When you start an e-commerce business, you have sales, customer service, and freedom in mind, not e-commerce bookkeeping. Accounting, for some reason, is always an afterthought. That’s where problems begin.
Everything seems like it’s going alright when you start off with your first few sales. Only till you check your bank account do you realize something is definitely wrong. There’s missing cash, or they don’t reflect the sales you’ve done, anything could be possible at that point. That is when it hits entrepreneurs.
The following guide is about the intricate details of bookkeeping for e-commerce business and Shopify accounting.
What Is Ecommerce Bookkeeping?
E-commerce bookkeeping in simple words, is tracking where your money is going. With e-commerce businesses, the flow of money isn’t straightforward. It doesn’t necessarily follow the direct from customer approach as would be the case with other businesses.
Money often flows through several platforms such as payment processors. It may undergo some transaction fee, delays and adjustments. Understanding how your money reaches you, and what amounts get deducted, is extremely essential.
Bookkeeping for e-commerce businesses can be slightly technical due to the added layers involved. This is because:
- Multiple Selling Points: You sell in several platforms. You may have started off selling with Shopify. Then you added Amazon and some other platforms too. With several platforms, there’s different totals, different dates and transactions. Which of them are correct requires attention to detail.
- Processing Fees: Although you made a sale of $50, that’s not what you received. You may get $45 or some other amount less than $50. This is because of platform cuts, transaction fees, payment processing fees, and more. Careful tracking of these will result in a correct profit figure.
- Timing: While you made a sale today, the payment would reflect in your bank account a few days later. These delays may worry you if you lack the understanding of timing mismatches. Your books and bank account may not match, but it shouldn’t worry you if you understand what’s going on.
- Refunds: In e-commerce, refunds are normal and expected. You may end up losing on sales, shipping costs or even the product. Unable to record refunds correctly can drift your numbers far from reality.
Breaking Down Bookkeeping for Ecommerce Business
It’s important to breakdown the essentials of bookkeeping for e-commerce business. Understanding e-commerce accounting results in clarity about your business performance.
- Revenue: When referring to revenue, people normally refer to gross sales. You need to know your net revenue as well. This is calculated by deducting sales returns, refunds, cancelled orders and discounts. Your actual net revenue may be much lower than gross revenue.
- Cost of Goods Sold: This is basically your product cost, including your purchase cost as well as other costs such as manufacturing, packaging, taxes and duties, shipping costs to your warehouse etc. Underestimating your product costs can inflate your profits to untrue levels.
- Expenses: Tracking expenses is crucial. Subscription costs, tools, shipping costs etc all seem negligible till they accumulate over time. Suddenly, you’re spending thousands a month on useless items because they seem to be cheap. Fees such as processing costs of payment platforms are often forgotten or unintentionally ignored. This is because they are simply deducted and not manually accounted for.
- Inventory: This can be difficult at times but it’s important. Wrong inventory numbers means your costs are wrong, profits are wrong and your decisions would be affected at the end of the day.
Shopify And Shopify Accounting
Shopify enables business owners to set-up their own online stores and sell products online with ease. It basically handles the complex infrastructure to handle your online business.
However, many believe that with a Shopify store, your books are also being handled. This is not the case.
Shopify gives you data about your sales, orders, website traffic, conversion rates and more. While it gives a huge load of data, it doesn’t provide the full picture. Similar to what we discussed previously, your sales may be showing $1000 but the payout is only $900. Remember, this is because of fees, refunds, and timing mismatches. Without proper Shopify accounting, this gap seems like lost money.
Keep in mind that Shopify is a tool, not a bookkeeping solution. You will still need accounting software to organize all your data correctly, in the form of proper accounts, and financial reports or financial statements.
Cash vs Accrual Accounting
This is one of the basics to understand and get through. Your choice of accounting method needs to be decided before starting accounting, and your accounts need to be maintained consistently using the same method. So what is cash vs accrual accounting ?
Cash Accounting
Money is recorded when it moves. So any inflow would mean income and outflow would mean expense. This works best for very small and new businesses only.
Accrual Accounting
Opposite to cash accounting, you record things not when money flows, but when transactions occur. You record a sale when an order is placed, not when you receive the proceeds of the sale. Expenses are recorded when they are incurred, not when paid for. This is much more accurate for e-commerce businesses.
It gives a better sense of business insight rather than focusing solely on the bank account.
