Ecommerce Accounting vs. Regular Accounting: What's the Difference?

We help small and medium-sized ecommerce businesses with their accounting. We find that a lot of small business owners or their bookkeepers don't understand ecommerce accounting. It leads to really poor financial data. So really poor accounting leads to poor decision making, which can lead to business mediocrity or even failure. So we truly believe that ecommerce accounting is a huge piece of success for ecommerce businesses.

So let's dive into the main differences between ecommerce accounting and typical accounting. The four main differences you need to be aware of within ecommerce accounting are, number one, where to find your financial data. Number two, how to handle COGS and inventory accounting. Number three, sales tax compliance, big pain. And number four, oh yeah, foreign transaction fees.

1:00 One, where your financial data lives

So number one, where to find your financial data. For a typical business, when they do their bookkeeping, most of their financial transactions are found in their bank account. But with ecommerce accounting things get really messy. You have financial data in your sales channels and your payment processors, and if you have multiple sales channels and payment processors it's a pain to gather all that information into one place.

So usually you get a net deposit from your sales channel or payment processor in your bank account. This is a net deposit and it does not reflect accurate revenue.

1:53

So let's dive into this a little further. So let's say you see a deposit in your bank account from Amazon for fifty thousand dollars. This deposit likely included sales, minus shipping cost, minus FBA fees, minus gift card credit, plus maybe any sales tax that you collected from customers. And then it resulted in fifty thousand dollars that Amazon deposited in your bank account.

This is not your sales number. When you dive into Amazon you'll likely find, and I'm going to keep these numbers simple, but you'll likely find you had something more like 150,000 in sales, minus 25,000 in gift card credit, minus 25,000 in shipping fees, minus twenty five thousand dollars in FBA fees.

Okay, so if you're going to record this number in QuickBooks that you see in your bank account, you're misstating revenue, and sometimes this can be by a large difference.

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Now why does this matter? This is going to affect your gross profit margin, which you make a lot of decisions off of. Also when you go to sell your company, let's say you're looking at a multiple of your revenue, recording the sales accurately is going to make a big difference in the value of your company at that point.

So this is really important in understanding that where you find your financial data with ecommerce accounting is not in your bank account. You need to dive through your sales channels, through your payment processors, and tie all that data up with what shows up in your bank account as you record that in QuickBooks Online or Xero.

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So now this can seem like a daunting task, to dive through all these sales channels and payment processors. But there's some tools out there that we really like. One of them is A2X. It's a great tool we use that takes all your financial data from Amazon or Shopify, and you can set it up so it transfers that into your accounting software.

So I'll include a link to a video up here on A2X accounting, and another link on recording your Amazon sales. You can also find that down below in the description.

So once again, the first main difference you need to understand with ecommerce accounting is that you find your financial data not just in your bank account, but in your sales channels and payment processors.

4:24 Two, COGS and inventory

Okay, moving on to number two, understanding how to calculate and record COGS and inventory.

The most common mistake we see with ecommerce businesses is that when they purchase their inventory they expense all of that purchase as cost of goods sold. So let's say they buy a bunch of inventory in January, you'll see a huge cost of goods sold in January, then in February, March, April you won't see cost of goods sold.

Now the issue with this method is that you won't get a good understanding of the percentage of your cost of goods sold to sales. Your COGS should move about the same in relation to sales. As your sales increases, cost of goods sold should increase, and the opposite.

So this is super important, because sales minus cost of goods sold equals your gross profit margin. And understanding and having an accurate gross profit margin as an ecommerce business is super important, because you're going to base all your other decisions off of what your gross profit margin is. That's how much money you have left to spend on everything else in your business.

So getting your sales accurate by finding your financial data in the right place, and then getting your COGS accurate, will give you that gross profit margin that you need.

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So how do you accurately record your cost of goods sold? Well, for each of your product SKUs you should calculate a COGS for that product, or the cost of that product. I'm not going to dive into how to do that in this video. I'll include a link up above and down below on calculating and recording COGS.

But you'll have a product cost for each of your SKUs, and however many of that SKU you sell in a month, that's your cost of goods sold for that SKU in that month. So we recommend that you tie this out at the end of each month, so that on a monthly basis you have a good understanding of your COGS and therefore your gross profit margin.

Now when you expense out your COGS as you sell product, you also decrease your inventory amount. And your inventory value should be, you know, the cost that you've calculated for each product SKU times however many you have on hand. That's the value of your inventory, and that decreases as you get rid of inventory or sell that product.

That's a basic understanding of the basics of COGS and inventory, but like I said, I'll include some links down below and up above here that will give you more details on how to do that accurately.

7:02 Three, sales tax compliance

All right, so the third unique aspect of ecommerce accounting that you need to understand is sales tax compliance.

Sales tax compliance is messy. There's so many different laws and it differs by state, so it's difficult to keep track of where you need to be collecting sales tax and remitting that sales tax. So all I'm going to say is that this is something you need to be aware of. You'll have to dive in deeper to understand all the laws.

As you start out as a small business, typically you'll only need to collect and remit sales tax for sales in the state where your business is located, or wherever your inventory is held, including Amazon FBA.

But for sales on Amazon, Amazon is collecting for most of its sellers. It's collecting and remitting sales tax in most states. I think there's a few states left where you actually need to collect and remit sales tax for Amazon sales. But if you sell on other sales channels and you're required to collect and remit in certain states, then you'll need to be doing that on your other sales channels. And like I said, each state has differing laws, and there's different laws that require you to collect sales tax in states.

So it gets really messy. We have a really good video on ecommerce sales tax that you can watch, and I'm going to include some links down below on like PDF downloads that we have that take you through the steps you need to do for sales tax compliance.

So if you aren't tracking, you know, your sales tax liabilities, an important step is diving in and understanding this in greater detail. Let us know if you have any questions down below on sales tax compliance and we will send you to the right resources.

8:48 Four, foreign transaction fees

The fourth and final difference with ecommerce accounting that I'm going to cover today is foreign transaction fees.

Ecommerce companies in general have to deal with more foreign transactions, and the associated fees, than other businesses. And it's super important to understand what these fees are and different tools that are out there. So experienced ecommerce accountants will be able to point you to the right tools for your business so that you can decrease these fees. Some include Veem, Plooto, Bill.com.

So we've got a Veem payments video that you can watch. I'll include that link up here and down below. But understanding that this is an issue that ecommerce businesses need to face, and trying to reduce these fees, is something important that we've seen as accountants for ecommerce businesses.

9:39 Where to get help

So that wraps up the main differences of ecommerce accounting that we wanted to cover.

If you like this video, make sure and like below and subscribe to our YouTube channel. Also, on our website we have a PDF with the five most common mistakes that we see with ecommerce accounting. That link will be down below. You can download that PDF and it will help you check your books so that you can get on the right track.

Please, if you have any questions, comment below. We'll answer your questions directly and we can point you to more resources that we have.

If you need help with your ecommerce accounting, we typically start to help businesses once they are over 500,000 or a million dollars in annual sales and they're growing. This is when it makes sense to get the specialized ecommerce accounting services that we offer. So don't hesitate to reach out if you need help.

And best of luck in your ecommerce accounting and growing your ecommerce business. We wish you the best, and that's a wrap.