If you own a small business that sells products online, you know how important it is to get the details right. You spend what feels like forever perfecting the details of your product, your branding, your online store, but have you perfected your accounting process? One of the main reasons people start businesses is to make money, so it makes sense to ensure your financial affairs are as efficient as possible.
At Thomas & Co Accounting we work with ecommerce business owners every day, so we know a thing or two about the nuances of ecommerce accounting. In this essential guide to ecommerce accounting for small business owners we will provide practical information your ecommerce business needs to know.
What is Ecommerce Accounting?
Accounting, at its most basic level, involves the process of monitoring and documenting transactions, and classifying them as either revenue or expenditure.
Ecommerce accounting is accounting that is tailored to address the distinct requirements of an ecommerce business, compared with other businesses. Usually, these businesses rely on multiple payment processors to collect payment form customers. Some popular UK payment processors are Klarna, Clearpay and Paypal. Integrating these processors with the businesses accounting system is where things get specialist, and many businesses choose to employ the services of ecommerce accounting professionals such as Thomas & Co Accounting. Ecommerce businesses must ensure that all transactions are properly recorded, reconciled, and classified according to the correct revenue and expense accounts. This involves working closely with the payment processors to resolve any issues that may arise, such as chargebacks or disputes, and ensuring that all payments are processed accurately and on time.
Specialist ecommerce accountants also play a critical role in managing financial transactions for ecommerce businesses that operate through Shopify. By linking directly to Shopify, ecommerce accountants can access real-time information on the business’s pay-outs and revenue streams. They can also ensure that any taxes associated with overseas transactions are calculated correctly, which can be particularly challenging given the complexity of international tax regulations.
Key Components of Ecommerce Accounting
Cost of Goods Sold
One of the most valuable pieces of financial data for an ecommerce business, calculating your cost of goods sold (COGS) allows you to determine if your pricing is correct. Cost of goods sold refers to the overall expense of creating and delivering a product, this may include shipping, storage, credit card charges, and any other costs directly associated with selling products. It excludes general expenses such as office space, payroll, marketing and software licenses.
Purchase orders are key because they formalise requirements such as type of goods and amount of goods, as well as prices. They represent a commitment to buy and should include payment information.
Sales orders are useful as they provide additional information such as the desired quantity of items and how many items were actually delivered. Prepared by the seller, they should also include client and payment information, sale amount, delivery address and date.
Value added tax applies to the sale of almost all goods and services in the UK. This sales tax is collected by businesses, including ecommerce businesses, and paid to the government.
What is involved in E commerce Accounting?
Similar to most businesses, the primary functions of ecommerce accounting are bookkeeping, managing taxes and planning for growth.
As well as categorising and tracking expenses and income, ecommerce bookkeeping also includes tracking customer returns. When implementing an ecommerce bookkeeping and accounting system, it is important to consider customer returns and ensure that the system accommodates returns without affecting the accuracy of financial reports.
If returns are not administrated correctly, they can skew financial data such as VAT records, sales, inventory and expenses. For this reason, it may be worth employing outside bookkeeping services, so you can rest assured the details are correct.
Ecommerce Tax Management
At Thomas & Co Accounting, we are experts in tax planning and preparation. The consequences of incorrectly interpreting and filing tax returns can be severe and we take pride in reassuring our ecommerce clients. If you are unsure about your businesses tax obligations, it is always best to get expert advice from an accountant.
How do good accounting practises allow Ecommerce businesses to plan for growth?
Accounting may seem like a chore, but in reality it is the most exciting part of your ecommerce business. Through good accounting practises, you are gathering all the data you need to make major decisions and reach your business goals. By utilising ecommerce accounting, you can examine the following:
- The most profitable products or services offered by your company
- The fluctuation of your profits over a period of time
- Your significant expenses and financial liabilities
- Ways to enhance your profit margins
Knowing these figures helps you to make financial decisions as your business grows. It also allows you to generate financial reports such a profit and loss statements and cash flow statements, which are fundamental to planning for the growth of your business.
What should ecommerce business owners monitor and record?
Good business accounting practises involve keeping an eye on various metrics, such as:
- Gross profit – the difference between total revenue and the cost of goods sold.
- Gross margins – derived from the same data as gross profit, but represented as a percentage of total revenue.
- Cash flow – the inflow and outflow of money in your business.
- Balance sheets – comprising three primary categories: assets (including cash, accounts receivable, and inventory), liabilities (including accounts payable, wages, and income tax), and the combined equity of all shareholders.
- Profit and loss – these statements provide a comprehensive view of your business’s profitability during a specific period.
Ecommerce seller’s accounting methods
There are two popular accounting methods for businesses: cash accounting and accrual accounting. But which is best for ecommerce businesses?
Ecommerce sellers typically recognise sales when settlements are received from the platform. Therefore, if you sell products on online platforms, you only account for sales after the funds have been deposited into your bank account. This is an example of cash accounting.
Accrual accounting looks at things slightly differently. For example, a transaction that occurred on an online platform on February 14th would be accounted for on February 14th, even if the settlement from the online platform wasn’t received until February 20th. As ecommerce sellers don’t typically receive or make payments instantly, if you want to be able to forecast your cash flow, accrual accounting could be the best method for you.
Deciding which method is best for you depends on your business model and it is always best to consult with an ecommerce accountant who can advise on the pros and cons of each method when applied to your specific business.
As your business grows, things will inevitably become more complicated, which is why we recommend focusing on the details. Whether you are a relatively small business with minimal operational expenses, or a larger business with lots of overheads, getting your bookkeeping and accounting correct from day one will set up your ecommerce venture for a positive financial future.