Accounting is an integral component of managing any business. Accurate data helps you understand your incomings and outgoings, providing essential insight for budgeting, meeting tax obligations, and making informed decisions.
Organization is hard work, so it’s wise to start early if you want your ecommerce business to remain compliant, save time, and maximize growth. Here are five essential accounting practices ecommerce businesses should implement to remain compliant, reduce time wasted in compliance, save effort and accelerate their expansion.
Categorizing Transactions
Ecommerce brands must closely track cash flow and gross profit – the indicators that show them whether money is coming in or leaving their business – in order to stay in control and achieve financial goals. These numbers form the backbone of every successful enterprise.
Accurate bookkeeping is essential to producing insightful financial reports that support decision-making, forecast, and file taxes accurately and on time. Furthermore, following proper accounting practices ensure compliance with business regulations and standards.
Example: If you sell 100 dinosaur-shaped balloons to a customer and pay your vendor $10,000 wholesale for them, their revenue must be recorded as accounts receivable. But this same money may have also been spent on shipping costs or marketing expenses that should also be allocated correctly; failing to do so can skew your income and expense statements, sales tax returns and cash flow statements significantly.
Recording Transactions
Due to the billions spent online each day, every cent that comes and goes through your business must be recorded accurately. A reliable accounting system makes it easy to keep tabs on where money is going allowing you to make sound decisions that help expand and strengthen your company.
After recording all your sales and expenses, it is also essential that you categorize these transactions. Your accounting software should automatically do this for you; however, it is a good idea to review and add any pertinent extras such as returns, chargebacks or fees as needed.
Calculating and filing sales taxes is another essential task, which can be complicated when state laws differ, making accurate information essential in avoiding overpayment or underpayment of sales tax dues. Reliable accounting software like Bench can make this task a lot simpler.
Reconciling Transactions
Accurate accounting is essential to any business, but especially crucial for online retailers and entrepreneurs. Ecommerce businesses typically face more logistical hurdles than their traditional brick-and-mortar counterparts, so having a dependable bookkeeping system in place can help owners avoid cash crunch situations, unexpected expenses or unwanted inventory.
To use an example: With cash accounting, sales are only recorded when your bank account receives payment; when using accrual accounting instead, transactions are recorded when they occur (such as when your vendor invoices you for shipping costs). From here, subtract your cost of goods sold and other expenses in order to arrive at net income.
Tracking sales tax can also present a difficulty. With software designed specifically to help, and by setting up your company as a separate entity, this task becomes simpler. An experienced Bench bookkeeper is also invaluable in this regard; with accurate records showcasing how well your ecommerce business is doing, accurate financial statements can provide essential data that allows sound decisions, loans applications or tax preparation to take place efficiently.
Reporting Transactions
Ecommerce accounting requires much data entry, but more importantly it must be reported accurately. One misclassified transaction, such as customer returns or chargebacks, can alter sales figures, inventory levels, expenses forecasts, forecasted income streams and even sales tax records.
As eCommerce businesses expand, reporting becomes more complex. Accurately tracking recurring payments, processing credit cards, paying banking fees, and handling currency conversions all add complexity to financial record-keeping. In addition, many online retailers utilize third-party marketplaces and social media platforms as channels for sales and inventory management; managing such channels accurately will ensure accurate records.
Confronted by multiple challenges when operating an e-commerce business, one of the key ones is knowing when revenue should be recognized and charged for. Sales tax should typically be charged according to when an e-commerce company has established presence within a state (i.e. physical storefronts or warehouses, employees or shipping partners in state), attending trade shows there or selling more than threshold amount (this can be established through physical storefronts, warehouses or employees working there or traveling to trade shows there), traveling there for trade shows or selling over threshold amounts). Utilizing software that supports accrual basis accounting helps simplify this process and ensures compliance with sales tax regulations.
