Updated: Sep 9, 2022
If you are looking for an accountant for your e-commerce store, this guide can help. Here is everything to know about the best practices in e-commerce accounting.
There were between 12 and 24 million e-commerce sites in January of 2022. Every day, more and more people are venturing into entrepreneurship and opening new e-commerce businesses. The question is...are they practicing good e-commerce accounting?
There are many best practices in e-commerce accounting. These range from managing fixed costs to classifying transactions. For a new business owner, it can quickly become overwhelming.
E-commerce business owners often wear many hats, so understanding accounting is a must. Do you want to learn more? Keep reading to understand the best practices in e-commerce accounting in 2022.
1. Monitor Cash Flow
To accurately understand the money going in and coming out of your business, you have to monitor cash flows. Cash flow analysis should be conducted at least 13 weeks out of the year.
A 13-week cash flow forecasts your business's cash inflow and outflow over 13 weeks. Its purpose is to help you determine the best strategies to ensure your business grows or scales as you had hoped. A cash flow statement calculates working capital by adding up all the changes in your inventory, plus or minus all the changes in your short-term capital such as loans, investments and credit card payments. In basic terms its the cash you start with from sales or operation at the beginning of the period plus any other current assets minus current liabilities. Current meaning less than a year.
2. Choose an Accounting Method for Your E-Commerce Business
There are two types of accounting methods. They are the accrual and cash methods. Each differs in how you manage financials, so understanding them is important to make the best decision for your company.
This is the simplest and easiest accounting method. With cash accounting, you focus on incoming and outcoming cash flow. Transactions are recognized as the money comes in, not necessarily when the transaction happens. Most starts ups use the cash accounting method. And add financial projections through accounts like us in case they need to compute long-term goals.
However, per the IRS's website "Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. See Inventories, later, for exceptions to this rule." The rule applies to "small business tax payers" who sell $26 million dollars a year and less and or are not a tax shelter!
Do you want more tips on e-commerce accounting? Check out our blog.
Whichever method you choose, be sure to stick to it, as the IRS requires form 3115 to be filled out in order to change the election which requires some backup to say the least.
Do you want more tips on e-commerce accounting? Check out our blog.
With accrual accounting, expenses are recognized when they occur. Income is recognized when goods or services are delivered. Accrual accounting recognizes transactions happen whether they've been paid yet or not.
Matching revenue and expenses during the same period improves the accuracy of your financial performance. This method is compliant with Generally Accepted Accounting Principles (GAAP). It is also recognized by investors and banks.
As a result of using accrual method of accounting, you will have accounts that contain transactions that will be recorded as revenue or expenses. When making day-to-day decisions, use the cash flow statement or cash accounting method instead of accrual financials.
3. Choose the right entity.
This step cannot be emphasized enough. It applies to any business. It is possible to be taxed as a sole proprietor/single-member LLC/ or self-employed person, which is also how you will be taxed under a partnership. As a result, your business income and expenses will be included in your 1040 return, and you'll pay federal and state self employment taxes on this income, or you can deduct the loss from your personal tax if you're a startup. Additionally, you can be taxed as an S-corp for which we run projections for our clients which include all the fees they would pay to set up the entity plus our tax return fee. Additionally, an S-corp qualifies as a PTE which means that, for example in California, you can bypass SALT limitations and deduct more than $10k in state taxes. Book an entity projection with us now if you are not sure which entity to choose.
4. Prepare financial statements you can rely on:
The balance sheet shows your liabilities, assets, and equity. This statement is beneficial in helping you plan for the long term. Your assets must equal liabilities plus equity for the balance sheet to be accurate.
The income statement shows the company's income and expenses. This document helps companies to see if they should increase revenue or decrease costs to make more money.
E-commerce revenue recognition is not as easy as many accountants are used to dealing with. Most accountants are not very tech-savy. E-commerce sales must be reconciled with gross and net sales from each sales channel, such as shopify, Amazon, PayPal. If we told you how much one of our dear client's was missing in "hidden" cash, you wouldn't believe us. And we do not, find money and tell per our agreements.
