A beginner’s guide to accounting for ecommerce

No business is complete without accounting. The art of maintaining a balance between the incoming cash and outgoing cash is crucial to your success. The accounting process might appear daunting and scary, but with the right knowledge and tools, it becomes transparent and easy to follow.

Since your ecommerce store brings in orders throughout the day and these orders can get canceled or refunds requested at any time, it’s necessary to automate the accounting process to track transactions. This takes a plan.

If you’re running an online store and looking to streamline your accounting process, these pointers will help put you on the right track:

Open a separate bank account for your business

Having a separate bank account for your business will keep your personal and professional spending separately. While sole proprietors don’t require a separate account, it’s still recommended. For LLC and partnerships, it’s mandatory. This will help you organize funds and plan taxes. As your business grows, the separate accounts will make bookkeeping easy.

Integrate with payment gateways

With a rapid increase in ecommerce platforms, it is essential to choose the right payment gateway, such as PayPal, Authorize.net, Stripe, or 2checkout. The commission each gateway charges for transactions varies. It’s important to understand these transaction charges and how it affects your profit percentage. Research and identify the right payment gateway—not necessarily just who has a low transaction rate, but also who has a high success rate. You don’t want your user to enter their credit card information only for the payment to fail—they might leave, never to return again.

Categorise transactions into income or expenses

Every transaction should have its own entry in the ledger. This makes sure that each expense is accounted for.

For every transaction, an online order must be placed. Usually two types of orders will be made—one towards the vendors from whom you purchase the raw materials and the other to a customer who purchases a product from you.

Payments made to vendors should be counted under expenses while amounts credited to the account should be counted under income. Having software that processes this information will come in handy when there is a large number of transactions happening. Good software should also allow scanned copies of receipts to be uploaded to avoid discrepancies.

Consider returns and chargebacks

Returns and refunds are unavoidable parts of the ecommerce business. When a refund is given, it reflects in accounting as if no sale happened. The product will be added to the inventory while the refund will be subtracted from your revenue under Returns. The processing fee is a loss to your business and will have to be borne by you.

Chargebacks happen when customers claim they have not made a certain transaction on their credit card. The business has to repay the credit card company. These transactions come with a processing fee that is subtracted from your revenue and will be added back to chargebacks or operational costs.

All these excessive costs should be kept in mind while setting your product selling price. Charging the customer a little extra will help you break even for losses that happen during returns and chargebacks.

Compare with bank statements

Obviously spending what you don’t have is not good for business. Monthly bank reconciliation—matching bank statements with the books you’re maintaining—will help manage and foresee your available funds.

Comparing the cash mentioned in the books to the cash in an account will help you immediately identify small discrepancies.

Prepare for tax liabilities

Every company selling taxable products has to pay sales tax in jurisdictions where they have a significant presence. These taxes are not visible when we buy products on websites like Amazon and eBay. Tax management will be done by the seller for the entire online store as a whole. This is one reason why managing sales tax compliance is a tedious task.

If tax was not properly collected from your customers at the time of sale, that amount will come from your cash flow. To avoid complications and minimize tax penalties, proper account management is required.

Taxes are different based on the legal structure of the business. The sole proprietor will have to pay it as a personal tax, whereas corporations will have to pay separate professional and personal taxes.

Handle merchant fees

Setting up an online store with an ecommerce platform comes with a merchant fee. They take a percentage of every sale made online. The amount reflected on your account will be the gross revenue and not the net revenue because the merchant will have already deducted the amount before depositing into your account.

Cover shipping costs 

Customers love free shipping. As a business owner though, it’s not free for you as you end up paying out of your own pockets. If free shipping is offered, this operation cost should be included in the product price. Ideally, a nominal shipping charge works for most online sellers.

If you decide to provide free shipping, increase the processing time to reduce operation stress. Some shipping providers reduce shipping costs for longer transit times. Framing the right shipping price is important for the overall operation success.

Factor in foreign costs

With a brick and mortar store, your business might be restricted to only a single region, but with an online store you have the option to expand services worldwide. To cater to an international audience, you should let customers shop in more than one currency. A system capable of dealing with international currencies is mandatory for global expansion. Ensure you research each region and figure out information like country-specific merchant rates to calculate the price of the product along with the tax.

Calculate gross income

To understand exactly how much money your company is making, you need to calculate the gross income. For this, you need to ascertain how much you incurred to produce or procure your product. This amount is called as Cost of Goods Sold (COGS). This will include the labour charges, materials and transportation costs. The net revenue is the total amount made by the business. To calculate gross income, COGS should be subtracted from the net revenue. The difference between how much you spend and how much you make is your profit.

Understanding each of the above points is important for your online success. It’s tempting to be competitive and cut your product price to improve sales, but this is not a good strategy in the long run. Understanding how much you actually spend vs how much you made is crucial for a profitable business.

If you have an online store built on Zoho Commerce and looking for an end-to-end accounting tool, Zoho Books can simplify the whole process. It can be easily integrated to your store and help perform complex tasks like negotiating deals, creating invoices and automating tax maintenance.