E-commerce Bookkeeping Mistakes
Being careless is one story, not knowing something is another. Most of the common mistakes in bookkeeping are due to lack of knowledge. These are discussed below:
Mixing Personal and Business Money: This only complicates your books. While it may save you time in the moment, it will make things difficult later on. Once time passes, you will find it difficult in remembering which transactions were personal and which were business. This can lead to stress especially during tax season. Also, poor bookkeeping creates IRS issues and can result in audits and penalties from the authorities.
To counter this issue, immediately set up a separate bank account and credit card for personal and business transactions. This can help avoid this problem in the first place.
Ignoring Negligible Expenses: Subscription fees, fees for tools rarely used, etc., are quite small when considered alone. When you add them, they can be in the thousands. Ignoring such costs can be problematic for your cash flow.
Not Reviewing Your Books: If you’re not reviewing your books regularly, errors stay hidden and they can grow over time. Consider taking out even ten minutes a week to review your books, because once the errors increase, it would take months to correct things. Healthy bookkeeping habits can keep your books free from error. Try to look for variances in your actual vs budgeted estimates and determine how they can be avoided later on.
Guessing Inventory: This one is risky. You think you know your stock levels, but unless you’re tracking it properly, you don’t. Make use of accounting tools such as accounting software, integrations and inventory tracking tools. Pick the system that fits your business and avoid constantly changing them. Consistency always wins.
Procrastinating: This is probably the biggest one. Anyone who says that they’ll fix it later knows very well that they won’t. Accounting work can be monotonous, but it needs to be done. The problem is that later turns into months and then it becomes overwhelming. Try to automate whatever you can to avoid manual work. By reducing manual work, you reduce the chances of error.
Modern Tools For E-commerce Businesses
There’s several tools that can be used to make bookkeeping easier for you.
Accounting Software: Accounting software helps you organize your books, categorize your transactions and provide you with data important for decision-making. Accounting software such as QuickBooks or Xero produce financial dashboards that can give you instant data, crucial for decision-making in real-time. Manual work can be exhausting, and may result in many errors. Accounting software avoid human-error and increase accuracy. Data can also be accessed from any where, at any time.
Integrations: These connect your store to your accounting system. They save time and reduce mistakes. Any transactions on the store such as Shopify or Amazon get updated in your accounting software immediately. Some of the most common ones are A2X, Synder and Zapier. A2X is able to correctly record payouts and provide the breakups of the processing fees and other deductions when transferring the data to your accounting software. A2X is best for businesses doing consistent sales and are looking for accurate books.
Inventory Tools: Once you grow, spreadsheets stop working. You’ll need tools to manage inventory. An example is Zoho inventory. Zoho inventory is clean and affordable. It tracks stock levels, manages orders and handles multiple warehouses. It also integrates with Shopify and Zoho Books. Based on your business scale, you should choose the tools that fit your needs the best.
Understanding Your Numbers: Financial Reports
You don’t need to be an expert. By producing financial reports for e-commerce businesses, you can understand quite a lot about your business.
Profit and Loss Statement: This statement shows your revenue, cost of goods sold, gross profit, expenses and net profit. It basically details the financial performance of the period, which is normally every quarter or half year. With the Profit and Loss Statement, you understand if your sales are generating enough profits to cover expenses or not. It also helps you understand whether your sales and pricing decisions were correct.
Balance Sheet: The balance sheet states the assets, liabilities and equity of the business. It is based on the accounting equation which is Assets = Liabilities + Equity.
Cash Flow Statement: While the Profit and Loss Statement can show a profit, the cash flow statement can still show that cash is negative or low. This is because there is a difference between profit and cash flow. The Cash Flow Statement shows the movement of cash in and out of the business through out the period. This is essential in understanding where your cash has moved, and how much cash you have.
When It’s Time to Get Help: Outsourcing Your Books To AccountiPro
At some point, doing everything yourself stops making sense. You avoid looking at your numbers. You feel confused or you’re growing faster than you can manage. That’s when help makes sense. Outsourcing your books to an accounting service gives you the freedom to spend time on more important issues, or to relax your mind.
With a professional bookkeeping service on your side, you can rest assured that your books would be accurate, up to date and consistent. You don’t need to worry about your inventory numbers, skipping out a few transactions or missing tax deadlines. We, at AccountiPro, do all that for you. So give us a call today so that we can setup and manage your books in a way that benefits you the most.
