Shopify has continued to gain popularity amongst the e-commerce community, with statistics supporting a 200% growth from 2020. This platform maintains its popularity because of the added ease of running and scaling an e-commerce business.
Although Shopify can be a great platform to host your e-commerce operations, the duty falls on you as a business owner to guide your business in the right direction with proper accounting procedures.
What makes your business growth unique also makes it complicated. Sales tax, revenue recognition, inventory accounting, and tax planning are four key areas that you need to focus on to contribute to the long-term success and scalability of your business.
Sales Tax
Many e-commerce businesses act as direct consumer sellers, meaning you are responsible for assessing the sales tax risk in different states. Certain states have a nexus program, which is the ability to avoid filing and paying sales tax if your sales in that state are under a certain limit.
This creates the need to determine which states you have a nexus in and which you are obligated to register and pay sales tax. Determining that you are required sales tax is often the first step in collecting sales tax for your Shopify business. You will need to facilitate the whole process, from the customer checking out and being charged sales tax to collecting and remitting the money to each state.
Sales tax can become complex quickly, resulting in not all accounting firms having the capabilities to handle the necessary processes, especially when multiple states are involved. For example, New Jersey charges sales tax, but not on clothing purchases. Many other states deem clothing as taxable, leading to the risk of overpaying on sales tax if your professional doesn’t have the necessary background knowledge.
Shopify accounting relies on calculating and remitting the proper sales tax amounts to each state. Overpaying on sales tax takes money directly out of the profits of your e-commerce business, making it important to work with an expert with the proper knowledge if you do outsource this function.
Revenue Recognition
Another important piece of Shopify accounting is revenue recognition. ASC 606 was recently passed, which requires accrual basis e-commerce sellers to report revenue when it is earned, not received. One of the main challenges that Shopify owners face is uncovering the true revenue of their business.
The money that shows up in your Shopify dashboard isn’t what hits your bank account. Fees, chargebacks, and discounts are all taken off the top of your gross revenue before the money is sent to your bank. Without any adjusting entries in your accounting software, revenue would be understated because the net amount is recorded, not the gross amount.
Revenue recognition under ASC 606 is highly regulated, meaning experienced accountants should understand how to properly adjust your books. However, many Shopify sellers gravitate towards the cheapest bookkeeper who doesn’t have a lot of experience. Although the fees might be lower upfront, you risk owing back taxes to the IRS and facing audits for incorrect returns. Is the extra $100 you save really worth it?
Inventory Accounting
Inventory accounting is another crucial component of Shopify accounting. When your business purchases inventory, those amounts are not immediately deductible. Instead, the purchases go to the balance sheet until you sell the items. Only once the item is sold can you move the cost to your income statement.
Completing the proper Shopify accounting for your e-commerce business relies on understanding what your inventory value is at landed cost, which is the amount you paid for the inventory. The inventory amount on the balance sheet should include any freight, shipping, and sales tax.
The good news is that Shopify provides sellers with a way to track inventory accounting, reducing the risk of errors and ensuring you are recording the right amounts on your financial statements. Nevertheless, technology doesn’t always function as intended, making it important to consistently review your inventory balances.
Tax Planning
Shopify accounting isn’t always concerned with how much product you sell or your profit margins. In fact, a major component of running a successful Shopify business is tax planning. The income you report on your internal financial statements needs to be adjusted for taxable and non-taxable items.
For example, there are various credits and deductions available for Shopify sellers, such as the Qualified Business Income Deduction, Home Office Deduction, Bonus Depreciation, Section 179 Depreciation, and others.
To be effective, tax planning strategies must be implemented before year-end. This means that it’s important to work with an expert in Shopify accounting who understands that the state you reside in and conduct business in impacts your tax situation. The right expert should be able to create a tax plan that is tailored to your situation to find the right strategies to reduce your tax burden.
Summary
Sales tax, revenue recognition, inventory accounting, and tax planning are four important areas of Shopify accounting. To work with an expert that understands how to properly handle each segment, reach out to BUSINESS today.
