An eCommerce store has several benefits compared to a conventional brick-and-mortar store, notably that its customer base isn’t limited by geography. However, this is also one of the features of eCommerce that can make accounting practices that much more complicated, underscoring the importance of following various best practices. With deep expertise in eCommerce accounting and experience working with all types of eCommerce companies, Graphite Financial can help ensure that your accounting is optimized for the best results.

In this post, we’ll discuss the key components of eCommerce accounting, various best practices, accounting software, challenges and how Graphite can serve as an extension of your business to take your accounting to new heights.

Understanding eCommerce Accounting

eCommerce accounting involves managing and tracking financial transactions and records relative to your online business. It often requires small business accounting practices to help leaders understand business health, make financial decisions and predictions, and pay the appropriate amount of taxes.

Some of the unique challenges associated with eCommerce accounting involve determining the appropriate sales tax across state lines, managing inventory, handling returns and creating accurate financial forecasts. Other challenges may include paying third-party marketplace fees and managing payments in different currencies.

Key Components of eCommerce Accounting

From proper inventory management to managing sales tax across state lines, there are various key components in accounting that all online businesses must adhere to and optimize for the best results.

Inventory Management and Cost of Goods Sold (COGS)

Proper inventory management is essential to the health of any eCommerce company. Good accounting practices can help keep better track of inventory levels, assist with supply chain management and help streamline planning.

Also key to eCommerce profitability is the Cost of Goods Sold, which is the direct costs that are attributed to the production of goods sold by a company. COGS includes materials and labor used to create the good or service, but excludes distribution costs.

Sales Tracking and Revenue Recognition

Sales tracking and revenue recognition are two more key components in eCommerce business accounting. Sales tracking helps determine what marketing and sales activities are most successful. Revenue recognition is also key. For eCommerce companies, payment is normally received before goods are delivered, but it typically isn’t recognized until control is transferred.

Managing Returns, Chargebacks and Refunds

Managing returns can be costly and inefficient for eCommerce firms. However, when they’re carried out properly, they can also provide valuable data and insight about your online store. Another important part of this is chargebacks. Chargebacks occur when a customer disputes a charge that’s made on their account, wants to cancel the payment, and get their money back.

Sales Tax Compliance Across Multiple States

eCommerce businesses aren’t limited by geography, which can create challenges when it comes to collecting the appropriate sales tax. Failure to comply with sales tax requirements across state lines could impact financial performance and potentially even come with legal consequences.

Understanding Financial Statements for eCommerce Businesses

A comprehensive view of an eCommerce company’s financial health and operations is a must to ensure success. That’s one of the key roles that financial statements can play.

Profit and Loss Statements

Better known as an income statement, a profit and loss statement provides insight into the business’s financial health and profitability. Such statements help eCommerce companies identify trends, make smarter decisions and entice investors.

Balance Sheet Essentials

Balance sheets help communicate an e-commerce company’s financial position at a specific point in time, helping ensure financial health, identify potential issues and empower leadership to make more informed decisions. Balance sheets help communicate assets, liabilities and equity.

Cash Flow Statement

Cash flow statements help eCommerce companies better understand how they’re performing so they can adequately plan for the future. They are integral to cash flow management, helping to communicate inflows and outflows and overall cash position. A healthy cash flow for any business – let alone an eCommerce company – can spell the difference between a thriving and struggling firm.

Accounting Methods for eCommerce Businesses

Good accounting starts with implementing the right accounting method. eCommerce businesses can use either cash-basis or accrual accounting – or even a combination of both.

Cash-Basis Accounting

Cash-basis accounting is a simple, straightforward accounting method. In this method, companies recognize revenue when payments are received and deduct expenses when they pay for them. While it’s easy to implement, can provide an accurate view of cash flow and can streamline tax filing, it does have some drawbacks. These include potential inaccuracies in assessing overall financial health, an inability to track profitability in real-time, and the possibility of omitting important information.

Accrual Accounting

Unlike cash-basis accounting, accrual accounting records revenues and expenses when they are earned or incurred – not at the time when cash is received or paid. Some of the benefits of accrual accounting include a more accurate overall financial picture, increased transparency and the ability to meet GAAP requirements for financial reporting. Some drawbacks of accrual accounting include vulnerability to fraud, a greater time commitment and challenges in recording payments before the money is actually received.

Choosing the Right Method for Your eCommerce Business

Whether you select an accrual or cash-basis accounting system largely depends on your eCommerce business. For instance, since cash-basis accounting tends to be a simpler method, it’s often better for smaller businesses. Accrual tends to be better for larger eCommerce businesses and those that need to comply with GAAP standards. Some eCommerce businesses may even use a combination of each method. As an expert partner for your eCommerce firm, our Graphite accountants will work with you to see what method would suit it best.

eCommerce Accounting Best Practices

Following accounting best practices is imperative to thoroughly understand financial health, help manage cash flow and make the best, most informed decisions for your eCommerce business.