Cost of Goods Sold- Track your inventory
This is especially important in ecommerce and or retail to ensure that budgets and financials are accurate. But most importantly as mentioned above if you sold more then $26 million, you should have been recording your COGS that pertain to the exact period they were sold.
Keep track of of your Operating Expenses such as Fixed costs:
Fixed costs are costs that your company incurs to keep your business running such as salaries, rent, utilities, etc.
And finally, Net Income- Which determines your taxable income and is used to project your growth...
5. Why sales tax calculation isn't straight forward for e-commerce business owners.
The Wayfair vs. Supreme Court ruling in 2018 changed everything when it comes to sales tax for e-commerce businesses. The court ruled that sales tax on out of state purchases must be collected regardless of whether a store exists there. Each state has different requirements, regulations and tax laws when it comes to collecting sales tax. This feature is available on other platforms as well. If you establish nexus in a certain state, you are required to collect and pay each state.
Methodical Financial Services can handle all of your sales tax obligations, no matter the size of your business, so the owners can focus on other tasks that will help them grow.
6. Select an E-Commerce Accounting Software
E-commerce comes with its own tailored accounting software just like any other industry. Wave Financial and Sage Business Cloud Accounting offer different features than the FreshBooks or Xero. Magneto has been a very popular application for the past year or so, because of its ease of use. Magneto also offers a very different feature than the previously mentioned applications, by promising to solve all accounting needs. No matter what products and services, E-commerce Business Owners may find that the more popular platforms, such as Quickbooks, Xero, and FreshBooks, have everything they need at the beginning of their venture. NetSuite, Sage and Magneto are becoming more useful to mid-size businesses as they grow and add features. Hwever, among the most important factors in the success of a relatively young ecommerce business is the ability to integrate cheaper platforms with popular sales channels such as Amazon Pay, Shopify, etc. The more costly accounting softwares usually require a third party integration specialist who will map the chart of accounts and more.
A centralized accounting software solution allows you to manage your accounting more efficiently, including:
Invoicing or A/R
Pay bills or A/P
Profit & Loss, Financial Reports
Where you'll product your financials from for year end for tax purposes.
Where a more mid-size needed accounting software such as Oracle Netsuites, Magneto or Sage come in to place are:
All of the above,
And the ability to workflow and project manage.
7. Get Help If You Need It
As a business owner, it's impossible to do everything all the time and do it correctly. So, getting help is ok. You may need to hire a bookkeeper or accountant to help with these daunting accounting tasks.
Hiring the right person (accountant or bookkeeper) will determine whether your business grows or if you need to cut costs. Accounting is more than just recording transactions in the right categories, ensuring reports from your sales channels match your financial statements, and ensuring you're compliant. In order to provide the most value-added financial services, our team discusses your business and growth strategies, and a plan for getting there, in order to provide the most value-added financial services.
So why us:
Our tailor-made plans for your specific needs, no matter how big or small your business is, is what makes us stand out from other outside CFO/Controller/Tax Preparer services. The accounting software we provide to clients is tailored specifically to their needs, ensuring not only financial support, but also growth. From, budgeting to meeting your goals, outsourcing more areas of your business we are here to help.
Our clients receive either both of us or one of us every month, and we address any issues that arise together. Why hire an internal bookkeeper that has little to no knowledge of your industry when we have automated most tasks.
We believe it is our team's duty to save CEOs time by taking care of not only the basic bookkeeping needs, but also providing controller services and CFO services at a fraction of the cost of hiring in-house.
The best part of our jobs is when we see our clients happily grow and scale up the way they dreamt. Don't forget we are a one stop shop from Tax, Accounting needs, to Financial Advise, MFS gets it done.
Do you want to learn more? Or are you interested in hiring a bookkeeping service? Check out the services we offer.
This article discussed the best tips about fixed costs, cash flows, and transactions. We covered the key points of e-commerce accounting,
At Methodical Financial Services, we assist with tax preparation, bookkeeping, and CFO services. Let us share our expertise and manage your accounting function!
Do you want more information? Or are you ready to get started? Contact us today to get started.