How accounting for an e-commerce business is different

Have you just set up your e-commerce business, or are planning to launch one soon? The next step is having e-commerce accounting in place.

Many e-commerce business owners have the notion that e-commerce accounting is the same as regular accounting, but it isn’t.

Using traditional accounting methods will not give you an accurate picture of your e-commerce business and may affect your financial calculations.

In case you are still looking to complete the formalities to get your business underway, consulting professionals for company formation in the UK can make the process faster and seamless. Enterprise Nation community members can get one month off Osome’s services on bookkeeping and accounting too.

In this post, we will discuss how e-commerce accounting is different and needs specialists to manage so that the correct financial situation of your business reflects.

Traditional accounting vs. e-commerce accounting

Many business owners think traditional accounting and e-commerce accounting are the same or interchangeable.

Traditional bookkeeping is about capturing the daily transactional details of a business and keeping the books in order.

The accounting process looks into the long-term financial state of a business by recording and calculating profits and losses quarterly or yearly. Accounting professionals get a deeper insight into business finances and they also advise on tax-related matters.

On the other hand, e-commerce accounting involves recording transactions through business channels, and not from bank accounts. Also, capturing the data of inventory and cost-of-goods-sold (COGS) is highly important for e-commerce accounting.

Two crucial accounting systems for your e-commerce business

Considering the specific needs of your e-commerce business, we have discussed two crucial accounting systems. Each of these will enable you to decide which works the best for your business.

1. Cash basis accounting method

This accounting system helps an e-commerce business to record sales data and expenses only when the money is credited to or debited from your bank account.

For example, if you have not received payment against an order, your bookkeeper will hold the transaction details. The transaction will be included in the calculations once the money is credited into your account.

This type of accounting method is common in non-profit organisations, government agencies, community associations, and small service-based businesses. It is because these businesses are not into selling products or services on credit and pay their bills whenever needed.

2. Accrual basis accounting method

The second method is accrual basis accounting, which records transactions when they take place, and not when the money is credited to or debited from the bank account. This method is ideal for large-scale businesses, which need to manage inventories.

The accrual basis accounting method captures the receivables and payables of a business regardless of whether the actual amounts have been credited or debited from the bank account.

Although this type of accounting method needs more work, a quality software application, along with an expert accountant can do the job for your business. You can consult Osome to get e-commerce accounting done smoothly. You can schedule a free demo for our e-commerce accounting service.

Three crucial aspects of e-commerce accounting

E-commerce businesses are dynamic by nature and run 24/7 and often run on autopilot. It means even when you sleep, your automated e-commerce system keeps doing business for you. This is why customers can do business on any e-commerce platform even during odd hours and complete their purchases and transactions without any issue.

Considering the fast pace of e-commerce business transactions, it is not surprising that e-commerce accounting has to keep up and manage more complicated processes. Due to the unique features of the e-commerce platform, its accounting needs to consider all the elements to ensure perfect recordkeeping.

Here are three crucial aspects of e-commerce accounting that will help you better manage your business.

1. Identifying your transactional data

In an e-commerce business, the transactional details are available in its selling channels rather than the bank accounts or credit card statements.

Your bookkeeper should not be capturing the deposits reflecting on your business bank account as it is different from traditional accounting. Doing so will make the calculations inaccurate.

Instead, your bookkeeper should consider the following data:

Earnings and other transactions

When your business bank account reflects a certain amount, includes various transactional elements, such as marketing/sales, shipping cost, returns, and sales tax charged on your customers.

It means the credited amount does not reflect your actual profit. To capture your earnings and key data accurately, it is important to check the backend of your online selling channels and record the breakdown of sales and various other transactions.

Example:

In December 2020, Leonard had a net deposit of £6,000 in his business bank account. However, after a detailed review of the backend of his e-commerce platforms, and breaking down all the transactions, he found that actual earnings for that month were £5,139.

The actual date of transactions

Considering the ‘net deposit’ in the bank records will not reflect the actual date of sales.

Example:

Christie sold an iPhone 12 Pro and a Samsung Galaxy S20 Plus online on December 24, 2020, through her third-party partner website. However, the third-party portal paid her the selling prices in January 2021. Christie’s business bank account reflected that the amount was credited on January 12.

Now, instead of considering January 12 as the date of transaction, Christie noted December 24 as date of sale. In the future, this data will be helpful when calculating her earnings from sales, expenses, and liabilities accurately.

2. Efficient inventory management

While running an online store, proper inventory management will ensure generating sales revenue. To track the cost of inventory accurately, you will need complete data on the current inventory.

The following two inventory management methods will be helpful:

Periodic inventory system

The periodic inventory method takes more time and effort, which involves manually counting each unit of inventory and recording the sale of the value of every item. You need to update your cash flow sheet to track your business expenses and earnings through inventory management.

The frequency of applying this inventory system will depend on your business scale and inventory. For example, if you have just set up your online store, you can use this inventory system monthly. However, after scaling up your business, you can use the periodic inventory method quarterly or annually.

Perpetual inventory system

This type of inventory system involves using an accounting software application to monitor your inventory. The software app will automatically track and update the latest inventory, including any surplus or shortage of units, and the total sales amount when a product gets scanned for sales or any material purchased. This is a hassle-free inventory management method and takes little time and effort since the software application does most of the jobs.

3. Insights into cost of goods sold (COGS)

Different accounting methods treat Costs of Goods Sold or COGS differently. However, you need to know about the expenses for selling products before comparing them with the earnings.

Remember that the earned amount is not your actual profit. You will get your net profit margin after deducting the costs of goods sold from the gross profit.

E-commerce accounting has its challenges

Tracking inventory is complicated

Tracking inventory is a complex task in e-commerce accounting. Your accountant needs to figure out the units of stock that are in production, in transit to your inventory, in customers’ cart, or the process of return.

In the growing phase of a business, e-commerce business owners are likely to encounter an increasing number of stock-keeping units (SKUs). In addition, large volumes of transactions, various marketplaces, and countries make inventory management even more challenging.

Managing the liabilities relating to sales tax

When the turnover of an e-commerce business hits the £85,000 mark, it would be mandatory to register for VAT and start adding it to while selling products (generally 20%).

On the other hand, if the turnover of that business is yet to reach the £85,000 threshold, VAT registration is not a requirement, and it need not charge VAT on the products sold.

The rates of VAT vary according to products and services. You can get all the rates from the HM Revenue & Customs (HMRC) page.

The volume of transaction may affect your accounting system

When your business grows, there will likely be higher volumes of transactions that bring along plenty of data points.

To prevent your accounting system from getting overloaded with data, you can categorise your transactions in batches daily, such as weekly, bi-weekly or monthly.

Are you too busy? Let our e-commerce accounting experts do it

If all these concepts and methods sound complex to you let the e-commerce accounting experts of Osome take care of your accounting process.

We offer comprehensive accounting services for e-commerce. Different online platforms have various types of transactions and charges, and only experts can manage them perfectly. For example, Amazon statements include more than 150 types of charges. Any sales on Facebook run on Shopify. Enterprise Nation community members can get one month off Osome’s services on bookkeeping and accounting too.

Another online payment platform Stripe has its receipts in a different format. Every platform has a specific VAT requirement for domestic and international transactions. You need not worry though, since our accounting experts will manage everything on your behalf.