E-Commerce Bookkeeping: Key Points to Consider in a Bookkeeping Solution
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From calculating taxes on online sales to inventory management to figuring out shipping logistics, running an online store comes with many challenges and considerations. Your bookkeeping solution needs to be able to keep up.
Whether you do your bookkeeping with accounting software, hire a professional bookkeeper, or work with a bookkeeping service, your solution should be equipped to deal with the intricacies of e-commerce bookkeeping, including:
- Merchant Fees
- Third-Party Payment Processors
- Inventory Management
- Alternative Sales
- Multiple Currencies and Foreign Sales
- Sales Tax
That way, your records and financial statements (like your Balance Sheet and Statement of Cash Flows) are accurate and complete so that you can make sound financial decisions for your store.
In this article, we explain seven essential considerations for e-commerce bookkeeping. Plus, we dive into three key features you should look for in a bookkeeping solution for your e-commerce business.
Important Things to Consider for E-Commerce Bookkeeping
E-commerce bookkeeping comes with challenges that some business models — like selling services or software — don’t have to worry about. In this section, we’ll look at the most frequent challenges e-commerce business owners face with bookkeeping.
Understanding how these aspects of e-commerce operations affect your bookkeeping makes it easier to choose the right solution for your business.
1. Handling Merchant Fees
If you host your online store on an e-commerce platform like Shopify or BigCommerce, merchant fees come with the territory. Building your store on top of those platforms offers many benefits, from quicker startup to easy search optimization. But to provide those perks, e-commerce platforms and payment processors must take a small cut out of every sale you make online. It’s how they make money.
That can complicate things from a bookkeeping perspective because the deposits in your bank account are net sales instead of gross sales. That’s because the platform has already taken its cut before depositing the money in your account.
The correct way to show this in your books is to note the gross sale, then record the difference between that number and the final deposit to your bank as “merchant fees.”
2. Using Third-Party Tools and Issuing Refunds
In addition to e-commerce platforms, third-party tools like payment processors (think Stripe and PayPal) can add complexity to your record-keeping. This is especially true when it comes to tracking returns and exchanges.
For example, if you make a sale through Shopify’s platform, the payment is processed by Stripe (and recall from the above section that there will be a merchant fee). But if your customer returns the item a week later, where does the return get tracked? Whenever multiple third-party tools are involved, you may run into tracking issues. Was the return tracked in Shopify or Stripe? Did it get recorded numerous times in your books?
On top of that, many payment processors (including Stripe) don’t refund the merchant fee you paid just because a customer returns the item. So that fee becomes a loss for your business and has to be reflected that way in your books.
3. Tracking Inventory Across Sales Platforms
Many e-commerce platforms bake inventory tracking into their software. That makes it easy to track and manage inventory for online sales through your store.
But if you sell in multiple places online — say, on your own Shopify website, plus Amazon — your platform won’t track any changes to inventory resulting from outside sales. So your Amazon sales won’t be reflected in the inventory that Shopify records.
That makes it exceptionally important to have one central place to track inventory, whether or not it automatically updates your books. Then, if you choose to work with a bookkeeper, they can use that information to create an accurate record of sales, returns, and restocks in your books.
4. Accounting for Alternative Sales
Most of the payments you receive will be through customer credit cards versus other forms of payment. However, you can still accept different payment types (primarily if you also sell in person).
Some e-commerce platforms are equipped to track sales that come from cash, check, gift cards, and credit. If you plan to offer those payment types, you’ll want to ensure your solution can handle those sales.
While additional payment types can make life easier for your customers, keep in mind that they’re less straightforward from a bookkeeping perspective. Suppose you receive a payment via cash or check. In that case, the sale won’t be fully recognized in your books until you deposit that money into your bank account.
If you offer gift cards, a typical sale means someone pays you, and you give them a gift card at that moment. That cash inflow gets recognized as unearned revenue in your books because you haven’t exchanged any goods yet. When the gift card is redeemed, you can recognize the unearned revenue on your income statement.
5. Foreign Sales
E-commerce enables you to sell products globally, and many e-commerce platforms make it easy to sell in multiple currencies. However, when you sell and ship to foreign countries, your books may need additional information to reconcile those sales.
