Accounting isn’t just for people with “CPA” after their name. Ecommerce accounting lets you understand the health of your business, plan for the future, and file your taxes correctly.
If you run an ecommerce business, here’s a rundown of everything you—or your bookkeeper—needs to stay on top of.
Accounting vs. bookkeeping
Accounting is the big picture stuff: financial reports, taxes, planning for growth.
Bookkeeping is the work of recording your transactions and keeping track of your money.
These tasks together give you the financial information you need to make sound business decisions.
For the sake of simplicity, this article refers to all essential financial tasks as accounting. But if you’re feeling curious, you can learn more about accounting vs. bookkeeping.
Ecommerce accounting for new businesses
If you’ve been in business for a while, you can skip this section. But if your ecommerce business isn’t off the ground yet, here are some accounting tasks you need to take care of first.
Choose a business entity
A business entity is the legal form your business takes. Some entities, like sole proprietorships, are very simple to set up. (In fact, the moment you start doing business for yourself, the government automatically classifies you as a sole prop.)
Others, such as partnerships or corporations, take more work to set up. The type of business entity you choose will depend on what kind of business you’re running, your future plans, and whether you co-own it with others.
Consider registering as a limited liability company (LLC), as this status separates your personal and business assets—giving you the liability protection of a corporation at a lower cost. And it offers potential tax benefits, depending on how you choose to file.
You can learn more by checking out our guide to choosing an entity type for your business. And while you’re at it, you should look into whether you need a business license to sell online.
Choose an accounting method
There are two ways for business owners to handle accounting: cash, and accrual. Whichever one you choose, you need to stick with it. So, it’s important to make the right choice now. (You can change accounting systems, but you have to go through a government process.)
The cash method of accounting lets you record transactions the moment money enters or leaves your business. For instance, when a vendor invoices you, you record the expense only after you send them their money.
The accrual method records transactions the moment they occur. So, as soon as a vendor invoices you, you record the invoice as an expense—even if it hasn’t left your account yet.
For a full breakdown of the difference between the two you can read our guide to cash basis vs. accrual accounting for small business owners.
Regular accounting tasks
Here are the tasks you should plan to take care of on an ongoing basis to keep your ecommerce business on track, financially speaking.
1. Enter and categorize your transactions
Any time money enters or leaves your business, it needs to be recorded.
When you sell 100 dinosaur-shaped balloons to a customer, the revenue your business earns needs to go on the books (meaning, you need to record it in your accounts receivable in some kind of ledger, whether that’s accounting software, an Excel file, or a paper ledger). And when you order another 10,000 dinosaur balloons wholesale, the money you pay your vendor needs to be recorded as well, in your accounts payable.
You can manually import that information by copying it from your online bank account. Or you can use accounting software to automatically import it for you. This can happen daily, weekly, or at the least, monthly, depending on how busy your ecommerce store is.
Once a transaction is on the books, it needs to be categorized. The two main categories are income and expenses. Accounting software won’t categorize your transactions for you, but a bookkeeper—or your team at Bench—will.
Helpful resource: How To Categorize Business Transactions
2. Categorize returns and chargebacks in your books
Returns and chargebacks are two unfortunate types of transactions that ecommerce entrepreneurs need to deal with. If you don’t enter and categorize them correctly, you could soon find your balance sheets out of whack.
A return is pretty straightforward: someone who bought your product wants to give the product back and get a refund. When that happens, you won’t record it as an expense—you’ll subtract it from your revenue and categorize it under “Returns and allowances.”
For example, if a customer purchased a $40 product and then returned it, the journal entries might look like this:
|Revenue—Returns and allowances||$40|
You would send $40 cash back to the customer, reducing your revenue as if the sale never happened.
A chargeback happens when a credit card company asks you to return funds you charged to a customer’s credit card. This happens because the card’s user has told the company that the charges on the card are fraudulent.
A chargeback can happen if their card was stolen and then used to make the purchase. It can even happen if the customer forgets they made the purchase, or if the transaction has a weird name on their statement that doesn’t line up with your store name.
The money you withdraw for the chargeback should be categorized as “Returns and allowances.”
All chargebacks come with processing fees. You can either record that fee as a general business expense, or set up a chargeback fee expense category.
