Bookkeeping 101: Accounting for Online Shops
However, launching an e-commerce store can be both daunting and exciting for merchants. And for the store to succeed, it’s important to implement proper bookkeeping practices. In doing so, you make it easier to track transactions and manage day-to-day e-commerce finances.
Whether you engage in B2B or B2C e-commerce activities, you need to keep tabs on expenses and revenue to determine the venture's profitability. Thankfully, you can rely on a wide selection of accounting tools to simplify financial management. Moreover, doing so frees up your time, allowing you to focus on marketing and growing your store.
However, it’s important to familiarize yourself with various bookkeeping practices to maximize the efficiency of your financial management processes. Key aspects of e-commerce accounting include credit card chargeback, asset accounts, and tax returns. These terms can be confusing, particularly in the early days of running the business. That’s why it’s crucial to invest considerable time and effort to learn accounting basics.
Before delving into the basics of e-commerce accounting, you should note that several key considerations require your attention. These aspects include:
Choosing an accounting method (double-entry bookkeeping or single-entry)
Adopting effective transaction tracking processes
Selecting and deploying the ideal bookkeeping or accounting software
Taking advantage of bookkeeping services to enhance core business processes
Maintaining and updating financial records is a key part of accounting. As an e-commerce entrepreneur, you need to acclimate to handling tasks like invoicing, billing, bank statement consolidation, settling accounts receivables, and tracking payroll expenses.
To handle these tasks correctly, you should conduct careful analysis and double-check all the details at all times. In doing so, you maintain high levels of accuracy and balance the books. Effective bookkeeping requires excellent organization and communication skills. You need to create an efficient system for handling reimbursements and submissions.
In turn, you can rely on your bookkeeping processes to improve day-to-day e-commerce operations. The best e-commerce accounting software available on the market makes it easier to consolidate data, automate routine tasks, and create detailed financial reports for your online store.
Meanwhile, your choice of bookkeeping method should align with your business processes. You can opt for the single entry method to simplify your accounting processes. Smaller businesses rely on this method for its simplicity. On the other hand, the double-entry bookkeeping method is ideal for larger businesses with complex financial management requirements.
E-commerce Bookkeeping Basics
It is vital to set up an accounting workflow for your online store. The process entails identifying the best way to track and cost your store's inventory. Furthermore, you need to create templates for receipts, sales orders, and invoices. Another key step involves creating a cash flow statement, income statement, and balance sheet. As you set up your workflow, do not forget to download suitable retail accounting software.
When it comes to small business financial management, you deal with several accounts, including revenue or income, assets, liabilities, expenses, and equity. E-commerce accounting starts with setting up different accounts to track transactions under specific categories. The accounts appear in your general ledger.
By compiling detailed financial statements, it becomes easier to maintain up-to-date operational finances. The statements also enable you to improve planning and overall control of operational expenditure. This approach enables you to identify viable ways to boost your profit margin.
A balance sheet contains an up-to-date record of your business's assets, equity, and liabilities. In most cases, a balance sheet comes with two columns indicating liabilities and assets. Items shown on both sides of the columns should balance, allowing you to determine the financial health of your online store.
An income statement covers all the revenue received over a specific period. It lists items either as operating or non-operating income for a given month, quarter, or financial year. Revenue received for regular retail activities, such as inventory sales, falls under operating income.
A cash flow statement plays a more prominent role in e-commerce accounting. It indicates a wide selection of business expenses, including transport, marketing, rent, and inventory.
Sales Orders, Invoices, and Sales Receipts
As an e-commerce entrepreneur, you will deal with sales receipts, invoices, and sales orders regularly. Sales orders indicate payments made to your e-commerce platform without a deduction to inventory. As such, they represent orders awaiting shipping or fulfillment.
Meanwhile, invoices allow you to request payments from customers. They indicate services provided or inventory delivered. In addition, it shows the total cost of the listed items. You can deliver an invoice to your customer via email, by post, or in person.
On the other hand, a sales receipt acts as proof of purchase for goods shipped to your customer. Unlike the sales order and invoice, a sales receipt does not request any payment from the recipient. Accounting software products available on the market can generate sales receipts, invoices, and sales orders for your convenience.
Whether you’re running an e-commerce business on the side or committing yourself to it full time, implementing accounting best practices is a must. Not only will it help reduce the workload and headache come tax season, but it will ensure you have an accurate sense of your business performance and help you make well-informed decisions to keep your dream business thriving.