Congratulations, so you've taken the first step and started your e-commerce business! The next course of action would be learning the ropes of e-commerce accounting. If you think that e-commerce accounting is just like other types of accounting, hold your horses.
Basing your e-commerce accounting after traditional accounting methods will not provide you with an accurate overview of your business and could drastically affect your business's success.
Ahead, we delve into the essentials of e-commerce accounting so you can navigate your business with confidence.
E-Commerce Accounting and Traditional Bookkeeping – What’s the Difference?
It’s a common mistake to assume that bookkeeping and accounting are interchangeable.
Bookkeeping involves taking care of your business’s day-to-day details, recording transactions and keeping you organised financially.
On the flipside, accounting entails an in-depth analysis of your financial state. The accounting professionals also have a better understanding of your personal and business finances and are more qualified to advise on tax-related enquiries. They are the ones who help to file your personal and business income tax returns.
Unlike traditional accounting, e-commerce accounting involves unique aspects that should be detailed for the accuracy of your numbers to make more informed decisions.
2 Ways To Keep a Record for Your Business
Based on the specific nuances of your business, there are several advantages and disadvantages to consider. Having a thorough understanding of each system will allow you to better determine which works best for your business.
Cash-based Accounting System
This method enables you to record sales and expenses only when the amount of money reaches or leaves your bank account. For instance, you may have received an order from a customer who has yet to pay you. In this situation, you hold off detailing this transaction until the money reaches you.
The following is an example of a cash-based accounting record:
|+£600 (sale of apparel)
|-£100 (cost of shipping)
|+£443 (sale of accessories)
|-£80 (packaging fees)
Bi-weekly income: £863
This accounting method is generally used by government agencies, non-profit organizations, community associations, and small service businesses, as these businesses do not sell goods or services on credit and typically pay the bills when they are incurred.
Accrual-based Accounting System
Contrarily, an accrual-based accounting system is recorded when the transaction takes place, and not when the amount of money reaches or leaves your business bank account. This method is recommended for businesses of a bigger scale and has to deal with an inventory.
The following is an example of accrual-based accounting:
|+£5,400 (online sale of apparel)
|-£1,000 (platform fee)
|+£2,000 (sale of accessories)
|-£900 (cost of shipping)
Bi-weekly income: £5,500Sales
The company earned £5,400 in week 1, from their online sale of apparel. That amount of money was immediately transferred to the company’s business bank account. Week 2 saw £2,000 in the sale, but the cheque has yet to be deposited into the company’s bank account. Nonetheless, this transaction should still be recorded at the point of sale.Expenses
While the £900 shipping costs from shipping accessories were immediately deducted from the company’s business bank account, the £1,000 platform fee from the sale of apparel will not be due until the subsequent month. In other words, this £1,000 will remain in the company’s bank account for the time being, but records should reflect this as an expense at the point of sale.
When you are just getting started, the accrual-based accounting method may seem confusing, but in the long run, it provides a more holistic view of your business’s finances. Taking into consideration your account receivables (the money that you have yet to earn) and deducting your account payables (the costs you have yet to incur), this system allows you to make a better financial decision.
When it comes to managing a business, accrual accounting is a far more powerful tool. Although it requires more work, technology can perform most of the job for you. Simply schedule a free demo and see Osome help you with accounting.
3 Aspects To Pay Attention to for E-commerce Accounting
Unlike traditional businesses, e-commerce is akin to the store that never sleeps, with a high volume of transactions that occur every day on a 24-hour basis. Thus, it's not surprising that e-commerce accounting would be a much more complicated process compared to other types of accounting since it involves specific aspects unique to the nature of the e-commerce business.
Having a solid understanding of these nuances can help you to assess your cash flow and profitability, as well as the decision-making process.
There are 3 main aspects of e-commerce accounting that are crucial to your business:
Locating your transactional data
As an e-commerce business, your transactional detail should be located at the backend of your selling channels instead of your credit card statements or bank accounts.