Suppose the customer made a $40 purchase, and later did a chargeback on it—so the revenue has to be returned. Plus, the credit card company charges you a $10 fee, which you pay out of your cash account. The journal entry might look something like this:
|Revenue—Returns and allowances||$40|
Helpful resource: 6 Challenges of Ecommerce Accounting & How to Overcome Them
3. Reconcile bank statements
It’s important that your bank statements and your books match up. When they don’t, you may end up trying to spend money you don’t actually have.
Bank reconciliations are typically handled monthly. To complete one, you’ll need your bank statement, plus financial statements, and you’ll be comparing the two to make sure every entry matches up.
If you use cash basis accounting, the process should be quick—cash basis accounting means you record each transaction at the same time the bank does, so unless something has gone awry there shouldn’t be any discrepancies.
For ecommerce companies that use accrual accounting, however, bank reconciliations are more in-depth. That’s because you’re going through your statements and the bank’s to make sure that every uncleared transaction you recorded actually went through.
Helpful resource: How to Do a Bank Reconciliation
4. Generate and analyze financial statements
Financial statements are generated from the information you have recorded on the books. There are a few different types:
- Balance sheets
- Income statements
- Cash flow statements
- Statements of changes in owners’ or shareholders’ equity (for small businesses that have more than one owner or shareholders)
They give you important financial data like how much money your business has, how much it owes, and how money is moving around. You should look at your financial statements monthly.
You can create your own financial statements, or use accounting software to generate them automatically (if your books are up to date). If you’re not up for doing it yourself, your accountant or your Bench bookkeeper can prepare your financials.
Financial statements help you forecast revenue and make concrete plans to help your ecommerce business grow. It also helps you keep track of any changes in how your business is performing. If your business has big (or slow) months or weeks, your financial statements will show you. They’ll also help you keep an eye on expenses, and look for ways to tighten up your bottom line.
Financial statements have a lot of other uses, as well—such as helping you secure a loan or prepare your business and income taxes.
Helpful resource: How to Read Financial Statements
5. Pay estimated quarterly taxes
Depending on the size of your ecommerce business, there’s a good chance you’ll have to pay estimated quarterly taxes.
When you pay estimated quarterly taxes, you estimate how much your business is going to earn for the year, and then pay taxes on that amount every three months. Essentially, you’re paying your taxes in advance. If you overpay, you’ll get the extra money back from the Internal Revenue Service (IRS). If you underpay, the IRS could penalize you.
Once you learn how to estimate and pay quarterly estimated taxes, you’ll be set up to make payments throughout the financial year. But it’s extremely important that you actually follow through and make the payments on time, or you risk interest and penalties. That’s why it’s included on this selection of monthly business accounting tasks—even if you only do it every three months.
Helpful resource: Free Estimated Quarterly Tax Calculator
6. File sales tax
Depending on your state and your company’s revenue, you may need to file sales tax on a monthly, quarterly, or annual basis. If you file once a month—or even once every three months—you should put it near the top of your regular accounting to-do list.
That’s because filing sales tax can be an intensive activity. First, you need to collect the sales tax, report on how much you collected (and from where), and then remit the sales tax to the right state. That gets even more complicated if you’re selling your products through multiple ecommerce channels.
So, it’s important to make enough time for yourself to file sales tax. If you find it’s eating up too much of your time, you might want to consider automating it with a service like TaxJar. Some ecommerce platforms also offer sales tax tools and management.
Helpful resource: A Simple Guide to Calculating Sales Tax
7. Maintain a budget
Lots of ecommerce businesses are seasonal. The best way to prepare for the feast-and-famine cycle is to keep a budget. Once you create a budget for your online business, it takes some monitoring and tweaking to make sure you stay within it. Here are some budgeting tasks you should expect to handle on the regular.
Update your budget calculator
A budget calculator isn’t actually a calculator—it’s a spreadsheet in which you enter your budget for a set period, usually weekly or monthly. At the end of that period, you total up how much money you spent, so you can track whether you’re staying on budget. Using your calculator regularly is also a good way to monitor how and when your budget needs to be adjusted.
