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What is the Role of eCommerce Accounting?

If you’re planning to become an eCommerce business owner, there are plenty of things to consider and plan for.

You’ll need to create an attractive and well-optimised eCommerce store, explore different platforms, advertise your brand, and more.

You’ll also need to factor in an essential part of running an eCommerce business effectively – eCommerce accounting

In the following sections, we dive deep into the following:

  • Why eCommerce accounting matters?
  • What is eCommerce business accounting?
  • What does effective eCommerce accounting include?
  • How does online business accounting work?
  • How do eCommerce accounting practices differ from traditional accounting?
  • What accounting software is best for eCommerce?
  • How can myPOS help?

Here’s all you need to know.

Why eCommerce accounting matters for large and small eCommerce businesses

The UK’s eCommerce industry is one of the largest in the world, holding third place after China and the U.S

Starting an eCommerce company with a UK market estimated at more than £225 billion is more attractive than ever. 

One of the most exciting things eCommerce companies experience when they launch their online businesses is the first sale. It’s usually a long-remembered event when your money goes into your business bank account.

However, don’t be tempted to sit back and relax.

As your brand grows and your eCommerce clients increase, monitoring financial transactions and understanding the business’s financial performance becomes vital. 

This will enable you to perform financial forecasting, adhere to business budget limitations, run efficient inventory management, and more.  

To do so, you’ll need to understand eCommerce accounting in detail.

What is eCommerce accounting?

In essence, eCommerce accounting relies on the basic principles of traditional accounting but adapts them to the peculiarities of running an online store

The term represents a combination of practices, including recording, organising, and managing the complete transaction and financial data relevant to an eCommerce company.

This data is consistently tracked, enabling eCommerce accountants to allocate transactions to a business income or an expense category

Although eCommerce accounting may sound straightforward, it has many branches and components. For this reason, it’s highly recommended to work with a professional eCommerce accountant rather than relying on yourself.

Most eCommerce business owners prefer to entrust a specialist eCommerce accountant with part of the equation, allowing them to invest time and resources in priority tasks.

The essential components of eCommerce accounting

The essential components of eCommerce accounting

If you haven’t worked with an eCommerce accountant before, it can be challenging to become familiar with the elements that shape this space.

There are multiple terminologies to keep in mind. Some of the most common ones include:

  • Accounts payable and accounts receivable – both refer to unsettled financial obligations, representing either money to be collected by the business or paid to others. 
  • Purchase order – an official document demonstrating that a client has requested products or services from your business. The purchase order outlines the specific quantities and types of products they wish to acquire, showing a commitment to pay for the requested goods. While purchase orders differ from payments, they consist of the payment details. 
  • Sales order – sales orders are created by the eCommerce seller and serve to provide all of the information about a sale. While sales orders can be customised, most include customer data, description, the amount of products sold and their price, payment information, delivery address, date, and more. 
  • eCommerce sales tax – the sales tax, the tax you charge and collect from your online customers, represented as a percentage of your product prices. 
  • Cost Of Goods Sold (COGS) – all expenses involved in producing or distributing your products as a business. COGS usually feature warehouse expenses, shipping costs, credit card fees, and others. However, it excludes overhead expenses, such as marketing and advertising, licences, payroll, and others; 
  • Gross profit – a metric representing the difference between a business’s total revenue and its COGS. Gross profit shows the original profit of the company before deducting expenses like taxes, marketing, rent, and others. 

A basic knowledge of these fundamental eCommerce accounting terms will help you communicate better with your accounting department and stay on the right track.

What’s included in accounting for eCommerce businesses

eCommerce business accounting is a complex, multi-layered process. It contains three core areas that work together to monitor business finances and ensure it grows over time.

These include bookkeeping, tax management and compliance, analysis, and growth planning.

eCommerce bookkeeping

Although frequently used synonymously, bookkeeping and accounting are two different things that have similar purposes.

Bookkeeping is the act of monitoring and categorising transactions, including purchases, receipts, invoices, and payments. Some bookkeepers’ tasks include creating financial records like balance sheets and payroll

Many accounting firms offer bookkeeping services. There are also plenty of partners to choose from when it comes to receiving a service strictly designed for bookkeeping. 

Tax management & tax compliance 

One of the most burdensome parts of running an online business is keeping track of taxes

This serious accounting component can either improve your tax efficiency or lead to legal conflicts and consequences when underestimated. 

eCommerce accounting takes care of tax planning and preparation, helping business owners understand all applicable taxes. 

Through this component, eCommerce sellers can also enjoy peace of mind, knowing their taxes are calculated, and all essential documentation is properly filled out and submitted.

