Basics of eCommerce Accounting
The eCommerce business model is not simple, it involves inventory management, understanding marketing spend, ever-changing digital market trends, basket sizes, understanding state taxes, amongst many other factors. eCommerce businesses need great accounting in order to understand how the business is doing financially, to make data-driven decisions, and to remain compliant with the IRS. Good accounting can help you grow your business, bad accounting could lead to failure of your company.
Let’s discuss some of the basics of eCommerce Accounting:
What You Need to Start Accounting for Your eCommerce Business
If you operate as a corporation or partnership, you will need to request an EIN (Employer Identification Number) from the IRS; you will use this number for all tax documents. Sole Proprietors have the option to use their social security number.
To make your business accounting easier, we suggest you open a dedicated business account for your eCommerce business. It’s important to keep personal and business finances separate.
Select an accounting software, some of the benefits you will receive from an accounting software include: ease of use, integration, financial reports accessibility, payroll reporting, online banking, receipt-match, and inventory management. To learn more on benefits of accounting software click here (https://www.cpabychoice.com/post/benefits-of-quickbooks-for-small-businesses)
Choose an Accounting Method
There are two ways to keep a record of your business: cash-based or an accrual-based accounting system.
The cash method of accounting allows you to record transactions the moment money enters or leaves your business.
The accrual method records transactions the moment they occur. So, as soon as a vendor invoices you, you record the invoice as an expense; even if the payment hasn’t left your account yet.
There are advantages and disadvantages to both, we recommend speaking to your accountant to choose which method is best for your business.
eCommerce Bookkeeping vs Accounting
While many people use the terms bookkeeping and accounting interchangeably, they are not the same. Bookkeeping refers to the day-to-day task of recording your company transactions and financial records, this is a daily business operation. On the other hand, Accounting is the process of summarizing, interpreting, and communicating financial transactions which were classified in the ledger account.
Both retail and eCommerce businesses must record transactions in which money enters or leaves your business. These are some of the transactions you must keep track of:
Revenue: Money you collect from sales
Expense: Money paid to run the business, like website fees
Assets: What the company owns, like equipment or vehicles
Liabilities: outstanding balances on loans
Equity: Money the owners put into company, this not a loan, it is not expected to be paid back
Returns & Chargebacks: Money returned to a client
You must keep track of all your transactions to accurately file taxes and also to know your company’s gross profit. Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. You can calculate gross profit by deducting the cost of goods sold (COGS) from your total sales.
Bookkeeping is not easy, and it can be time consuming. At CPA by Choice we can recommend the best accounting software and manage all your accounting needs.
The eCommerce business model is relatively new and rapidly changing, analyzing financial records and forecasting for the future is more difficult. Some accounting tasks include:
Preparing and adjusting entries
Financial audits
Tax planning and reporting
Financial forecasting and risk analysis
Financial statement preparation
Sales Taxes
Sales Taxes are one of the factors that make eCommerce businesses unique in regards to accounting practices, and also more complicated.
Businesses must collect taxes in states where they have economic nexus. Sales tax nexus is the connection between a seller and a state that requires the seller to register, then collect, and remit sales tax in the state. In the past, retailers with a physical presence in a state, such as offices or warehouses, had sales tax nexus. Under that definition, online sellers could simply collect sales taxes in the states where they had facilities and ignore the rest.
That changed with the 2018 Supreme Court decision in South Dakota v. Wayfair, which allowed states to define sales tax nexus more broadly to include e-commerce businesses with no physical presence within their borders. Since remote seller laws are still developing, it's important to conduct periodic audits to ensure compliance.
Sales taxes is one of the factors of how eCommerce accounting differs from standard accounting. Other factors include:
International duties and taxes: eCommerce businesses that ship overseas must ensure compliance with international regulations.
Shipping: shipping can account for a high proportion of your total expenses. You need a system to estimate and track these expenses. You must also decide whether to pass these costs to your customers.
Inventory Management: eCommerce businesses are different. Some businesses use third-party logistics companies and/or companies that ship your products. Other businesses function like a brick-and-mortar where they sell directly to a customer.
As an eCommerce business owner, you understand the rapidly changing environment you ventured into. Allow us to take on the accounting responsibilities so you can focus on running your business. Find out how our professionals and personalized services can save you time, money, and frustration with managing your accounting, and tax needs. We are available to answer your questions, feel free to call us or send us a message.