Plan your inventory
You already know that understocking or overstocking your inventory can get you into trouble. Luckily, when you keep on top of bookkeeping tasks and maintain good records, that’s less of a risk. You can use past sales figures to anticipate big swings—like Black Friday/Cyber Monday—and plan your inventory management accordingly.
Check your cash flow
Be prepared to check your cash flow statements on a weekly or monthly basis. When you use the accrual method of accounting, you may appear to have a lot of money on paper—but, when it comes time to cover expenses, you come up short. Cash flow statements will let you know how much money you actually have to work with.
- A How-To Guide for Creating a Business Budget
- A Simple Guide to Inventory Management for Small Business
- How to Effectively Manage Your Cash Flow
Recordkeeping for your ecommerce business
It’s hard to overstate the importance of recordkeeping. All your accounting is based on business records like bank statements, credit card statements, and receipts.
If you’re not keeping track of your records in an organized way, you can’t back up the information reported in your books. Which is a problem if you get audited. If you do get audited, you’ll want to have all the records for your business organized and available—especially ones related to deductions you’ve claimed.
Here are the records you need to keep track of:
- Bank and credit card statements
- Canceled checks
- Shopify or Square revenue records
- PayPal monthly account statements
- Transaction records for cryptocurrency wallets
- Proof of payments
- Financial statements from Bench or your bookkeeper
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
To learn more about the ins and outs of keeping records, check out our guide to small business recordkeeping.
Helpful resource: Bookkeeping for Amazon Sellers
When to hire a bookkeeper
Ecommerce business owners typically decide to hire a bookkeeper after one of two things happens:
Their business grows and accounting needs become more complex, so it’s no longer workable to handle everything themselves. Or,
They make bookkeeping mistakes or start to fall behind, and realize the cost of hiring a bookkeeper is worth it to avoid the QuickBooks rage.
When you’re ready to hire a professional, you have two main options: hire a traditional bookkeeper, or work with Bench.
Hiring a traditional bookkeeper
When you hire a freelance bookkeeper, they typically charge by the hour. The cost will depend on how complicated your business is, and how many transactions they have to categorize.
Your bookkeeper will track and categorize your business transactions. They can also create financial statements and might even help with things like invoicing.
You’ll want to find a freelance bookkeeper who has experience working with ecommerce businesses like yours. And of course, one who has solid reviews.
Keep in mind that any freelancer you hire is just one individual, with multiple clients. Your bookkeeper may not be available 24/7 to answer your questions, and you could face occasional downtime due to illness, personal leave, or holidays.
If you’d like a full exploration of how a bookkeeper can help you, check out our guide, What Does a Bookkeeper Actually Do?
Hiring an online bookkeeper, like Bench
Bench (that’s us) charges a flat rate per month. There’s no hidden fees or extra month-end hourly costs based on how many expenses your business has. The more expenses, the more bookkeeping work there is to do.
With Bench, you get a team of bookkeepers who do your bookkeeping for you, and simple software to keep tabs on your finances. If you have a question about your books, you can message your bookkeeper any time through the Bench app.
We automatically import transactions from your bank or credit card accounts, and use it to categorize your expenses. Your bookkeeping team generates financial reports for your business at the end of every month. At the end of the year, you get a financial package that gives you everything your accountant needs to file your taxes.
Tax filing is easier with Bench
In addition to your monthly bookkeeping, Bench can also file your federal and state income taxes for you. Your IRS compliant financial records are collected by your Bench tax coordinator and passed to a Tax Professional at our trusted partner Taxfyle, to get your taxes filed on time, every time.
If you don’t have many paper records (like most ecommerce businesses), and do most of your banking online, Bench is a good choice. A lot of the entrepreneurs we work with run ecommerce businesses, so we’re familiar with the ins and outs of your industry.
That being said, some businesses aren’t a great fit for Bench. If your business has scaled beyond a few million in revenue, you may want to look at hiring a full-time bookkeeper in-house.
Selling products online may have started out as a hobby, but look at you now—you’re running a full-time ecommerce operation! If the financial aspects of entrepreneurship are starting to feel like a bit much, we’re here to help. Have questions about what it’s like working with Bench? Check out An Inside Look at How Bench Does Your Bookkeeping.