E-commerce is a lucrative way to generate revenue for your business. You need accurate accounting, inventory control, and tracking systems to properly manage costs and expenses. Mistakes can be costly. This article explains how e-commerce accounting software can help you avoid them. Some key takeaways to look for:
- High transaction volume with a diverse product line can pose several accounting challenges for e-commerce businesses.
- The cost of goods sold (COGS) is a key metric in evaluating an e-commerce business and an expense entry on your income statement.
- Proper categorization is crucial when tracking e-commerce transactions, particularly when selling across multiple platforms.
E-commerce presents unique accounting challenges.
High transaction volume, combined with a diverse product line, can pose several accounting challenges for e-commerce businesses. The first is keeping track of the margins between costs and revenue. Prices are often reduced to increase sales volume. It’s essential to understand the impact on your bottom line: selling fewer products at higher prices per unit may be more profitable.
Managing international transactions and tax compliance also becomes a concern when conducting business across borders. Vendor licenses and registration fees need to be recorded in the general ledger. That affects your cash flow and financial reporting. Currency exchange fees also fall into this category. They need to be accounted for, no matter how small.
Other accounting challenges include chargebacks, refunds, and fluctuating inventory costs. These variable costs are common in the e-commerce industry. According to Shopify, the average return rate in e-commerce was 16.9% in 2024. That number needs to be factored into any financial and cash flow projections. Startups should set the projected return rate at 20% to be safe.
Let’s talk about options for inventory valuation in e-commerce accounting.
Inventory costs are a key variable in calculating taxable income. The way you order and sell your products helps determine the profit margin. Supplier prices are variable. E-commerce prices are often fixed. If you pay more for the supply, you make less. Your inventory control method helps regulate that. Here are some examples:
- FIFO (First-In, First-Out): The FIFO method ships the oldest products first. This works well during inflationary periods when supplier costs are rising. Selling the older products first increases your margins because they cost less.
- LIFO (Last-In, First-Out): LIFO is shipping the most recently bought products first. This can compress margins when supplier costs increase, but you’ll benefit from this system if you reduce costs by ordering larger quantities.
- Weighted Average: You can calculate the weighted average by adding the cost of all your inventory and dividing it by the number of units. This makes financial projections easier, but it could be inaccurate if there’s a significant cost increase or decrease.
The cost of goods sold (COGS) is a key metric in evaluating an e-commerce business. It’s recorded on the income statement as an expense. That affects the total income number that carries over to the balance sheet, which means that reducing COGS can ultimately increase shareholder equity value. That’s a topic for another day.
Track and categorize e-commerce transactions for lower costs and increased ROI.
Proper categorization is essential when tracking e-commerce transactions, especially when selling on different platforms. Keeping your sales on Amazon separate from the transactions on Shopify or Etsy gives you better financial data to calculate ROI, build sales funnels, create marketing programs, and produce more accurate expense reports.
Refunds and chargebacks are a significant challenge to effective e-commerce accounting for small businesses. As we mentioned above, they can skew your financial projections. It’s important to record and categorize them as they happen so you have accurate account balances. You can do this by debiting the accounts payable account and crediting the original expense account. You can set that up in your accounting software.
Payment processing fees are an area that’s often overlooked and underestimated in maintaining accurate e-commerce accounting and bookkeeping. PayPal, Stripe, and Shopify all charge a fee for each transaction. It’s easy to ignore that fee because you never see the money in your bank account, but it’s part of the cost vs revenue equation because you’re not receiving the full amount you’re selling the item for.
Every transaction should be categorized, not just the ones you consider important. Other transaction categories include shipping costs, sales tax obligations, licenses and fees, and service call or delivery charges. Include these and other expenses in your budget to ensure you don’t miss anything when you set up your accounting software.
Bring the latest accounting software to your e-commerce business.
Recording and categorization are more accurate when you automate the transaction data. Accounting platforms like QuickBooks and NetSuite offer API connectivity to Shopify and Amazon. That connection feeds real-time information to your accounting platform. Look for that and other features when shopping for new software. Here’s a short list to start with:
- Automated Transaction Recording
- Multi-Currency Capability
- Global Tax Compliance
- Sales Tax Calculation & Reporting
- Expense & Cost Tracking
- Multi-Channel Selling Support
- Automation & AI-Powered Insights
- Scalability & User Access
- Secure Cloud-Based Access
- Custom Dashboards & Reports
Another factor to consider when you choose accounting software is the customer service process. QuickBooks has a helpful article database and an AI assistant. NetSuite has a phone number you can call. Conduct an online search for reviews on both of these. You might be surprised by what you find. Expand that search to other platforms to get the full picture.
Do you need a CPA for your e-commerce business?
Modern technology simplifies accounting for executives and small business owners; however, e-commerce is a complex field with a lot of moving parts. You’ll need professional accounting when you grow and scale. I think it’s fair to view these services as an investment, not an expense, simply because we help you cut costs and increase profits.
Let us streamline your e-commerce accounting, improve tax compliance, compose financial reports, and increase profitability.
Schedule a discovery call today to get going.
Talk soon,
Jeremy A. Johnson, CPA