It's impossible to effectively manage your finances in e-commerce, as it is in any other sector, if you don't keep your financial records in order.
Ecommerce accounting comes into play in this situation. Keeping track of your payables and receivables, as well as other payments, is important for e-commerce growth.
This article will teach you everything you need to know about e-commerce accounting services in the United States and how it benefits e-commerce companies.
What is Ecommerce Accounting?
Ecommerce accounting is the systematic process of collecting, analyzing, arranging, and reporting financial information concerning business transactions within an ecommerce business.
All of the financial data that these procedures provide is useful for making effective business decisions in future.
The e-commerce owner can handle their accounting themselves. However, as the business expands, he can outsource ecommerce accounting services.
Accounting for e-commerce business is divided into three categories:
- Submitting tax returns
What You'll Need Before You Start Ecommerce Accounting
For good ecommerce accounting, the following criteria are required:
- Bank account
- Business tax identity number
- Accounting software solution
Opening a dedicated business bank account is the first step toward accurate ecommerce accounting.
Business owners can choose from a variety of banking packages. Their maintenance fees and incentives may also differ. As a result, visit a few different banks to make inquiries about their services before deciding on the best bank for your e-commerce business.
In addition, finding a dependable and efficient payment processor is critical for properly collecting online payments.
Using different bank accounts for your personal and eCommerce business can help separate your business funds from your private funds.
Business Tax Identity Number
In the United States, owners of e-stores must contact the Internal Revenue Service (IRS) to obtain an Employer Identification Number (EIN). This is a 9-digit number that will appear on all of your company's tax records. You don't have to physically go to the IRS office to request it; instead, you can fill out an electronic form. It is sent to business owners as an email attachment.
Best Accounting Software For Ecommerce
Nobody does e-commerce accounting these days without using a proper ecommerce accounting system. Using such a tool to handle your accounts is faster, more accurate, and more handy.
Consider the following five ecommerce accounting software solutions:
- Xero: Some of the features of this cloud-based service are; user-friendly, simple integration with other applications, automated bank processes, and currency conversion.
- QuickBooks: Simple invoicing, tracking bills, easy financial reporting, easy tax reporting, time tracking, as well as payroll services. QuickBooks is one of the best e-commerce accounting software.
- ZipBooks: Effortless credit card processing, accrual and cash reports, and an unlimited number of customers and vendors.
- Sage: User-friendly features, scalability, cash flow management, inventory and task management, customer service center.
- FreshBooks: Integrated payment methods, affordability, easy project tracking, and improved invoicing are all advantages.
Types of Bank Accounts For eCommerce Business
There are different types of business bank accounts, based on the features and the purpose of the account. For e-commerce business owners, here are the four most relevant.
1. Checking Account
If you choose a checking account, you will receive the following benefits:
- You'll have immediate access to the funds you've deposited.
- There is no demand for minimum account balance. Ensure that your account has enough funds to support your purchases.
- Interest rates are usually low.
The primary disadvantage is the possibility of a monthly limit on the number of cash deposits.
2. Savings Account
Online entrepreneurs who are foresighted and responsible always set aside some funds for savings. To do so, you'll need to open a savings account and have the following information:
- On the money you deposit, you get interest.
- Interest rates are taxable since they are considered income.
- Withdrawing money from a savings account is subject to limits.
- There is a need for a minimum balance.
3. Certificate of Deposits
A certificate of deposit is a type of savings account in which you deposit money for a set period of time, such as one month or five years.
The most significant advantage or benefit of a certificate of deposit is that interest rates are typically higher.
The main disadvantage is that the funds must be kept in the account until the agreed-upon date, otherwise you will pay some charges.
4. Money Market Account
A money market account is a combination of a savings account and a checking account.
The main benefits of a money market account are:
- Interest rates are higher than those offered by checking and savings accounts.
- Suitable for e-store business owners with higher account balances who wish to earn higher interest rates.
The main downside is that you can only make six withdrawals each month.
Types of Financial Statements
E-commerce store operators must keep track of all transactions and financial documents. You won't be able to make rational financial decisions unless you have a clear picture of your business costs. You can forecast possible losses and eliminate some hazards by monitoring and inspecting your financial data.
The three financial statements that e-commerce business owners should pay attention to are:
- Income statements
- Balance Sheets
- Cash flow statements
An income statement can be defined as a financial statement that shows how much money a company has made over a certain period of time. It covers the company's gains, losses, income, and expenditures and is sometimes known as a profit and loss statement or a statement of revenue and expense.
The income statement is calculated with the formula below:
Net Income = Total Revenue – Total Expenses
Here's an example of a profit and loss statement:
A balance sheet is a detailed report on a company's liabilities, assets, and stockholders' equity at a specific point in time. It comprises information about a company's assets and liabilities, as well as investments made by investors and shareholders.