Establishing whether an online business must add sales tax to product prices can be difficult. When you work with a professional eCommerce accounting firm, you can rest assured that your tax returns are on track and you’re protected from HMRC penalties (His Majesty’s Revenue and Customs)

This will enable you to confidently focus on other business areas that will help you grow your online store and attract more customers

In summary, tax-related eCommerce accounting activities include:

  • Registering for sales tax; 
  • Calculating tax and filing tax-related documents;
  • Collecting, monitoring, and paying taxes;
  • Taking care of tax obligations like VAT; 
  • Staying up to date with new tax regulations;
  • Managing tax audits. 

All of these activities are fundamental for operating a successful online business.

Evaluating the company’s financial health and business growth planning 

Contrary to popular belief, eCommerce accounting can also help you scale a business. Rather than simply recording data, it can also produce valuable financial reports that offer insights into the business’s financial position. 

When all essential data on your business transactions are collected, eCommerce accounting allows you to make informed decisions on:

  • Product catalogues – accounting data can show which products or services are profitable for the business and which are accumulating higher costs than profits;
  • Profit changes – via eCommerce accounting information, you can compare your business’s performance over time;
  • Expenses and liabilities – having an understanding of your expenses and liabilities can help you reduce them in the long run and make sure you don’t have any outstanding payments;
  • Net profit margin growth opportunities – you can make strategic decisions and implement new approaches to ensure that your profit margins increase. 

Overall, eCommerce accounting tasks can serve more than one purpose. They can help you stay compliant with rules and regulations and transform your business into a profitable venture with unlimited potential.

Different eCommerce accounting method options

Different eCommerce accounting method options

When discussing eCommerce accounting, it’s essential to know that several methods can be used to record financial transactions, track records, and produce financial statements. 

The choice of method will influence your ability to make strategic decisions and can sometimes affect financial planning.

Some of the most popular eCommerce accounting methods worth knowing about include accrual accounting, cash accounting, and modified cash accounting.

Here’s a detailed overview of each.

The accrual method

If your business is involved in inventory purchases as part of business operations, accrual accounting is a suitable method for you. 

Based on this form of accounting, the business must note revenue from sales at the time of their completion. In this case, revenue is recorded once the consumer purchases, not when the business receives the money. 

This is just one example of how this method works, but this basic principle applies to all other records. Unlike in cash-basis accounting, transactions are recorded at the time they occur. 

Accrual accounting is the most frequently used form of eCommerce accounting. However, this doesn’t mean that it will be the best fit for your business.

This method is more complex than others. At the same time, it offers a realistic representation of the money entering and leaving your bank account. This enables business owners to make better-informed decisions related to finances and growth. 

The accrual method also comes with a few challenges. For example, it could be difficult to understand how much money you have available to use at a point in time. 

Due to the fact that this method records real-time transactions, it portrays payments and expenses that will be realised in the future. As a result, in some cases, you may find that your account balance looks better than it is in reality. 

In summary, the accrual accounting method is helpful for larger, well-established eCommerce businesses with significant growth plans.

The cash accounting method

On the other hand, cash-based accounting works on the principle that transactions are only recorded when the money enters or leaves the business bank account

Naturally, this form of accounting is much simpler than accrual accounting and shows the money flow in real-time. 

This method is extremely close to the way individuals handle their personal finances. 

It’s especially useful for smaller eCommerce businesses, start-ups, dropshipping businesses, and consumer-to-consumer merchants. 

One thing to remember about cash accounting is that it doesn’t factor in accounts receivables and payables. As noted above, both of these terms are essential for larger businesses, which is why we don’t recommend this method for established eCommerce shops.

Modified cash accounting 

If neither accrual nor cash accounting sounds like the right choice for you, the good news is that businesses can also explore a hybrid model: modified cash accounting. 

This method allows accountants to rely on both the cash and accrual methods based on the type of transaction being recorded.

For example, operating expense transitions can be handled in cash, while revenue and COGS (Cost of goods sold) can be recorded on an accrual basis. 

This approach allows you to enjoy greater profitability accuracy and save time compared to a complete accrual method.

How does eCommerce accounting work?

So far, we’ve outlined the basics of eCommerce accounting. But how does it work, and what do you need to get started?

To commence your eCommerce accounting, you’ll need to take care of three core elements: getting a business tax ID number, opening a business bank account, and investing in accounting software. 

Business tax ID number

The first thing to think about is getting your business tax ID number.

In the UK, this is the Unique Taxpayer Reference (UTR) – a 10-digit number that the HMRC automatically assigns businesses at the time of company registration.

This number will be required when your business corresponds with HMRC, files forms, submits company accounts or pays Corporate Tax.

Business bank account 

Believe it or not, some of the most common eCommerce accounting problems stem from the failure to separate personal and business finances

While using the same bank account for personal and business needs may seem beneficial, this can create significant complications. 

This makes it merely impossible to track your business performance. But most importantly, it can create legal conflicts that may be extremely costly.

