Setting up your business online is an exciting step as an entrepreneur, but like with any business, there are important accounting factors to know and understand first.
At first glance, this can be an overwhelming process, which is why we're here to break down what exactly e-commerce accounting entails (and how we can help!).
Before you get started, it’s important to have a way to stay on top of necessary integrations with Stripe and data-processing platforms, factoring in and recording any necessary financial data. All of this, in addition to traditional accounting necessities such as bookkeeping or tax management. Together, this makes up accounting for e-commerce sellers.
Our team at Jump Accounting understands the in-and-outs of the accounting complications that can come with setting up an e-commerce business. We are ready to assist you in setting up and keeping track of all necessary integrations so you can focus on running your business!
So what exactly does E-commerce Accounting consist of?
While all businesses need some method of accounting to keep track of transactions and expenses, e-commerce businesses accounting can be a bit more complex.
The most important components of e-commerce accounting can be simplified into five categories, which are:
Purchase Order: this is not a payment, but should contain all necessary payment details in addition to the product and quantity the customer wants to buy.
Sales Order: this is the document sent in response to a Purchase Order, containing confirmation of the type and quantity of product requested, in addition to the payment information and estimated delivery date and address.
Cost of goods sold: this refers to the total cost of production AND distribution of the product, which means the seller can factor in shipping or credit card fees, or anything else that is directly associated with selling the product.
Accounts payable & accounts receivable: any outstanding bills, invoices, expenses still to be paid, or revenue not received.
E-commerce sales tax: while this tax is paid by the seller, it is contingent on where the buyer lives as it will be paid out to the state where they live, rather than where the seller lives.
In addition, there are a few key factors to keep in mind within each purchase.
Managing your online business’s financials isn’t just tracking the number of orders coming through and the subsequent business expenses of maintaining your inventory.
💡Shopify Example
If you’ve opened up an online storefront on Shopify and are using Stripe to facilitate payments – for each transaction, both Shopify and Stripe will take a percentage of it as a fee. All of these components, per purchase, are incredibly important to keep track of as part of your business accounting.
Other E-commerce Accounting complications
In more traditional retail sales payments, there is normally a clearly defined path where the money goes, from customer directly to seller. This makes tracking time periods, tax codes, and any corresponding fees relatively simple.
With e-commerce sales, this is not the case, primarily because e-commerce business owners will be paid in batches from their sales, rather than money coming in individually from each transaction.
This results in:
no clear timelines for when each transaction occurred,
no separation by different tax rules,
transaction types are not specified.
All of these designations are incredibly important for your business’s accounting records, so sorting out and managing the best accounting integrations can be overwhelming – particularly for first-time e-commerce sellers.
Even if you’ve already been using a reliable accounting software service (Xero, for example), it is not enough to simply download reports from whichever e-commerce platform you’ve been using and plug in the data because the generated reports often are:
batch payouts resulting in hundreds of uncategorised rows of raw data,
incredibly time-consuming to sort out,
leaves a wide margin for error.
This is where integrations come in;
To keep on top of your basic business accounting in addition to Stripe and e-commerce platform fees, and filter through your payout reports, integrations such as A2X are key.
With Jump Accounting we use A2X to make sense of the raw data and transfer it into Xero, so there are no transactions unaccounted for, and each time period and tax code applied.
Just like with any business, it's imperative to keep track of your financials effectively and efficiently. Without clear and concise records of each transaction and fee, you won’t be able to keep on top of your basic accounting building blocks like tax management, basic bookkeeping, or eventually scaling your business.
At Jump Accounting, our team is well-acquainted with the complicated ins-and-outs of accounting for e-commerce sellers and ready to help you manage your financials so you can focus on running your business!