Learn About Ecommerce Accounting – Why it’s so Different

By January 3, 2019 February 6th, 2019 Ecommerce Accounting

You should learn about ecommerce accounting

Alright, you’ve started an ecommerce business on Amazon, Shopify, or a similar selling channel. You are focused on ordering inventory, managing inventory, shipping, driving traffic to your products, branding, etc. In the back of your brain, you know that you will need to do some accounting for your business…but that’s super easy. Relying on knowledge from your college accounting class ten years ago should be good enough to learn about ecommerce accounting or accounting in general. Maybe do a few Google searches. Eventually you could even hire a bookkeeper when it gets too time-consuming or difficult (great idea actually!).

These methods will make your feel like you are taking care of your accounting. But they are usually based on the assumption that ecommerce accounting is just like accounting for any other business.  Modeling your ecommerce accounting after other businesses will likely give you a very inaccurate picture of your business, which could drastically impact your business’ success.  So, what would you or your chosen bookkeeper need to learn about ecommerce accounting to get it right? 

 

 

Unique aspects of ecommerce accounting

Every industry has accounting nuances. Understanding these nuances is important in getting accurate numbers that lead to informed decision-making. Poor accounting will lead to business mediocrity or even failure, as accounting uncovers the secrets of profitability and cash flow. So, if you are currently doing your accounting or have hired a bookkeeper, you will want to learn about ecommerce accounting and its unique aspects.

Surprisingly, many typical bookkeepers will either not be aware of these aspects or will have trouble in navigating them. As our specialized ecommerce accountants work with businesses like yours, we see four main areas of ecommerce accounting that are important in getting accurate numbers:

  1. Where to find transactional data
  2. In-depth understanding of inventory and COGS
  3. Sales tax for online sales
  4. Reducing foreign transaction costs

The rest of this blog dives into each of these areas so you or your bookkeeper can learn about ecommerce accounting.

Table summary of unique aspects of ecommerce accounting:

 

Area of accounting

Why it’s different for Ecommerce

Solutions

Finding the numbers, the transactional data, the story of the business
Most ecommerce transactions are found on the businesses’ selling channels, NOT through the bank accounts and credit cards like it does for most businesses.
  • A2X (Amazon sellers) 
  • Learn to understand where to find this data in the back-end reports of your selling channels 
  • Accountants who are experienced in pulling data from selling channels 
Inventory and COGS

Inventory and COGS are the most important numbers as an inventory-based business. You will need in-depth knowledge on the following:

  • How to calculate correct COGS 
  • Inventory management and controls around your most important assets 
  • How to account for the flow of inventory through your business
  • A2X (Amazon sellers) 
  • Inventory tools that will track most of this for you when they are set up correctly 
  • Ecommerce-specialized accountants
Sales tax

Online sales tax rules are complicated and constantly changing from state-to-state.

Foreign transaction costs
A lot of ecommerce businesses deal more heavily with foreign transaction costs.  Many tools today allow for less expensive transaction costs with increased transparency. 

 

Where to find transactional data

This is perhaps the most unique aspect to understand as you learn about ecommerce accounting. For businesses outside of ecommerce, it’s very easy to find business transactions. Simply looking at the bank account or credit cards will usually show a business every transaction that has taken place. If they then add accrual transactions, (outstanding invoices, bills, etc.) they will be 99% of the way there.

Ecommerce businesses are a different story. Many bookkeepers will treat bank transactions for ecommerce businesses the same as other industries. For example, when a bookkeeper sees a deposit in the bank account from Amazon or Shopify, they will simply record this transaction as “income” on that deposit date. Two problems occur with this method:

  1. Income (and other numbers) are inaccurate
  2. The timing of transactions is inaccurate

Income and other numbers are inaccurate

A lot of bookkeepers don’t realize that the deposit hitting your bank account from your selling channels is not an accurate income number. These deposits are “net deposits” from your selling channels. A “net deposit” means there were other transactions, not just sales, that affected the number deposited in your bank account. In fact, there are likely 20-30 activities that affect each “net deposit” in your bank account! These activities include sales, returns, sales tax, chargebacks, shipping paid by customers, etc.

To find the transactions that truly go into an ecommerce business, you will need to dive into the backend of all your sales channels. This is where you will find accurate numbers for sales and all other activity.

The timing of transactions is inaccurate

When you record the “net deposit” in your bank account, you are also missing the correct timing of activities. For example, if Amazon hits your bank account with a deposit on the 5th of January, many of the transactions for that deposit will have occurred in December. Over time, and as your business grows, not having accurate timing of transactions (sales, expenses, liabilities, etc.) will become more impactful.

In-depth understanding of inventory and COGS

As an ecommerce business, you are an inventory-based companies. Not surprisingly then, your inventory and COGS numbers are probably the most important numbers to understand and have correct! You will need more knowledge for this area of accounting than for a typical business. You or your bookkeeper should understand the following:

  • Calculating an advanced COGS number for each SKU
  • Inventory management processes
  • Bookkeeping principles for inventory and COGS (a lot of bookkeepers actually get this wrong!)

Some of the most common mistakes we see here are bookkeepers expensing all the product immediately when the product is purchased from the vendor.  See this blog here for a more in-depth discussion on COGS and inventory.

Sales tax for online sales

This one is annoying and frankly a little frightening. Sales tax laws for online sales are constantly changing (learn more about sales tax laws by state here). Because of the North Dakota vs Wayfair ruling in June 2018, states are moving quickly to implement and change sales tax laws that could likely require you to collect and pay sales tax in more states than you think. The road to becoming sales tax compliant can get complicated, and you will want help from sales tax consultants and/or sales tax tools.

Read about three best practices for becoming sales tax compliant here.

Reducing foreign transaction costs

As an ecommerce business, you are likely dealing with more foreign transactions than a typical business. Reducing the costs related to these transactions is important for your profitability. Experienced ecommerce accountants can help you use the right tools to reduce these costs.

Moving forward

Understanding these four unique aspects is an important foundation as you learn about ecommerce accounting. Follow along on our blog for more in-depth solutions as you move along your journey of ecommerce accounting.

Read this blog here for in-depth details on accounting for Amazon sellers.

Read this blog here for a message from our CEO on her ecommerce accounting journey.