This article dives into multiple methods you can consider for your Shopify accounting. We know Shopify accounting can get messy, complicated, and quite frustrating. But getting accurate financials is important in making better-informed decisions for your Shopify store. Every day we personally see the power that accurate Shopify accounting can provide sellers who want to profitably grow their business.
You’ll probably come across different methods, tools, and opinions on how to do your Shopify accounting. Our goal with this article is to give you a comprehensive understanding of the things you should consider, along with various methods, so you can decide on what is best for you. Then we show you how to execute the method you decide on.
How detailed should you get?
An important thing to understand with your Shopify accounting is the trade-off between the amount of detailed financial information you get and the amount of time it takes to get that level of accuracy. Each method I cover progressively gets more accurate and, therefore, complex and time-consuming. Depending on the stage and size of your business, there is a time and place for each method. I would suggest each method for the following business sizes:
- Cash-Deposit Method – Sellers doing less than about $250K in annual sales
- Shopify Details Method – Sellers doing about $250K to $1M in annual sales
- Shopify Accounting Guru Method – Sellers doing about $1M+ in annual sales.
How does Shopify accounting differ from other businesses?
In addition to accounting for transactions in your bank account and credit cards like other typical businesses, Shopify sellers have an added complexity of accounting – a lot of financial activity occurs in your Shopify channel and your payment processors. You can think of the activity in three levels (see diagram below). These levels include (1) your sales channels (Shopify), (2) your payments processors, and (3) your bank account. Each level has financial data flowing through it.
Therefore, the Shopify deposit you see in your bank account is a NET deposit of all this activity happening on Shopify and your payment processors. This net deposit includes activity such as sales, chargebacks, refunds, shipping, sales tax, merchant fees, and more.
So, by simply recording the Shopify deposit you see in the bank account as sales, you are misstating revenue and you are missing other activity going on. The larger your business, the larger the discrepancy is going to be between this misstatement, which is why bigger companies need to move towards the Shopify accounting guru method. They will get more detailed info as to what is happening at the channel and payment processor levels so that they can increase profits.
Here are examples of two clients (one smaller, one bigger) and how much they would be misstating revenue by just recording the Shopify deposit in their bank account (deposits) vs getting accurate “sales” numbers through the Shopify accounting guru method (accuracy):
Shopify Accounting Methods
Keep in mind that the methods below are focusing on different ways to record all the activity in Shopify and your payment processors. Remember that you will likely still have other financial transactions through your bank account and credit cards that you’ll need to record. (These other transactions are typically much easier to handle). Also know that each of these methods will suffice when it comes to getting an accurate net income and the financials needed for tax season. But there are other big differences that are really important to understand!
It also doesn’t dive into accurate COGS and inventory recording.
Let’s dive in.
First method – Shopify cash-deposit accounting
The first Shopify accounting method is what we like to call “cash-deposit accounting”. This method is for smaller sellers who are busy getting their business off the ground and growing. To be frank, your marketing and other activities are more important to growing your business right now than dealing with your accounting. (Yes, I said it!) You don’t want to be spending countless hours figuring out your accounting. Sure, you need to be considering sales and profitability, but you likely don’t need this information in detail. And with low sales volumes, you probably have a decent idea of where you are at financially.
How to do it
For this method, you will simply be recording the deposit you see in your bank account from Shopify as “sales”. We like QuickBooks here at LedgerGurus, so we’ll give you an example of how to do this in QuickBooks Online.
- Click on “Banking” tab (get help setting up your bank feeds here)
- Select the bank where your Shopify deposits are going
- Click on “Spent” column to flip the transactions to show all “Received” transactions at the top
- For all deposits coming from payment processors, categorize them as some sort of “Sales” account that you keep consistent
- Add class tracking if you have multiple sales channels (find additional info on class tracking here)
Watch a screenshare walkthrough of this method.
Pros and cons
Overall, you’ll have a pretty good idea of how your business is performing with little amount of time spent on bookkeeping and accounting. In addition, your financials will be tax appropriate.
Just know that you will lose detail on product margins and therefore your margins will be skewed. Your sales will almost always be understated. And finally, you may miss out on some liabilities such as sales tax. Companies that are this small will likely have little sales tax exposure. But sales tax is something you should be thinking about. We have some great videos on understanding where to collect and how to setup sales tax settings in Shopify.
Second method – Shopify details accounting
The second Shopify accounting method is a little more detailed. This method ties out to what you would see on the back-end of Shopify and is good for businesses doing $250K to $1M. Basically, you’ll be focusing on recording accurate gross sales, pulling out sales tax liabilities, and then clumping the rest of the activity into “payment processor fees”.
How to do it
This requires a journal entry and gets a bit more complicated. Once you figure it out, it really isn’t too bad. But to fully understand, you’ll want to watch this screenshare walkthrough.
Pros and cons
As mentioned, this method is going to give you greater detail and your “sales” will be more accurate than the previous method. It will also help in making sure you are setting aside sales tax liabilities so that you can remit those to the necessary states as you grow.
The biggest downsides are that you will have timing issues from month-to-month. In addition, you are still estimating or making assumptions for “payment processor fees”. Therefore, you are losing some visibility as to what is happening at that level. Finally, yes, you must deal with a journal entry (it’s really not that scary though).
Third method – Shopify accounting guru
This Shopify accounting guru method is highly recommended for sellers over $1M in annual sales. At this sales volume, you are really trying to grow a profitable business as you continue to increase demand. You need the financial data that you’ll get in this most advanced method, where timing and transparency is as accurate as you’ll get.
Unlike the previous methods, it requires diving into payment processor data. In addition, you’ll need some excel skills and/or implementation of a tool like A2X. You’ll have a detailed view of what is happening on your sales channel, your payment processors, your bank account, and necessary liabilities will be tracked and separated.
How to do it
To breakdown this method completely, it would likely require 3-4 hours of training. Then, many more hours of practicing the method before you’d likely feel comfortable with it. At this point, we highly recommend outsourcing your accounting to ecommerce accounting experts, as you focus on what you do best.
For those who would like to attempt, start by watching this high-level screenshare walkthrough of this method. It won’t dive into all the details, but it’ll give you a great starting point.
Pros and cons
The Shopify accounting guru method is complex. It will require hours of learning and skills in different tools or programs. With that said, the level of financial detail and accuracy you’ll get is what you truly need to grow a profitable, successful Shopify business. You’ll have numbers that can drive key business decisions. This method is not for the faint of heart.
This article covers everything you should understand and know in order to start your Shopify accounting. Accounting for Shopify is not an easy, one-click solution if you attempt it on your own or with a bookkeeper that doesn’t understand Shopify. It requires thinking through what you need at this stage in your business and understanding the implications of the accounting methods you go with. Best of luck as you get the financial data you need to grow a large, profitable Shopify store!
If you need help with you Shopify accounting, reach out to us here.