E-commerce, just like any other business, requires you to keep financial records in order. If your goal is to succeed, you need to handle finances daily accurately. Therefore, you should get familiar with the subject of eCommerce accounting even before you open the doors to your online store. Accounting that’s adequately done will enable you to plan and achieve both short-term and long-term goals. On the other hand, lousy accounting (or no accounting) can quickly lead you to failure and possibly even problems with the IRS.
If you’re still gathering essential information before starting your eCommerce business, you may also read our article on how to build an online store. Since you should implement eCommerce accounting as soon as you step into the online market, here’s our guide on doing it correctly.
1. Why are bookkeeping and accounting important for eCommerce?
First of all, keeping records of your incomes and expenses allows you to run a stable and viable business. You won’t run into unpleasant surprises and costs because you’ll know how your company operates at any point in time. With that in mind, you’ll also be able to plan your future projects. Proper bookkeeping saves you from headaches when it’s time to pay for taxes and even allows you to save some money from them. Lastly, if you eventually decide to sell your eCommerce store, potential owners will usually ask for your bookkeeping and accounting records before deciding to make a purchase.
2. The difference between bookkeeping and accounting
Some people tend to use the words bookkeeping and accounting synonymously. However, it’s important to distinguish these two because they do not mean the same thing even though they are strongly connected. Bookkeeping helps day-to-day business management, as it refers to recording business transactions and keeping financial records. Accounting, on the other hand, is helpful for long-term business planning. It refers to using a company’s financial data to boost profitability and efficiency. It’s also essential for maximizing business tax savings. You can’t do accounting without accurate bookkeeping. Similarly, proper bookkeeping can’t be done without a good accounting process.
3. How to do eCommerce bookkeeping
As we mentioned earlier, bookkeeping’s primary goal is to record business transactions, meaning every occasion in which the money leaves or enters the company. Bookkeeping deals with different types of transactions, such as cash, credit/debit cards, and alternative paying methods. These transactions include:
- Revenue, which is the money your company makes from the sales,
- Expenses, meaning the money your company spends to keep the company running;
- Assets include anything your company owns, such as equipment, cash, property, vehicles, etc.;
- Liabilities or the balance of loans your company has taken out (if there are any);
- Equity refers to the money that you, as an owner, put into the company, and you don’t expect it to be paid back; and
- Returns and Chargebacks refer to the money you give back to your customers or a credit card company after a product return or a fraudulent credit card behavior. Unless you get too many of them, they’re not necessarily an indicator of your business’s overall health.
Bookkeeping is also crucial for filing taxes accurately. Without the records of these transactions, you won’t be able to know how much you owe to local, state, and federal tax authorities. Additionally, tracking inventory falls under bookkeeping duty since it’s essential to know your stocked goods at any given point during the year.
Preparing financial statements can be done by a bookkeeper or an accountant. But, if you’re just starting, you’ll most likely be the one who does it. Preparing financial statements is somewhat of a bridge between bookkeeping and accounting, as it is the final result of the bookkeeping process. It contains all of your business’s financial information, which you will use in making future decisions. Financial statements include:
- Income Statement, which shows how profitable the company was over a period of time, can be done over a year, a quarter, or a month. It summarizes the cost of goods sold, the gross profit, operating expenses, and the net profit;
- Balance Sheet gives you a long-term picture of your company’s financial health;
- Cash Flow Statement, and
- Shareholder’s Equity Statement.
4. How to do eCommerce accounting
E-commerce accounting is not much different from any retail accounting. Nevertheless, online businesses may witness some obstacles that retail businesses don’t have to deal with. To help you become an accountant-extraordinaire, we’ve summed up the essential steps that will help you along the way:
- Select the correct business entity. How you’re taxed depends heavily on the type of business entity you choose. Most small businesses choose to be a limited liability company (LLC) or a sole proprietorship.
- Choose an eCommerce accounting method. You can choose between accrual accounting and cash accounting. Cash accounting means recording transactions only when the cash leaves or enters your business. Small businesses prefer this method. On the other hand, accrual accounting is a required method for large companies. It refers to recording transactions when an invoice appears (even if the money has not yet been transferred).
- Cut some costs. By using your income statement, you can find the majority of your company’s expenses. Once you determine where the heaviest amount of costs are, you can consider cutting them down.
- Implement seasonal budgeting. If you notice your sales getting higher in the summertime and then fall down during winter, you may want to conduct seasonal budgeting. This means you’ll be saving some money during the profitable periods and deploy it when your sales are low.
- Boost your tax savings. This responsibility falls on both bookkeeping and accounting. You can claim tax-deductible expenses (such as office rent, wages, utility costs, accounting services) at the end of each year.
With all of the accounting guidelines we mentioned above, you should also consider using blockchain eCommerce technology for your business. It offers an entirely new approach to record-keeping and transaction settlement. This technology is already changing how industries function and develop, and the eCommerce industry is not excluded. Don't miss out!