You should seriously consider accounting before starting an e-commerce business. Many underestimate the need to understand accounting and lose significant money running an online business. This article will tell you what you need to know about accounting before entering the e-commerce sector.
What Is E-Commerce Accounting?
It deals with recording, categorizing, and managing all financial data relating to online sales. It is an accounting subset that caters to the needs of online retailers.
Basic financial reporting means classifying every transaction as income or expense. However, things can get murky for e-commerce businesses, e.g., classifying purchase orders.
The e-commerce financial management process involves;
- Keeping track of every sale and categorizing it appropriately.
- I am preparing invoices for customers.
- Payroll management.
- Creating accurate financial reports for specific periods.
Important E-Commerce Accounting Terms
Important terms that every e-commerce accountant should note include
- Accounts payable: Money that you owe to suppliers in the short term. It is recorded as a liability on your balance sheet.
- Accounts receivable: Money that customers owe you for invoiced products. It is recorded as an asset.
- Sales tax: A tax you pay on each sale to the government. Different states and jurisdictions have their respective sales taxes.
- Cost of goods sold: The total cost of producing and distributing a product. It includes the cost of manufacturing, shipping, warehousing, payments processing, etc.
Main Aspects Of Online Retail Accounting
The main aspects include tax management, bookkeeping, and growth forecasting/planning.
You must track all your sales and remit the appropriate taxes to state and federal authorities. Failure to do so can result in serious financial penalties. The easiest way is to compile all the sales taxes and remit them at the end of a period, e.g., monthly or quarterly.
Determining when to charge sales taxes and what percentage to charge can be difficult. But the good thing is that many software tools automate this process.
Bookkeeping entails recording all transactions and categorizing them accurately, either as an income or expense. E-commerce sellers often face complications in tracking customer returns, so ensure you record it as an expense.
You should be able to generate accurate financial reports from your bookkeeping data. Accurate bookkeeping makes it easy to evaluate your company’s financial performance.
You must plan for growth to ensure you can always fulfill orders. You don’t want a situation where customers order products and you can’t deliver them. You should always pay attention to which products are selling fast and ensure you restock them. Monitor your largest expenses over time and ensure you always have cash to cover them. This way, it’ll be easy to handle business growth.
Essential Metrics To Keep Track Of
The metrics you should pay the most attention to include
- Cash flow. The movement of money in and out of your company. Ensure you always have enough cash on hand to cover short-term expenses.
- Gross profit. Your total revenue minus your cost of goods sold.
- Gross margin. This is the gross profit expressed as a percentage.
These metrics are necessary to prepare a balance sheet, which is a detailed report of your assets, liabilities, and equity. Anyone who picks up your balance sheet can easily evaluate your company’s financial health.
- Cash basis: This is similar to managing personal finances. You record income only when you receive money from a sale and expenses when you send money out. Recording takes place only when cash has been exchanged.
- Accrual basis: In this method, you record income and expenses as soon as they’re incurred, regardless of when the money gets exchanged.
Small online retailers should use the cash basis, while large retailers are better off with the accrual method.
We have explained what you need to know about e-commerce financial reporting. At this point, keeping accurate accounts for your online retail business shouldn’t be difficult.