Every eCommerce rock star needs a solid accounting system in place to keep the business on track. Effective management starts with an organized eCommerce accounting system, and your business is headed for trouble if you don’t have a system in place. You need to keep accurate records so you can better manage your cash flow, inventory, and budget.
Whether you’re new to eCommerce or a seasoned vet, refining your eCommerce accounting practices can help your business grow and prosper. This complete eCommerce accounting guide has everything you need to know to implement and refine a professional-grade accounting system.
Accounting vs Bookkeeping
The terms accounting and bookkeeping often get used interchangeably, and while they are similar in nature, there is a bit of a difference. Accounting refers to the process of keeping financial accounts, and it’s typically more focused on big-picture financial insights.
On the other hand, bookkeeping centers around the day-to-day tracking of financial transactions. This can include tasks like recording income, tracking expense spending, reconciling accounts, and more.
eCommerce Accounting: Getting Started
Getting ready to launch your eCommerce store is an exciting time. You’ve got your website dialed in and your merchandise ready to go. However, before your launch, it is important to get your eCommerce basics covered.
Choose Your Business Entity
To limit your liability and protect your assets, it is important to set up a business entity. When setting up your business structure, you have several options. How you structure your business will affect how you pay taxes, so it is important to consider which business entity is best for your business.
Many eCommerce vendors organize their businesses as an LLC. An LLC is the simplest way to set up your business and is relatively low maintenance. You also have the option of setting up an S Corp or C Corp; however, these are more involved when it comes to set up, filing requirements, and management.
Decide on an Accounting Method
When it comes to your accounting process, you will need to determine if you want to use the accrual method or the cash method. The accrual method recognizes revenue and expenses as they occur, while the cash method only recognizes these transactions once the cash exchanges hands.
The cash basis of accounting is often chosen by small business owners because it is the simplest method; however, accrual accounting may offer more insight into the business’ future by analyzing trends and accurately matching up revenue with expenses.
Organize Your Books
An eCommerce store has a lot of moving parts. You need to keep track of revenue, inventory, expenses, shipping, and more. Before getting started, you need to have a system in place to manage all of these details.
This is where a capable accounting program comes into play. Choose a program that is reliable and integrates with your eCommerce platform. This can help make your bookkeeping process seamless.
How to Maintain Your Accounts
Maintaining your books is one of the most important parts of running your business. It is crucial to stay on top of things. Neglecting your books can really complicate things and make it challenging to run your daily operations and plan for the future.
A bookkeeping backlog can also lead to mistakes, and an error can have significant financial and mental costs. Unorganized books can also complicate your tax situation, which doesn’t need any help in the complicating department. It’s important to have an accounting system in place that functions but is also doable.
Record and Categorize All Business Transactions
A key component of your accounting is tracking transactions. This includes revenue streams and expenses. Tracking allows you to measure the success of your business and properly plan. Income and expenses are best recorded as they come in to reflect the most up-to-date information.
Expense tracking is also important when it comes to your taxes, as many of your business expenses qualify as tax deductions. To claim these tax deductions, you need to properly categorize your expenses, which is best done as they occur.
However, you can also use technology to streamline this process. There are several apps available that can take a picture of a receipt and automatically categorize it for you. Most of these apps sync with your accounting programs.
eCommerce Accounting: Returns and Chargebacks
At some point in time, you may experience returns or chargebacks. A return occurs when a customer returns merchandise and asks for their money back. A chargeback happens when a customer disputes a charge with their financial institution.
As a result, the bank or credit card company will reverse the charge and ask you to refund it. When this happens, an investigation is conducted by the fraud department to determine if the charge is valid. Both refunds and chargebacks need to be accounted for correctly.
To record a refund, you need to reverse the original revenue recorded at the time of the sale. If you are taking merchandise back, you will also need to adjust your inventory. Chargebacks need to be recorded in accounts receivable.
This does not delete the original revenue record but is positioned and money owed to you. If you fight the dispute and win, you can credit your accounts receivable. If you lose or choose not to fight it, you can categorize it as a bad debt expense, which you can write off come tax time.
Bank reconciliations are important to detect inaccuracies in your accounting and also fraudulent activity. The process involves cross-referencing bank statements with your personal financial records. Monthly bank reconciliations can help you ensure accuracy with your accounting and also identify inefficiencies within your organization.
Create and Review Financial Statements Regularly
Financial reports are instrumental in measuring the success of your business. It is important to run financial reports like your profit and loss report on a regular basis. This provides insight into the financial health of your business and allows you to plan for growth and make adjustments. Financial reports should be analyzed monthly, quarterly, and annually.
Pay Estimated Taxes Every Quarter
If you own your own business, you are probably familiar with estimated taxes. Estimated taxes, also known as quarterly taxes, represent the portion of taxes that would have been withheld by an employer. Since you are self-employed, you are responsible for remitting these taxes.
The estimated tax deadlines typically fall on the following dates:
- First Quarter: April 15
- Second Quarter: June 15
- Third Quarter: September 15
- Fourth Quarter: January 15
If you owe more than $1,000 in income taxes, you have to make estimated tax payments. You’re responsible for complying with these guidelines, so don’t expect the IRS to notify you.