Unlike traditional accounting, you or your bookkeeper should not be recording down the deposits reflected in your business bank account, as this would be largely inaccurate.
Instead, here’s what you should take note of for the following:
Income and Other Important Figures
The amount reflected in your business bank account is likely to include multiple transactions of sales, returns, sales tax, chargebacks and shipping bore by your customers. Therefore, this number is not indicative of your profit. To accurately record your income and other important figures, it is crucial to dive into the backend of your selling platforms and note down the breakdown of your sales and other transactions.
In December, Leonard’s business bank account reflected a net deposit of £6,000. However, instead of recording this amount as his income, Leonard delves deeper and trawls through the backend of his e-commerce platforms to sieve out every transaction. Eventually, Leonard has managed to derive his income for the month to be £5,139.
Avoiding recording the "net deposit" shown in your bank records, as this will not be reflective of the actual sales date.
Christabelle sold her iPhone 12 Pro Max on 24 December, but her selling platform Amazon only processed the payment in January. As such, Christabelle’s business bank account shows that the deposit was made on 12 January. Instead of recording 12 January as the time of the transaction, Christabelle accurately jots down the date as 24 December. In the long run, this information will help her in her sales, expenses and liabilities as the accuracy of the records can help her make better-informed decisions.
Managing your Inventory
As an e-commerce business, your inventory is important to generate sales revenue. To accurately track your inventory cost, you will need the full picture of the units of inventory you have at any point in time.
You can make use of these two primary methods:
Periodic inventory tracking
This method is more laborious and requires physical counting of every unit of inventory and the manual recording of each item's cost or sale value. Every time you recount, simply update your cash flow sheet to keep tabs on the amount your company has spent and gained on inventory.
The scale of your business and inventory would determine the frequency of this method. For instance, if you're just starting, you could use this tracking method monthly. However, as your company grows, you may consider tracking your inventory on a quarterly or annual basis.
Perpetual inventory tracking
This tracking method involves the use of automated accounting software to constantly track your inventory. This software would automatically track and refresh your inventory count, purchase account and overall cash amount when a product is scanned for purchase or reaches your inventory. Needless to say, this is a fuss-free way to account for your inventory.
Understanding the Cost of Goods Sold (COGS)
Under the different accounting methodologies available, Costs of Goods Sold (COGS) is treated differently. However, it is important to know how much you are making from each product before totalling your expenses. Take note that this sum should not be confused with profit. Your gross margin will be the cost of goods sold deducted by how much you sell an item for.
Difficulties of E-commerce Accounting
The complicated process of inventory management
Managing inventory can be a tricky one, since you will have to gauge the amount of stock that is in production, in transit to you, in a shopper’s cart or pending returns. When your business expands, you will likely face an increase in the number of product SKUs, transactions, marketplace and countries, making the inventory management process an even bigger challenge.
Keeping up with sales tax liability
If your taxable turnover reaches £85,000, you are legally obliged to register for Value-Added Tax (VAT) and charge tax on your goods (usually 20%). However, if your turnover is below this threshold, you are exempted from registering for VAT or charging VAT on your products and services.
The VAT rate differs on goods and services, you can refer to the HM Revenue & Customs (HMRC) page for more details.
Transaction volume can impact your accounting system
With a growing business, you are likely to experience a higher volume of transactions that comes with lots of data points. To avoid overwhelming your accounting system, you could batch your transactions on a daily, weekly, bi-weekly or monthly basis.
Don’t have time? Simply leave it to the experts
If the above sounds daunting to you, fret not.
Leave it to us at Osome, with an accounting service for your e-commerce business. Amazon statements have 150+ types of charges. Facebook sales run on Shopify. Stripe dumps receipts from your website in a different format altogether. Every line demands a different VAT at home and abroad. Don’t worry, we handle them all so you don’t have to.
Choose the plan that works for you, with our accounting packages that come as they are at no extra charges. Chat with us now!