A balance sheet is made up of two columns, with assets on the left and liabilities as well as shareholder's equity on the right. It is based on the equation below:
Assets = Liabilities + Shareholder's equity
Cash Flow Statements
The cash flow state is an important aspect of financial statements. It summarizes the cash and its equivalents paid to and by a business. It calculates the amount of cash a firm can make to pay off its obligations and fund its operations.
The following are the main advantages of cash flow statements:
- It informs the business owner about how the financial activities of the company are managed.
- It's important to know who pays the company money.
- Learning how the company's money is spent.
Ecommerce Accounting Tasks
Various ecommerce accounting responsibilities must be handled on a regular basis by the accounting department or the business owner. It all boils down to the following five operations:
- Categorize transactions
- Track expenses
- Track inventory cash flow
- Track inventory
- Track customer returns and chargebacks
- Calculate break even sales
- Stay current on taxes
Operating activities show how much cash is made from selling a company's products and how the cash is used for business activities.
Transactions are categorized into income and expenses.
Modern accounting software sorts transactions on behalf of the user. Even so, you should double-check each transaction and, if necessary, add additional categories.
The following business expenses are tracked in detail through ecommerce accounting:
- Evidence of payments
- Financial statements
- Previous tax returns
- W2 and 1099 forms
- Canceled checks
- Backup documents for deductions, income, or extra credit you claimed on your tax return.
Track Inventory Cash Flow
For ecommerce entrepreneurs who manufacture the items they sell, an inventory cash flow report shows how much the business inventory was paid and the manufacturing expenses.
The following aspects must be included in the inventory cash flow for e-stores who manufacture the products that they sell:
- Raw materials
- Equipment maintenance
- Purchase of equipment
If you want a complete view of your inventory cash flow and calculate your net profit correctly, you'll need to keep track of inventory losses, for example:
- Production-related damage
Furthermore, e-store owners need to know the exact number of inventories available to them at all times. There are two methods for keeping track of inventory:
1. Periodic tracking
This includes counting each and every inventory item in stock, as well as recording the cost and sale value of each item. Every change in the number of inventory items has an impact on the amount of money spent and gained by your company in terms of inventory during a certain time period.
2. Perpetual tracking
You can rely on automated ecommerce accounting software to keep track of your inventories at all times. The software solution you're utilizing automatically updates the inventory count and total cash figures as new items are scanned or added manually to your inventory storage.
Track Customer Returns and Chargebacks
Since client returns and chargebacks are two distinct categories, e-commerce merchants must maintain them separately.
1. Customer returns
When a customer returns an item, the original transaction should be recorded as an expense and added to the list of accounts payable. When the item is returned to your business, the return transaction should be reported under the Returns and Allowances section and deducted from your revenue.
A chargeback happens when a client lodges a dispute with their bank due to fraud or non-delivery of paid goods or services. Returns and allowances should be used to file all chargebacks. Any additional fees incurred as a result of chargebacks should be recorded as company expenses.
Calculate Break Even Sales
Sales taxes and corporate income taxes are two types of taxes that e-commerce businesses must be aware of.
E-commerce store owners in the United States must consider two types of taxes:
- State-level sales taxes
- Local sales taxes
Depending on the state in which an e-store is registered, the owners should contact the local tax office to learn more about the ecommerce taxes that they must pay.
In addition, the taxes that each customer should pay are determined by their shipping address. Depending on the platform you're using, you can either manually enter sales taxes at the checkout or utilize a software system to calculate them for you.
Ecommerce Accounting Terminology
Every e-commerce store owner should know the following accounting terms:
1. Ecommerce sales tax
This type of tax is imposed by the state government on retailers for goods and services sold online. It is collected and sent to the government during the sales period.
2. Sales order
A sales order is an official internal document which is created by the seller and sent to the customer to confirm and validate the sale of services and goods. The following items are included:
- Sale details
- Number of sold goods or services
- Price of goods and services
- Delivery address
- Delivery date
- Method of payment
3. Purchase order
A purchase order is the buyer's official indication that they want to buy products or services from a seller. It includes the required number of products as well as pricing. Purchase orders are used by sellers to create sales orders.
An invoice is a document delivered by a seller to a customer that details the amount of money the buyer must pay the seller for the goods or services that were agreed upon. The invoice is issued to the buyer while the sales order is still with him.
A receipt is the vendor's formal written document confirming that the buyer has paid for the agreed-upon products or services. It is used by buyers as evidence of payment.
There are various categories and subcategories in ecommerce accounting. Owners of online stores must understand what each of these elements means and how to incorporate them into their operations.
Entrepreneurs in the ecommerce industry have all the information they need to meet their accounting requirements quickly and efficiently thanks to the definitions, advice, and instructions provided in this article.
Don't let the financial side of your ecommerce business overwhelm you! Take control with the best accounting software on the market. With easy to use tools and streamlined financial management, you can focus on growing your business and reaching your goals. Start your search today and see the difference the right software can make. Invest in yourself, buy now!