce businesses are often quite complex, with transactions taking place across multiple countries, currencies, and platforms.

Many different types of transactions need to be tracked and reported, and ecommerce accounting is the system online business owners use to manage them.

Why is ecommerce accounting important?

Ecommerce accounting is essential because, without a solid accounting system, it can be difficult to understand your business’s financial health. When brands are just starting out, they often look at their bank account balance and assume the business is healthy if there’s money in it. But your bank balance doesn’t account for factors such as cost of goods sold, returns, which products are selling well, or which ones are unprofitable. Without this information, it’s impossible to calculate your business’s overall profitability.

Financial reporting isn’t the only reason you need a good ecommerce accounting system. Understanding your tax obligations can be complex without one, especially if your business sells products in multiple countries, provinces, states, and so on. Although setting up an accounting system can take time, you’ll be very glad you invested that time if your business is ever audited. Managing your business finances is much easier when you have a good accounting system in place.

Ecommerce accounting vs. accounting for other businesses: What’s the difference?

Bookkeeping and accounting are both part of ecommerce accounting, but they’re different. Bookkeeping is the process of recording every transaction into and out of your business and reconciling each one to make sure it’s recorded correctly. Transactions include sales, refunds, returns, and expenses.

Accounting has a much broader scope and covers your entire financial history, including reporting and analysis. It also covers tax compliance, allowing your accounting and finance teams to pay the correct amount of taxes. In short, bookkeeping is part of your overall accounting process and allows you to record your transactions. 

In contrast, accounting is a much broader term that covers all of your business’s financial processes, reporting, and analysis. The two are often confused because ecommerce bookkeeping is the day-to-day process of recording and reviewing your business transactions. This means that, as a business owner, you’ll generally use bookkeeping processes more often than strategic accounting processes.

Ecommerce accounting methods

There are two accounting methods for ecommerce businesses: cash and accrual. When choosing an accountant or accounting software partner, you need to decide which method you’ll use for your business. The method you choose can affect your year-end income taxes and how you record your transactions.

Cash-basis accounting

Cash-basis accounting essentially measures the amount of money in your bank account. This method is sometimes called bank account accounting for that very reason. It works by counting income or expenses only when money enters or leaves your account. For example, if you sell a product for $100, the revenue is only recorded in your system when it reaches your bank account. On the expense side, you may have purchased 100 units of this product at $10 each, resulting in a $1,000 expense. That $1,000 is only recorded in your system when it leaves the account. This may sound like the simplest and most logical way to keep your books.

Even so, forecasting profitability with this method is very difficult because it doesn’t account for the cost of goods sold for each sale. This makes it hard to predict how many products you need to sell and at what price to make money. Cash-basis accounting may be ideal for small, simple businesses, but it can quickly become very difficult to manage for complex companies such as ecommerce businesses.

Accrual-basis accounting

Accrual accounting is more useful for forecasting because it accounts for the cost of goods sold and storage costs when a sale occurs. The main reason this method is better for ecommerce businesses is inventory. For example, if you place a large inventory order, a significant amount of money will leave your bank account. Let’s say the order was $10,000 for 10,000 units. 

With cash-basis accounting, your accounting system will record a cost of $10,000. This will probably make you unprofitable that month because a large amount has left your bank account. If you were to report your numbers, it would be difficult to accurately show how profitable the business is. With accrual accounting, the cost of each unit is only incurred when a product is sold. This makes it much easier to understand how much money you’ll need to spend on a product to make sure you always have inventory available.

Accrual accounting is the preferred method for most ecommerce businesses because it provides a more accurate and realistic view of financial health. It captures the business’s true performance by matching revenue and expenses to the period they relate to, enabling better business decisions and financial analysis. This is especially important if you expect to sell your business in the future, since potential buyers will expect transparent and accurate financial reports. Most accounting software supports accrual accounting. 

Key ecommerce accounting terms

There’s some accounting jargon you should know when setting up an ecommerce accounting system. Learn the terms below to set up your system faster—and impress your accountant.

Cost of goods sold (COGS)

COGS includes all costs directly related to creating a product. The general formula is:

COGS = Beginning Inventory + Purchases During the Period - Ending Inventory

For most ecommerce businesses, this includes production costs, local taxes, shipping/freight, and storage. Some ecommerce businesses may also include certain fees in COGS, such as inspection/testing reports, product design, or photography. However, these costs are sometimes recorded as other expenses, such as marketing.

Gross profit and net profit

Gross profit is your revenue minus COGS. Net profit is revenue minus COGS and other business operating costs, such as Amazon fees, IT software, shipping costs, insurance, marketing costs, staff, and so on.

Here are the formulas:

Gross Profit = Total Revenue - Cost of Goods Sold

Net Profit = Total Revenue - Cost of Goods Sold - Operating Expenses - Interest - Taxes

Value-added tax (VAT)

VAT applies at every stage of the supply chain. You need to know the VAT rates and how they apply to your business. Accounting software can help you manage this, and many ecommerce tools can calculate sales tax and VAT rates automatically.

Profit margin and gross margin

Profit margin is the percentage of your revenue that remains after deducting all costs. It’s calculated using this formula:

Profit Margin = (Net Profit / Total Revenue) x 100

Gross margin is similar, but it only accounts for the cost of goods sold, not other operating costs. The formula for gross margin is:

Gross Margin = (Gross Profit / Total Revenue) x 100

These margins are essential for understanding your business’s profitability. Gross margin shows how profitable your products are before accounting for other costs. Net profit margin shows your final profitability after all costs.

Fixed and variable costs

Fixed costs are expenses that don’t change based on the number of products you sell. Examples include office rent, staff salaries, insurance, and certain services. Variable costs change based on the number of products you sell. Examples include cost of goods sold, transaction fees, shipping fees, and storage. For ecommerce businesses, understanding the difference between fixed and variable costs is crucial for managing your finances and planning for growth.

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You’ll also be able to accept international payments easily and securely, with the convenience of settling everything in your local currency. We also offer an intuitive admin dashboard that lets you monitor your earnings, transactions, and settlements in real time, giving you complete control over your business activity.

Cash flow

Cash flow is the amount of money moving into and out of your business over a period of time. It differs from revenue and expenses because it accounts for when money is received or paid. Cash flow is essential for keeping your business running smoothly. A business can be profitable but still have cash flow problems if it doesn’t receive payments on time or has large outlays at certain times. Managing your cash flow will help you avoid financial problems and make sure you can pay your bills and suppliers on time.

Do I need ecommerce accounting software?

Yes, definitely. Accounting software is essential for managing the complexity of ecommerce. Software solutions automate many tasks, reduce errors, and save time. They also provide reporting and analytics tools that help you make informed decisions about your business.

Accounting software features

When choosing ecommerce accounting software, look for these key features:

• Ecommerce platform integrations: Make sure the software integrates with the platforms you use, such as Shopify, Amazon, eBay, and others. This makes it easier to import sales and expense data automatically.






• Inventory management: The software should help you manage inventory, record costs, and track units sold.






• Tax automation: Look for software that automatically calculates sales tax and VAT and helps you file tax returns.






• Financial reporting: The software should provide detailed reports on revenue, expenses, profit margin, cash flow, and other key metrics.






• Multi-currency support: If you sell in multiple countries, the software should handle transactions in different currencies and convert balances automatically.

In conclusion, ecommerce accounting is essential to your business’s financial health. Although it may seem complex at first, the right tools and methods can help you manage your finances effectively and make informed decisions that drive your business’s growth.