Accounting software 

If your business is relatively new and you don’t have much data to record, you may be able to handle everything necessary with simple tools like Excel or Google Sheets.

However, as your online shop grows and your transactions increase, you’ll likely need more advanced accounting software. 

By investing in reliable technology, you can save significant time while effectively managing taxes, inventory, costs, sales, and more. 

Later in this article, we explore some software solutions that you can explore and offer tips on making the right choices for your business.

To fully understand how eCommerce accounting works and effectively manage these processes.

You also need to consider several key financial statements: 

  • Cash flow statement – cash flow statements provide an in-depth breakdown of a business’s cash movements throughout a selected time period. It organises transactions into operating, investing, and financial activities, offering a holistic view of the company’s liquidity and cash flow management. Combined with balance sheets and income statements, cash flow statements uncover the entire positioning of a company in terms of financial health. This statement is key if you’re communicating with potential investors. 
  • Profit and loss statement – also referred to as income statements, the profit and loss statements summarise the business’s revenue, expenses, and costs throughout a selected duration. They are usually produced every year and are standard accounting reports, making them a must-have for any business. They’re especially useful when determining how profitable your company is compared to previous periods. 
  • Balance sheets – unlike the previous two statements, the balance sheet offers a snapshot of the financial positions of a company at a specific point in time. Balance sheets monitor fundamental elements, like assets, liabilities, and shareholder equity. 

These are at the core of how eCommerce business works and offer essential insights into your business.

What accounting software is best for eCommerce?

What accounting software is best for eCommerce?

The best eCommerce accounting software for you will depend on the type of business you operate, its size, and other factors. 

However, several small business accounting software solutions stand out from the rest: 

  • QuickBooks Online – a cloud accounting software that automates processes across your eCommerce shop. It offers integrations with Shopify and other popular sales channels and offers features like smart matching, trend analysis, tax management, and more. 
  • Xero – cloud-based accounting software designed for small and medium-sized companies. It comes with various money management tools, like double-entry bookkeeping, budgeting support, and more. Core features include over 800 integrations, invoicing and quotes, expense tracking, and more. 
  • Zoho Books – a comprehensive solution for bookkeeping and transaction organisation. You can manage your bills and invoices, reconcile bank statements, and control spending via a single platform. 

When selecting accounting software, ensure it offers integrations with other systems and platforms your business relies on. Also, check if it offers flexible pricing plans that meet your growth plans. 

Research the software’s features and usability and ensure that you have access to full-time customer support. Last but not least, make sure that the software has security features, such as two-factor authentication, data encryption, and backups. 

The difference between eCommerce and traditional accounting

While traditional accounting focuses on the needs and requirements of standard physical shops, eCommerce accounting adapts core accounting practices to fit in with the specifics of running an online business.

In eCommerce, a shopper purchases an item from your online store. The payment is processed via a payment gateway, which also collects a percentage of the price as a fee to enable the sale. 

Rather than sending the rest of the paid money instantly into the eCommerce business’s bank account, the funds are transferred with a delay in lump sum payments. 

These payments usually represent a combination of gathered funds from separate sales. They could reach the bank account weeks after the original sale occurred and the customer completed the payment. 

For example, it offers reliable ways to record information on online sales. Such sales are usually completed via an eCommerce platform featuring peculiarities like payment gateways. 

This scenario is much different from that of a traditional physical store. 

From an accounting perspective, this creates challenges when tracking and categorising data on sales, returns, fees, inventory management, and shipping costs. Not to mention that this data is usually stored across multiple eCommerce platforms and channels.

How does the myPOS invoicing solution facilitate eCommerce accounting?

With myPOS, you can streamline your eCommerce accounting via our advanced invoicing solution designed specifically for online businesses. 

With a diverse suite of features created to simplify financial management, you can free valuable resources like time and employee availability to invest in other parts of your business.

Via the solution, you can take advantage of automated invoicing, customisable templates, multi-currency support, real-time reporting, diverse integration options, payment tracking, and more.

Conclusion

eCommerce accounting is the heart of running a compliant, successful, and efficient online business.

Although this space may initially sound easy and possible to manage alone, it can turn out to be more complex than expected.

We hope that this article will provide the foundation on which you can step. To achieve maximum results and adequately plan your business’s future, we recommend partnering with a reliable eCommerce accounting specialist. 

Frequently Asked Questions

Managing eCommerce accounting is a multi-step process. It includes choosing the right accounting method, setting up your eCommerce business accounts, recording transactions, monitoring inventory, generating reports, and more.

Generally, eCommerce accounting uses fundamental and consistent principles regardless of the sales channel. However, due to the variety of different transaction types, payment methods, and available accounting practices, there may be some variations.

Some popular challenges associated with eCommerce accounting are managing complex payment processing fees, reconciling multiple payment gateways, handling currency conversions for international business, and more.

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