When you start an ecommerce business, your focus is (understandably) on getting people to your store and selling your product.

But as your company grows, other tasks—such as managing the books—become more and more important. After all, great accounting is what helps you ensure a healthy cash flow and keep turning a profit year after year.

The tricky part? Accounting probably isn’t what got you into retail and it’s unlikely to be your main area of expertise. To add to the headache, ecommerce comes with unique challenges.

Let this article be your crash course in ecommerce accounting. It covers all the essential bookkeeping processes, breaks down key concepts, and shows you how to overcome common hurdles.

What is ecommerce accounting (and why is it different)?

Ecommerce accounting involves how you manage your online store’s finances. It’s the way you track your sales, expenses, and taxes to keep your books accurate and up-to-date.

Keeping your books organized is essential for:

• Finding and fixing mistakes
• Spotting areas for improvement
• Analyzing finances to plan ahead
• Staying compliant with tax requirements

As you start selling across various platforms, ecommerce accounting becomes more complex. You must track sales across your website, social media channels, and online marketplaces, which requires extra work. One small oversight and you might miss a sale or accidentally duplicate it.

International sales only add to the complexity, requiring you to manage various taxes, exchange rates, and local regulations. But there are currently over 30 million global online stores. Businesses can’t ignore their international audience if they want to stay competitive in this crowded industry.

What are the key components of ecommerce accounting?

Accounting comes down to three main areas. Understanding how these work is the first step to building effective processes and taking control of your finances.

Bookkeeping

Bookkeeping is about keeping accurate records of your transactions. This starts with logging every sale, expense, and refund to make sure your financial records are accurate.

Bank reconciliation confirms what you’ve recorded actually matches what’s in your accounts. This process helps catch discrepancies and gives you a chance to fix errors. For example, if you accept a purchase but the money doesn’t appear in your account, you can figure out where it went.

Properly categorizing expenses also gives you a clearer idea of where your money is coming from and going. In ecommerce, you might receive a lump sum from Amazon or eBay. Bookkeeping helps you break down this amount into individual orders and sales so you can record them properly. 

Accounting and tax management

Accounting and tax management helps you meet all your tax obligations wherever you sell products.

On a daily basis, this involves calculating the taxes you owe and keeping a running record. Online stores are usually responsible for income and sales tax. Some countries apply other fees based on factors like the products you sell or the size of your business.

Then you need to pay and file for these taxes according to a fixed schedule. Most countries expect you to file annual tax reports on your gross profit. Some also ask for monthly or quarterly estimated payments to break down the payment into smaller, more manageable installments.

Financial planning

While bookkeeping focuses on daily ingoings and outgoings, financial planning lets you look at the bigger picture. It involves forecasting revenue, setting budgets, and looking at where you can optimize spending.

Understanding cash flow is a key part of financial planning in ecommerce. You must know where money is coming from and going to make informed decisions about spending. For example, cash flow tells you whether you have enough funds to cover supplier payments after stocking up on a product.

Financial planning also indicates where you need to spend more or scale back. In ecommerce, this often ties into inventory management. You need to know which products are turning a profit and which are eating into your budget to know where to invest.

What do ecommerce businesses need to keep track of?

Ecommerce accounting comes with many responsibilities. Here are the key financial and operational components you need to focus on to keep processes running smoothly:

• Income: Like most businesses, online stores need to track all the money coming into their business from sales, investments, and funding. Your income statement (also known as your profit and loss statement) gives the sum of your revenue after costs and expenses in a given period.
• Cash flow: This tracks the amount of money moving in and out of your business, helping you ensure you have enough funds to cover expenses.
• Balance: Your balance tells you the amount of money you have at a given moment. Businesses usually calculate this using the balance sheet.
• Cost of Goods Sold (COGS): Your COGS is the direct cost of producing and selling all your inventory. It includes everything from the raw materials used to the amount needed for manufacturing and shipping. 
• Gross profit: This figure is the amount of funds you have left after subtracting the COGS from your revenue. Gross profit suggests how effectively your business produces and sells its products.
• Gross margins: While gross profit is a sum, your gross margin is a percentage indicating how much of your revenue goes to COGS. Higher percentages mean your business is profitable and running efficiently.

What are the two main accounting methods?

Rather than following a single accounting method, ecommerce businesses often have a choice of two: cash and accrual accounting.

The one you should use depends on your business size, structure, and local requirements. Here’s a quick rundown of the two methods to help you see which one fits your business:

Cash accounting

Cash accounting is a straightforward method that records transactions as they happen. For example, you log sales when the money appears in your account and supplier payments when you pay the bill.

This method works best for small online stores as it keeps accounting simple. But it doesn’t give the most accurate picture of your finances. You may appear to have more cash if you make a bulk inventory order but haven’t paid off your suppliers yet.

Accrual accounting

Accrual accounting involves recording income when it’s earned or expenses when they’re incurred regardless of when the money changes hands. For example, you would record a sale when you receive the order, not when the customer actually pays.

