From calculating taxes on online sales to inventory management to figuring out shipping logistics, running an online store comes with a whole host of challenges and considerations. Your bookkeeping solution needs to be able to keep up.
Whether you do your own 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:
That way, your records and financial statements (like your Balance Sheet and Statement of Cash Flows) are accurate and complete, so 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.
At Pilot, we have a team of expert bookkeepers using unique tools who can handle the most difficult e-commerce bookkeeping situations. If you want to keep better books, Try Pilot Now.
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.
If you host your online store on an e-commerce platform, like Shopify or BigCommerce, merchant fees simply come with the territory. Building your store on top of those platforms offers a lot of benefits, from quicker startup to easy search optimization. But to offer those perks, e-commerce platforms and payment processors have to 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 that show up in your bank account are actually net sales instead of gross sales. That’s because the platform has already taken its cut before depositing the money in your account.
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, 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 multiple 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. That fee becomes a loss for your business and has to be reflected that way in your books.
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 on 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. 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.
Most of the payments you receive will be through customer credit cards versus other forms of payment, but you can still choose to accept other payment types (especially if you also sell in-person).
Some e-commerce platforms are equipped to track sales that come from cash, check, and gift cards, in addition to 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. If you receive a payment via cash or check, 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 same 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.
E-commerce enables you to sell products across the globe, 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 some additional information in order 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. In order 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.”
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 both collecting shipping charges from the customer and purchasing postage from your logistics provider. Keep in mind 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 key point to keep in mind is that the shipping fees you charge customers often won’t match up perfectly with what you actually pay to ship those items. Let’s say you offer flat rate $5 shipping — you may actually pay $2 to ship one order, and $10 to ship 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 both the flat rate shipping income and any 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, payments out to shipping vendors go in the later. You would compare the differences between the two accounts as needed.
One of the most important 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. They deposit it into your bank account along with the rest of the sale, so it’s on you to get that money to the right tax authority.
From a bookkeeping perspective, it’s important 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. 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 places an order for $98, your e-commerce platform will collect $105.84 from them — $98 for the item(s) plus $7.84 in sales tax (which is 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:
In light of the complexity of bookkeeping for e-commerce businesses, many business owners will choose to work with a bookkeeping service or a professional to ensure their books are accurate and complete. That’s certainly what we recommend. 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:
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 make the best decision about how to handle your e-commerce bookkeeping and find the bookkeeping software or service that’s right for your business.
At Pilot, we have a team of expert bookkeepers using unique tools who can handle the most difficult e-commerce bookkeeping situations. If you want to keep better books, try Pilot.