Opening your first ecommerce business is full of important milestones. From listing your first products to making your first sale, every milestone should be celebrated. As your business continues to grow, you’ll have even greater milestones, like watching the cash roll into your bank account.
However, before you can sit back and relax, you need to make sure you have the proper controls in place for tracking your income and expenses, a process known as ecommerce accounting. Let’s go over the basics of ecommerce accounting services and when it’s time to wave the white flag and bring in an ecommerce CPA.
What is Ecommerce Accounting?
Ecommerce accounting is the process of recording the transactions in your business. There are two main types of transactions: income and expenses. Income is the money you receive from product or service sales, while expenses are the costs associated with running the daily operations of your business. Here are a few more terms to know:
- Purchase Order – This is a document that you receive from the customer that outlines what they want to purchase.
- Sales Order – This document is an invoice that you remit to the customer that confirms the products or services sold, payment due date, and identifying customer information.
- Accounts Receivable – Once you have delivered the products, your customers will most likely wait until they receive an invoice to remit the payment. The balance due will go to accounts receivable until the customer pays.
- Accounts Payable – This account is the opposite of accounts receivable and holds the money you owe to third parties.
- Ecommerce Sales Tax – Being an ecommerce seller might come with an obligation to file and pay sales tax in different states. Some states do have nexus rules, which is why it’s important to work with an Amazon FBA accountant or a Shopify accountant.
What Does Ecommerce Accounting Include?
Ecommerce accounting involves basic bookkeeping functions, like recording transactions, but also expands to encompass other important areas of your business. Here are three areas of emphasis in ecommerce accounting:
Tax Planning and Filing
Tax planning is vital to reduce your tax bill each year, especially as strategies are generally only effective if they are implemented before year-end. For example, maybe you notice you made more income than you expected, so you decide to purchase that piece of equipment you’ve been needing to take special depreciation options. Working with an ecommerce accountant can help you find the most advantageous planning items.
Ecommerce accounting also includes the filing of forms. This might entail filing W-2s for employees, 1099s for contractors, remitting sales tax returns, making estimated tax payments, and filing the annual tax return. There are countless forms that ecommerce business owners need to keep track of, each with a specified deadline. This is why many sellers choose to enlist expert help.
Bookkeeping
Accurate bookkeeping sets the foundation for complete accounting records. Forgetting to record a transaction can lead to making business decisions based on inaccurate information and overpaying on your tax bill.
However, bookkeeping expands beyond just transaction recording and might include inventory management, reviewing the financial statements, processing payroll, tracking customer payments, and managing sales tax payments.
Growth Planning
Growth takes strategic planning and consistent oversight. Ecommerce accounting can give you the information needed to reach your business goals, including:
- What products are performing the best
- Movements in profit
- Your largest expenses
- Ways you can increase profit margins
- The profitability of new ventures
Having tangible information to base your decisions on is important to keep your business moving in the right direction.
What Should Ecommerce Business Owners Keep Track Of?
As an ecommerce business owner, you should be keeping track of a few different areas in your business. The most important areas include:
- Cash Flow – Poor cash flow can lead to the inability to purchase more inventory and pay employees, ultimately leading to business closure. Implementing cash flow management tools can help you avoid taking on too much debt and making late payments.
- Gross Profit – If your business is generating a loss before you factor in general operating expenses, you have a serious problem. Analyzing gross profit tells you how much profit you earn from the sale of products before taking into consideration general and administrative expenses.
- Balance Sheet – The balance sheet tracks your over financial health by analyzing how much money you owe and own. This report tells you if you have the cash flow to pay upcoming obligations.
- Profit and Loss – This report provides a comprehensive view of your profitability for a period of time. Reviewing the profit and loss statement on a regular basis can help you implement actionable change and put more money back into your pocket.
When Should You Hire an Ecommerce Accountant?
Accounting software programs have made the accounting process simple, but it doesn’t replace expert help. If you are struggling with any of the topics discussed, don’t hesitate to reach out to an ecommerce CPA that can help keep your books clean and accurate.