You can easily calculate your quarterly payments by dividing last year’s total tax expense by four. If you underpay, you will owe taxes at the end of the year, but the safe harbor rule should protect you from penalties. If you pay too much, you can receive a tax refund at the end of the year to reimburse you for the overpayment.
Stay on top of your quarterly taxes or you could face fines, penalties, or worse. We recommend setting aside 30% of your income in tax savings account for the purpose of making tax payments.
Pay Sales Tax Regularly
Sales tax is an inevitable part of eCommerce. Unfortunately, the sales tax isn’t a one-size-fits-all thing. Sales tax varies from state to state, city to city, and county to county. Most states implement sales tax, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon. In the state of California, the base sales tax is 7.25%; however, each city and locality reserves the right to levy an additional sales tax.
For example, Los Angeles levies a 9.5% sales tax. Sales tax pays for things like schools, roads, and public services like the fire department. In addition, California also levies a use tax, which applies the sales tax rate to out-of-state purchases where a sales tax was not collected.
eCommerce retailers are responsible for collecting sales tax from their customers. Sales tax is based on one of two factors: the state where you have a physical presence and states where you have nexus. If you are based in California, you are responsible for collecting and remitting 7.25% from your customers.
Nexus is considered as having a significant presence in another state. For example, if you use Amazon’s order fulfillment system, and you send merchandise to an Amazon fulfillment center in another state, this would establish nexus, in which case you will need to collect and remit sales tax in that state.
Once you have collected the sales tax, you will need to remit the tax to your state’s department of revenue. The best way to pay any tax is online. Visit your state’s department of revenue website for the particulars in your state.
Maintain and Adjust Your Budget
Proper budgeting and planning are important parts of running your business. they help to ensure your financial success and allow you to grow your business at a steady pace. Accounting plays a significant role in your ability to create and stick to your budget.
Set Up a Budget Calculator and Review It Regularly
Spreadsheets can be extremely useful when it comes to creating your budget. You can set formulas to help you automatically calculate your budget, which can help keep you on track. It is important to consult your budget on a regular basis.
This ensures that you are inputting all of the relevant information like revenue and expenses and helps you monitor your success. Sometimes you may need to adjust your budget depending on the needs of your business. Ongoing tracking can help you be realistic with your budget and allow you to adjust it as needed.
Inventory planning and tracking are crucial for your eCommerce business. It is important to track key features such as the timing of sales, the location of sales, popular items, and items that don’t sell. By using historical sales figures, you can adjust your inventory accordingly.
If you overstock, your free cash is tied up in products that aren’t selling. Conversely, you could miss out on sales if you understock your inventory because you can’t meet demand.
Plan your inventory carefully and try to keep your stock aligned as closely with consumer demand as possible.
Review Cash Flow Reports
You need cash to cover your business expenses, so you should consistently monitor cash flow reports to ensure you don’t run short. If you’re using an accrual accounting method, you really need to pay attention because the system often produces large discrepancies between sales and cash flow.
Recordkeeping for eCommerce Accounting
A business’s financial records should be kept on file for a minimum of three3 years, but five5 years is ideal. This is to protect the business from audits and legal issues. For example, in the event of an IRS audit, the IRS may ask for proof of eligibility for a tax deduction. If you have been diligently maintaining your receipts, you will know exactly where to go for proof. Detailed records serve as a little insurance policy for your business. Some records that need to be maintained include:
- Sales receipts
- Contractor W9 forms
- Proof of payments
- Federal tax returns
- State tax returns
- W2 and 1099 forms
- Paid and outstanding bills
- Payment processor account statements (Square, Shopify, Stripe, etc.)
- PayPal statements
- Cryptocurrency transaction records
- Insurance policies
- Articles of incorporation or articles of organization
Best eCommerce Accounting Software
Selecting a good accounting software program can make a huge difference in your accounting process. It should be easy to use and accessible. These days, a lot of business is conducted from the little computer that fits in your hand, which means that cloud-based accounting programs are ideal because you can access them from anywhere. The more accessible your accounting program is, the easier it is for you to update your books.
We like to recommend Wave for DIY bookkeeping. Their free version is easy to use and comes with unlimited expense and income tracking, unlimited bank accounts, and credit card connection, and integrates with PayPal, Etsy, and Shopify. You can also create invoices and generate important financial reports like your P&L.
Finding a Qualified eCommerce Bookkeeper
At some point in time, your business may outgrow your ability to keep track of your books yourself. It is important to recognize when this happens and either delegate the task to someone you trust or outsource. Hiring a professional bookkeeping service is one of the best things you can do for your bookkeeping. It frees up your time so you have more time to spend running your business and doing the things you love.
It also ensures that your bookkeeping is getting done and sets you up for success when it comes to your taxes. Aside from working with a professional bookkeeper, look for someone who specializes in eCommerce. Experience with inventory tracking and planning is key. And since you are responsible for collecting and remitting sales tax, experience with sales and use tax (if applicable) is a plus.
Tax Hack eCommerce Accounting
You don’t need to spend endless hours learning bookkeeping and accounting to run a successful online store. Tax Hack specializes in eCommerce taxes, and we can take care of everything.
We understand the complexities of the eCommerce industry, and we can help your business navigate financial challenges with ease.
Let us handle your eCommerce accounting procedures so you can focus on business. Click here to get started now.