Money management is crucial for any online business. This is where e-commerce accounting comes into play. 

Your digital company needs a comprehensive database of where your money is coming from, where it’s going, and how much you have. Without this knowledge, operations become unorganized and begin to fall apart.

In this detailed guide on e-commerce accounting, we’ll cover everything you need to know about the subject so you can keep your business’s finances in check and ready for success.

What Is E-Commerce Accounting?

E-commerce accounting is the documentation, organization, and analysis of all financial data associated with your online business. This includes an itemized list of all transactions, assets (liquid or otherwise), and debt accumulated to date.

This data is compiled into reports and is fundamental for all concurrent and future business operations.

Why Is Accounting Important for an E-Commerce Business?

Organizing your finances is paramount when creating marketing strategies, budgeting, and for any business function that ties to money (which is effectively ALL business functions).

To be specific:

1. Past transactions, such as consumer sales, can be used to formulate annual sales projections and determine aspects such as growth potential. 

1. Making sure you’re on top of your e-commerce accounting will allow you to make better business decisions for the future and manage where you distribute your money more effectively.

1. Keeping track of your finances accurately is also imperative for a number of legal purposes, such as taxes and liabilities.

Types of Accounting for E-Commerce

The two types of accounting for e-commerce are cash-basis accounting and accrual-basis accounting. Each has advantages and disadvantages, so which one you choose to implement is circumstantial based on your business needs.

Cash-Basis Accounting

Cash-basis accounting refers to recording transactions as they are paid out. This means that only once finances are passed from one wallet to another will a transaction be documented on a report. 

This is a much simpler, cheaper bookkeeping system than accounting on an accrual basis and is better for small businesses with no official inventory.

Of course, the numbers on business reports won’t be as accurate since cash-basis accounting fails to document liabilities, time, and other expenses accrued but not yet officially paid. 

This may lead to skewed projections and misrepresented numbers on an annual report.

Accrual-Basis Accounting

Accrual-basis accounting keeps track of all transactions as they are incurred. In other words, you document transactions as soon as you get a bill or a client promises to pay you.

This is much more accurate documentation of a business’s finances and is exponentially more efficient in formulating future projections. The caveat is that these systems are much more complex and expensive to manage. Hence, small businesses often opt for cash-basis accounting.

Basic E-Commerce Accounting Tasks

There are four basic accounting tasks for e-commerce:

• Bookkeeping
• Creating business reports
• Taxes
• Analytics

General Bookkeeping

Bookkeeping is the documentation of all business transactions that happen within your company. This includes customer sales, business expenses, and any other transferral of money that occurs to or from your business.

Creating Business Reports

Business reports are fundamental for making important business decisions, managing your business’s finances, and compiling tax returns.

The first business report you should have is an organized list of all your assets, liabilities, and equity. Additionally, you’ll want to map out a conclusive record of all expenses, profits, losses, and overall net income each year.

Filing Taxes

Having an accurate representation of all your business transactions will significantly help you at the end of the year when you file for tax returns. 

It’s also a good precautionary measure to have your tax information ready in case of any legal issues.

Analytics

Financial reports help you analyze sales trends and create marketing strategies based on prior performances. Numbers can help you better understand your company’s strengths and weaknesses, among other valuable insights.

What to Get Before You Start Accounting for Your E-Commerce Store

Before you start your e-commerce journey, make sure to have these essential items in order:

Business Tax ID

Your business tax ID, or employer identification number, is a unique, 9-digit identification number received by the IRS. This isn’t required for sole proprietors but is for all other business types.

It’s necessary for functions such as opening a business bank account and building business credit.

Business Bank Account

Your business bank account is the backbone of your financial structure. It’s where digital deals are made and where all transactions can be traced.

Sole proprietors can use personal bank accounts for their businesses but are at high risk of liabilities and lawsuits (meaning this isn’t a recommended course of action).

E-Commerce Accounting Solutions

There are many different paid e-commerce accounting software and services out there which make digital accounting easy. They may cost a bit, but they’ll save you a lot of time and effort, which more than makes up for what you spend.

E-Commerce Accounting Issues

The impact of e-commerce on accounting can be translated into several challenges. These are a few common issues, along with simple solutions:

Issue: Payments in different currencies. 

Solution: use software that can handle multiple currencies and keep track of conversion rates.

Issue: Handing taxes on third-party platforms

Solution: when using the marketplaces such as Amazon, read up on their individual tax policies.

Issue: Stocking inventory

Solution: use financial reports to deduce sales numbers and make estimates based on profits and losses.

3 Quick Accounting Best Practices To Remember in 2023

As a final note, here are 3 quick accounting practices to remember in the upcoming year when handling your finances:

• Use up-to-date, reliable bookkeeping software. You don’t just want to go for the cheapest option; go for the option that’s best for your business.
• Document ALL transactions and receipts, regardless of how small. Accuracy is the key to creating outstanding reports and ensures your business is equipt for anything.
• Keep personal and business expenses separate. Not only will this keep you safe from individual liability responsibility, but it will also give you more business banking benefits such as business credit and tax deductions.