For example, you’ll need to know the amount of both the gross sale and merchant fees in the foreign currency. To reconcile the sale with the final deposit to your bank account (which will be in your local currency), you’ll need to know the exact conversion rate that your e-commerce platform used to convert between currencies.
Sometimes, that conversion can lead to a discrepancy between the foreign sale and the final deposit in your account. When that happens, the difference has to be recorded in your books as a “gain or loss on foreign exchange.”
6. Collecting and Recording Shipping Fees
Shipping charges are another can of worms for a whole variety of reasons. Should you offer free shipping? If not, how much should you charge customers? A flat rate?
Some e-commerce platforms make dealing with shipping logistics easier by integrating directly with shipping systems. That means your platform can handle collecting shipping charges from the customer and purchasing postage from your logistics provider. However, remember that while that’s one less step for you to worry about, your e-commerce provider will likely take a cut from the transaction.
Another critical point to remember is that the shipping fees you charge customers often won’t match up perfectly with what you pay to ship those items. For example, let’s say you offer a flat rate of $5 shipping — you may pay $2 to ship one order and $10 to send another. Your books need to be able to account for those discrepancies.
There are two main ways of doing that.
a) Have One COGS Shipping Expense Account
The first way of accounting for differences between shipping income and spending is to keep everything in one COGS Shipping Expense account. That means the flat rate shipping income and payments to shipping vendors (like UPS) go to the same place. You won’t be tracking the difference per se, but it ultimately won’t matter since they’re all COGS related.
b) Have Two Accounts: Shipping Income and COGS Shipping Expenses
Alternatively, you can set up two accounts, a Shipping Income account, and a COGS Shipping Expense account. Flat fees collected from the customer go in the former, and payments to shipping vendors go in the latter. You would compare the differences between the two accounts as needed.
7. Sales Tax
One of the most essential aspects of operating an e-commerce business is collecting and paying sales tax. Some e-commerce platforms will handle both sides of the transaction — collecting it from customers and remitting it to your state sales tax authority.
Most platforms, however, will only collect sales tax from customers. Instead, they deposit it into your bank account and the rest of the sale, so you must get that money to the proper tax authority.
From a bookkeeping perspective, it’s essential to recognize that tax money isn’t revenue. As soon as the sale is processed, the sales tax becomes a liability you owe to the government. Therefore, your books need to reflect the difference between gross sales, sales tax, merchant fees, and the final deposit on your bank statement.
For example, if a customer orders $98, your e-commerce platform will collect $105.84 — $98 for the item(s) plus $7.84 in sales tax (8% of the purchase).
Note: This sales tax percentage varies based on where you live.
The platform will deposit the total amount collected from the customer ($105.84) minus any merchant fees (often around 3% or $2.94 in our example) into your account. So your books need to reflect the following:
- $98 in gross revenue
- $2.94 in merchant processing fees
- $7.84 in sales tax due to your local tax authority
What to Look for in an E-Commerce Bookkeeping Solution
In light of the complexity of bookkeeping for e-commerce businesses, many business owners will work with a bookkeeping service or a professional to ensure their books are accurate and complete. That’s certainly what we recommend. But, unfortunately, even with software, it’s easy to spend more time than you have attempting to get your books done.
If you do decide to work with a service, there are a few key things to look for in an e-commerce bookkeeping solution:
- Inventory Capability: Not all bookkeeping services track inventory. That’s because inventory requires that you use accrual-basis bookkeeping. When you choose a bookkeeping solution for your store, be sure it offers accrual-basis bookkeeping and inventory tracking support.
- Integration with Your E-Commerce Platform: The whole point of delegating bookkeeping is to get it off your plate. That means your solution needs to work seamlessly with your e-commerce platform. That looks like accurate syncing, done without your involvement.
- Support for Multiple Currencies: Unlike brick-and-mortar retail, your e-commerce store will likely reach customers using a variety of currencies. Your bookkeeping solution needs to handle multiple currencies and account for any discrepancies they create.
Complete and Accurate E-Commerce Bookkeeping
Operating an e-commerce store comes with a variety of bookkeeping complexities. Whether your store is a small business or a big one, there will be challenges. By understanding those key points and how they affect your books and financial statements, you can decide how to handle your e-commerce bookkeeping and find the bookkeeping software or service that’s right for your business.
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