While it involves extra work, this method gives a more realistic impression of your finances over time. It’s also a legal requirement for large businesses in many countries.

Key challenges in ecommerce accounting

As we mentioned, ecommerce accounting comes with some unique challenges. Let’s explore the biggest issues the industry faces before moving on to some of the solutions.

• High traffic: Online stores experience a lot of traffic meaning even small businesses must potentially track and record hundreds of transactions.
• Multi-sales channels: Most businesses can concentrate their operations in one location. Online stores must sell on their website, social media platforms, and popular online marketplaces to remain competitive. But this means your business is sprawled, making it harder to keep track of transactions and tax obligations.
• Fees: The more channels you manage, the more fees you’re likely to owe. Platforms often have different fee structures, too, making reconciliation even more complex.
• Sales tax: Every country requires you to pay some form of sales tax but they often have different names, rules, and amounts. You must do a lot of homework to make sure you’re compliant in all these places without accidentally overpaying.
• Inventory management: Stock plays a major role in your profitability. You must consider various factors like manufacturing and shipping costs, wastage, and inflation among others to keep on top of expenses. Plus, inventory often affects how much tax you pay in countries like the US.
• Foreign currency: Accepting payment in multiple currencies means you have to factor exchange rates and conversion fees into your accounting.

Why your store needs ecommerce accounting software

Ecommerce accounting software isn’t a silver bullet but it helps you navigate many of the challenges above. It can take care of:

• Reconciling transactions across platforms
• Calculating and paying taxes
• Generating financial reports
• Tracking inventory
• Converting currencies

This is key to scaling your operations. As your business grows, manual processes take up more and more of your time, stealing focus from other priorities. Research shows that the paperwork takes an average of 100 hours per month, which is over half of your working hours just gone.

That’s why many ecommerce businesses and their accountants turn to specialist solutions like QuickBooks and Xero. The software syncs with your website and sales channels to share data and handle many of your bookkeeping processes.

But there’s a step missing: Ecommerce and accounting software have distinct architecture, meaning you can’t directly integrate them. You need a syncing tool like MyWorks to map the data between the platforms and share your store data in real time.

What benefits can you expect with the right setup? MyWorks customer, Full Pour, saved countless hours by syncing their website and their books. In their first year with us, they experienced over 10% growth and made the leap from domestic to international sales. 

Read the whole story about Full Pour here.

A quick look at how to choose ecommerce accounting software

Not all accounting software is fit for online sales. Here’s how to tell whether a solution fits your business and gets the expected results:

• Integrations: As you’re selling across multiple channels, accounting software must sync data with a range of popular apps.
• Wide availability: Similarly, you may sell across various countries so the accounting software should help manage international transactions.
• Tax compliance: The software should stay updated with all the relevant laws. For example, QuickBooks and Xero calculate sales taxes based on the latest rates.
• Automation: The best software streamlines all the key bookkeeping processes, leaving very little for you to do.
• Scalability: Online stores can be anything from a one-person team operating out of their basement to a multinational organization with hundreds of employees. Your software should have the features you need for your size and operations, with room for growth.
• Support: While software covers most of the essentials, you’re still likely to need guidance to make the most of your setup or handle complex challenges. The support team should be on hand to provide expert assistance through chat, phone, and email.

Note that the exact features or integrations you look for depend on your store and the platforms you use. Sometimes you might even want to keep your tech stack basic. For example, Answer BMX chose MyWorks to connect their WooCommerce site to QuickBooks because it didn’t force them to add unnecessary extras.

Learn about how Answer BMX manages their ecommerce accounting with MyWorks.

Upcoming trends in ecommerce accounting

Ecommerce is still a relatively new industry with services like Amazon and eBay only gaining momentum in the 00s. While it has borrowed many established processes from retail, some rules and practices are still taking shape.

AI automation is a key trend. 58% of accountants say they use the technology to manage books, including those in ecommerce. These advances only widen the gap between businesses streamlining bookkeeping with software and those still relying on manual processes.

Another key trend is the rise of digital wallets. Transactions almost doubled over the past five years as people are drawn to the convenience and security of the new technology. This adds another layer to accounting as you must sync these platforms with your books, too, and account for their fees. 

Keeping up with these trends and learning about how they affect ecommerce accounting keep your business agile. You can plan ahead and adapt your processes long before you feel the impact, minimizing disruption to operations.

Ecommerce accounting: the foundation for a stable business

While accounting isn’t the most glamorous subject, it’s the basis of a strong ecommerce business. Effective financial management helps you get an accurate idea of performance, minimize risks to your company, and keep one step ahead of challenges.

Now you have more access to support for accounting than ever. Technology has caught up with the ecommerce industry, providing tailored solutions to the issues you face.

Time to review your ecommerce accounting: Are you spending too many hours on the books and could you benefit from more automated, streamlined processes?