Why E-Comm Accounting Matters
By: Molly Kolton, VP Controller
Accounting is frequently confused with bookkeeping, but there are some critical differences. Bookkeeping is keeping track of all financial transactions, while accounting means analyzing these records and planning for the future (calculating taxes, analyzing risk, and forecasting). Both are necessary for adequate financial management.
While every business needs quality accounting, e-commerce operations have unique considerations and requirements to be aware of. Understanding the basics of e-commerce accounting is a must to grow a thriving digital business.
What is E-Commerce Accounting?
In an e-commerce business, all online sales are tracked through bookkeeping software integrated with the third-party platform, such as Amazon or the brand website.
E-commerce accounting consists of bookkeeping, creating reports, and submitting tax returns, which can be done through an accounting solution.
Amazon vs. Organic Websites for E-Commerce Accounting
Many e-commerce companies turn to Amazon to establish their online shops, and it’s easy to understand why. According to Statista, over 3.6 billion people visit Amazon every month. Amazon offers the highest traffic and access to ready-to-buy customers.
Amazon deposits funds into sellers’ accounts every two weeks. Unfortunately, Amazon doesn’t provide a detailed breakdown of these deposits, including sales, returns, chargebacks, and warehouse/shipping fees. It can also be challenging to record the cost of goods sold (COGS) and sales tax through Amazon. Online shop owners or their bookkeepers will need to know how to extract detailed data from Amazon seller accounts and upload it into their accounting software or use third-party software.
While Amazon can boost many online businesses, companies often choose to sell through their own sites as well. This approach is sometimes easier for reporting purposes as it doesn’t entail all the additional Amazon fees. The downside is that this option may require additional resources to file sales tax, process credit card returns, chargebacks, and authorize returns.
Understanding E-Commerce Accounting
E-commerce accounting starts by choosing an accounting solution and then setting the system up to suit the business’s needs.
Choose an Accounting Method
The first step is to choose between the two accounting methods: cash basis accounting and accrual accounting.
In cash basis accounting, every bank transaction is recorded. This simple system is preferred by small businesses, Fulfilled By Amazon stores and drop shipping websites. However, it is not ideal for large e-commerce businesses or businesses planning to apply for financing.
The accrual method registers every sale when it happens instead of when the money arrives in the account. This system provides much more accurate financial projections. However, keeping an eye on cash flow remains essential.
You will need to choose an inventory cost method to calculate your COGS and inventory valuation accurately. Based on the type of business, you will select between First In/First Out (FIFO), Weighted Average Cost (WAC), or Specific Identification to remain generally accepted accounting principle (GAAP) compliant.
⦁ First In/First Out is for companies that sell the inventory first that they bought first.
⦁ Weighted Average Cost is suitable for companies that average inventory costs and how much they sell over the period.
⦁ Specific Identification is not technically a cost-flow method but is allowable under GAAP and relies on serial numbers to differentiate products and inventory costs.
When setting up your accounting software, you can select the appropriate inventory costing method, which will help ensure accurate COGS and inventory valuation.
Find the Right Accounting Software
After choosing an accounting method, companies can seek accounting software to meet their needs. The best solutions keep track of all transactions and analyze them whenever needed.
When picking the accounting software, the top priorities are ease of use, adaptability, and reliability. However, another critical factor is the ability of the chosen tool to analyze and report on data to provide essential financial insights.
Digesting the Data into Meaningful Reports
Historically, reporting meant extracting the data and presenting it in a spreadsheet. Today’s accounting solutions offer visually appealing reports, easy to understand and completely customized to highlight critical data.
By regularly reviewing accounting reports, organizations can uncover opportunities to increase efficiency, cut costs, improve operations, or increase sales. This insight can improve day-to-day operations while helping organizations strategize for future growth.
E-commerce Accounting is a Must for Digital Success
E-commerce has expanded dramatically in recent years, and continued growth is on the horizon. Most businesses need a website and may sell through an e-commerce marketplace. While many online sellers have a presence on Amazon, e-commerce business owners shouldn’t rely on Amazon accounting as their sole financial source of truth.
Accounting software is a must to ensure accurate tracking of inventory and financials. Investing in accounting expertise (both human and the best-in-class software/tools) set successful E-commerce businesses apart from the pack. With the right accounting approach, a digital business can have a clear picture of its financial position, access data to make intelligent decisions, and position itself for long-term success.