Automating Your Accounting Processes

Automation can help streamline operations and reduce the likelihood of human-made errors. Some technologies for automating accounting processes include cloud-based solutions like FreshBooks or other tools that streamline business and banking processes, like Xero, QuickBooks and Netsuite.

Regular Financial Reconciliation

Reconciliation is the practice of comparing internally kept financial records against those provided to you by the bank. Regular reconciliation helps catch errors and potential fraud, improves financial data accuracy, helps with tax filing and can provide further insights into your eCommerce company’s financial health. The higher the volume of your transactions, the more frequently you should reconcile.

Budgeting and Forecasting for Growth

Budgeting and forecasting help eCommerce firms make better decisions when operating the business. It can also help them better manage resources, control business finances and anticipate future challenges. Budgeting involves more than just estimating income and expenses, but setting goals. Forecasting often involves the use of modeling within data sets.

Maintaining Accurate Recordkeeping

Good records mean accurate financial statements – and accurate financial statements are crucial to informed decision-making.

Choosing the Best Accounting Software for eCommerce

Utilizing the right software can be a huge asset for your eCommerce business. In addition to settling on the features that can help your business the most, it’s also important to consider intangibles in eCommerce accounting software options, like integration potential and security features.

Key Features to Look For

Various key features can help aid an eCommerce business. Some of these features that you’ll want to be on the lookout for include:

• Ease of integration with other eCommerce platforms.
• Analysis of sales and revenue trends.
• Tax management assistance
• Automation features
• Scalability potential
• Multi-currency support
• Strong security features

Integration with eCommerce Platforms

The more an eCommerce software solution can integrate seamlessly with other platforms and third-party applications, the more functional it will be for your business. Integration can connect platforms and marketplaces to automatically import sales and payouts, mapping them to the correct accounts.

Common Challenges in eCommerce Accounting

Compared to a conventional business, eCommerce accounting has several challenges that companies must meet to help ensure financial success.

Handling Complex Sales Tax Regulations

Sales tax regulations are complex and vary on a state-by-state basis. eCommerce companies need to navigate nexus laws, tax rates and understand tax liability. While brick-and-mortar stores also deal with sales tax, eCommerce businesses face unique challenges due to the need to comply with tax laws in multiple states where they may not have a physical presence.

Managing Inventory and Fulfillment Costs

Tracking items and item value is a challenge, notably when you’re often working with new products and managing multiple sales channels. Failure to successfully manage inventory and fulfillment can result in stockouts, delayed shipments and customer dissatisfaction.

Navigating Multi-Channel Sales Accounting

Accurate data collection, inventory management and bookkeeping are all practices that are influenced by multi-channel sales accounting.

The Future of eCommerce Accounting

Automation and AI will continue to play a role in the future of eCommerce accounting. Similar to its benefits in other industries, advancements in automation will help streamline workloads and reduce the potential for human error. Automation can also help ensure that financial reports are generated more effectively. AI can be utilized to help eCommerce companies make smarter, faster decisions about everything from how products are priced to managing inventory.

FAQs on eCommerce Accounting

What’s the best accounting method for an eCommerce business: cash or accrual?

Cash-basis accounting tends to be a more simple method and it’s often better for smaller businesses. Accrual accounting tends to be better for larger eCommerce businesses and those that need to comply with GAAP standards.

How do I manage sales tax compliance when selling across multiple states?

Sales tax regulations are complex and vary on a state-by-state basis. eCommerce companies need to navigate nexus laws, tax rates and understand tax liability.

What are the key financial statements I need to track for my eCommerce store?

Key financial statements that you’ll want to track include profit and loss statements, balance sheets and cash flow statements.

How can I accurately calculate the cost of goods sold (COGS) for my eCommerce business?

Use the COGS formula: Beginning inventory + purchases – ending inventory. This formula represents the total cost of inventory sold by including the intangibles that also must be considered with every unit that’s moved.

What software integrates best with Shopify or other eCommerce platforms for accounting?

Xero, QuickBooks, A2X, FreshBooks and Zoho Books are just a few of the programs that integrate with Shopify.

How should I handle returns, chargebacks, and refunds in my accounting records?

Returns, chargebacks and refunds are best handled by being diligent with documentation. This includes identifying transactions, adjusting revenue, updating inventory and moving chargebacks to accounts receivable until any dispute is settled. Any associated fees with chargebacks should also be recorded.

How often should I reconcile my financial statements to ensure accuracy?

It depends on the particular business and the volume of transactions, but it’s best practice to reconcile as frequently as possible. This might be as often as daily or as irregularly as monthly or quarterly. Businesses with a high volume of transactions, such as eCommerce companies, should reconcile more frequently.

Get Expert Help with Your eCommerce Accounting

eCommerce accounting can be difficult and overwhelming – and it may make sense to consider working with a trusted partner for this. That’s where Graphite can help. As experienced eCommerce accounting professionals, we work to serve as a true extension of your business and manage everything from your inventory to sales tax compliance, taking any internal guesswork out of the equation and giving you peace of mind that your accounting is properly managed. Contact Graphite today to learn more about our expertise in eCommerce accounting, our flexible pricing plans and to schedule a free consultation.