Ecommerce Accounting for Small Business Owners
Running a successful e-commerce business requires a lot of effort, and one of the most important aspects of it is accounting. You must know how to track your inventory, income, and expenses to run a successful enterprise. Otherwise, you’ll lose money due to negligence, and your business may not survive. This article will explain what e-commerce accounting entails for small businesses.
What Is E-Commerce Accounting?
It refers to the process of recording and managing financial data related to the operations of an e-commerce business. Fundamentally, it involves tracking all transactions and ensuring they are properly recorded and categorized. It sounds simple, but it’s easy to get lost in different terminologies. The most important ones to pay attention to include:
- Purchase order: A legally binding document from a customer declaring the item(s) they want to buy and in what volume.
- Sales order: A document the seller prepares outlining all the relevant information about an order, e.g., price, quantity, delivery address, etc.
- Sales tax: A tax on every sale you make payable to the government.
- Accounts payable: The amount you owe to suppliers and vendors.
- Accounts receivable: The amount owed to you by customers, i.e., revenue that you have not yet received.
What Does E-Commerce Accounting Involve?
It includes both basic financial reporting and sophisticated functions. The main tenets are bookkeeping, tax management, and growth forecasting.
Bookkeeping
This refers to recording all financial transactions and categorizing them accurately. You should record any sale you make as income and any external payment as an expense. Track customer returns and record them as an expense to balance the books. Anybody should be able to pick up your accounting books and understand your sales performance.
The good thing is that software makes e-commerce accounting easy. Your accounting software can automatically record income and expenses and balance them.
Tax Management
Every registered e-commerce company needs to pay taxes on every sale. It can get complicated because different countries and states charge different percentages as sales taxes. You need to keep records of what location a customer purchases an item from and ensure you pay the required taxes. The good thing is that accounting software can do that automatically.
Growth Planning
It’s necessary to plan and prepare for business growth, as you don’t want to reach a level where you don’t have the infrastructure to handle customer demands. You need to analyze
- Your biggest expenses to see if you can cut down on any
- What products bring in the most revenue? So that you can focus on them.
- How can you improve your profit margins on existing products?
- What products are having poor sales? So that you can discard them.
What Metrics Must E-Commerce Business Owners Constantly Monitor?
- Cash flow: The amount of money moving in and out of your business. You need a healthy cash flow to pay regular bills and expenses.
- Gross profit: The revenue from selling your products minus the cost of acquiring the products.
- Gross margins: The same as gross profit but expressed as a percentage.
- Balance sheet: A document accurately tracking your assets (cash on hand, inventory, and accounts receivables), liabilities (accounts payable, wages, and taxes).
Accounting Methods
The two main accounting methods for e-commerce businesses are
- Cash basis: In this method, you only recognize income or expense when cash changes hands.
- Accrual: Here, you recognize income or expenses as soon as they’re incurred, regardless of the money changes hands.
Cash basis is a simpler method, so we recommend it for small businesses. The accrual method requires specialized accounting knowledge, which makes it best suited for large companies.
Conclusion
We have explained the basics of e-commerce accounting for small businesses. At this point, it should be easy to understand how to track your income and expenses and keep balanced books. Remember that accounting software has made things easier, and you can choose from any available options.
