eCommerce accounting involves tracking and recording all financial transactions of your online business. It integrates data from different payment gateways and platforms while addressing unique complexities to ensure accurate reporting.
Beyond the scope of most business’ accounting needs, eCommerce accounting must account for (extremely) diverse tax regulations, multi-currency transactions, global sales, and high transaction volumes. It has several core components, including:
- Taxes: The most complex aspect of eCommerce accounting involves determining and remitting taxes because those obligations depend on the customer’s location. You should already be collecting and recording these taxes—if not automating the calculations to comply with state, federal, and international tax laws. Noncompliance results in stiff penalties, and even eCommerce newcomers likely hear all about Wayfair v. South Dakota.
- Cost of goods sold (COGS): This is the cost of inventory purchases or producing products. You need to calculate this cost to price your products and determine gross profit.
- Sales: Tracking sales across social media, websites, and marketplaces is important for revenue assessment and financial forecasting. Omnichannel eCommerce operations must pay close attention to all sales and their sources.
- Expenses: This includes operational costs like storage, shipping, advertising, and software subscriptions. Accurately calculating these costs is vital for financial analysis and budget control.
- Revenue recognition: You must establish revenue recognition policies to ensure timely and proper recording of sales. This is essential in eCommerce—where payments, subscriptions, and returns impact revenue recognition. Depending on your business, you may not be obligated to follow Generally Accepted Accounting Principles (GAAP) or ASC 606 revenue recognition, but it’s still a good idea.
Accurate eCommerce accounting is foundational for scaling and profitability. It supports sound decision-making, compliance with tax regulations, and sustainable business growth. It’s more than just eCommerce bookkeeping—it’s a strategic asset for forecasting, compliance, and long-term success.
Key Accounting Methods for eCommerce Businesses
In eCommerce accounting, there are two methods you can use to track and manage your financials:
- Cash basis accounting: This method records transactions when cash is paid or received. It’s straightforward, making it popular among small eCommerce businesses. However, it doesn’t provide a vivid picture of a business’s financial health.
- Accrual accounting: This method records transactions when they’re incurred rather than when cash changes hands. It provides a more accurate picture of financial health and is ideal for large businesses and those with seasonal or credit sales.
For eCommerce businesses with physical products, how they manage inventory is vital, and this involves methods like:
- First-In, First-Out (FIFO): This method assumes the oldest inventory is sold first, resulting in lower COGS and higher taxable income.
- Last-In, First-Out (LIFO): This approach assumes the latest inventory is sold first, and it offers tax savings during inflationary periods.
- Weighted Average Cost (WAC): This method calculates inventory cost based on the average cost of all units—it’s suitable for large inventory management.
The ideal inventory accounting method depends on your business model, scale, and long-term financial goals. Most eCommerce business owners prefer FIFO as it prevents obsolescence, saves money, and gives a clear picture of inventory costs.
Managing Revenue Streams and Sales Channels
Accounting for multi-channel sales can be challenging, as it involves tracking sales and revenues from different platforms, such as social media, websites, and marketplaces. But accounting software can simplify it, consolidating sales data from multiple channels into one place for actionable insights and reports.
The software can also help eCommerce companies manage the inventory cycle counting process. It lets you track your current stock value and levels, calculate COGS, and automate reordering. Software solutions like Xero, FreshBooks, Zoho Books, and QuickBooks offer this capability, giving you control of your inventory accounting.
They also simplify payment gateway reconciliation with your business bank account to identify errors and ensure accurate financial records. For instance, Freshbook offers automated bank reconciliation to streamline the process, effectively tracking and validating accounts receivable (AR) and accounts payable (AP) transactions.
Tax Compliance and Sales Tax Obligations
eCommerce businesses must charge tax on taxable goods and services and remit it to taxing authorities. This requires understanding state, federal, and international tax laws. For instance, some states exempt groceries, clothing, and prescription drugs from taxes, while others—like Kansas (for now)—charge a reduced rate of 2% on groceries.
Certain states require you to collect and remit taxes when you hit a set number of sales or transaction volumes—this is a sales tax nexus. The common amount is $100k or 200 transactions in the last four quarters. States like California, New York, Texas, and Massachusetts have a threshold of $500k.
Tools like QuickBooks automate nexus monitoring, filing, and remittance, simplifying tax compliance tasks and helping you better manage your business deductions (e.g., home office, shipping materials).
Key Financial Reports for eCommerce
Financial reports provide invaluable insights that can support business growth and profitability. Reports you should regularly analyze include:
- Profit and loss (P&L) statement: This report shows business income and expenses over a certain period. It’s important in gauging your business performance over the report’s period.
- Balance sheet essentials: This report overviews your assets and liabilities. It also calculates your current debt, asset-to-debt ratios, and working capital to help you understand your financial health.
- Cash flow management: A cash flow statement or report highlights your incoming and outgoing expenses, allowing you to project your working capital. It also helps you determine if you have enough cash or liquidity to pay expenses.
Reviewing your profit margin, inventory, marketing ROI, and customer acquisition reports provides business insight. Collectively, this data allows you to make sound decisions and measure your financial health.
Tips for Scaling eCommerce Accounting Operations
Streamlining business accounting operations can boost your revenues and give you greater control of your financial health. Consider how the following efficiencies might alleviate challenges:
- Transition to advanced tools: Upgrade to accounting software instead of manual and disconnected tools like Excel. Software like Xero, QuickBooks, and FreshBooks can streamline the process and ensure accuracy.
- Automate repetitive tasks: Accounting software helps automate repetitive and manual tasks like billing, invoicing, data entry, payroll, compliance, and reconciliation. The results? Reduced workload and human errors.
- Add some outside help: Sometimes, cloud accounting software and automation aren’t enough, and small and medium businesses need more expertise or extra hands to help with the more complicated aspects of eCommerce Accounting. Partnering with strategic finance specialists or accounting firms might offer your business the accounting solution you’re looking for and the financial guidance you didn’t know you needed.
Effective eCommerce accounting is the backbone of any successful business. Today’s cloud-based accounting solutions have made it simple, providing tools for accounting tasks like budgeting, billing, invoicing, reporting, and reconciliation—all in one place.
Outsourcing eCommerce Accounting: What You Need to Know
Outsourced eCommerce accounting can deliver streamlined financial management. But you must find the right service provider with a complete accounting team and eCommerce experience. The service extends your business, allowing you to access specialized expertise and tools on demand.
An outsourced service provider can offer real-time tracking, handle bookkeeping tasks, and compliance support. They use advanced accounting tools that integrate with eCommerce platforms to streamline inventory tracking, sales reporting, and tax management, saving time and reducing errors in financial data management.
Some tasks you can outsource include 1099 filing, bookkeeping, budgeting, tax planning, customer billing, compiling financial statements, reporting, and financial planning. This allows you to focus more on core competencies and strategic areas like customer experience and growth while ensuring accurate financial reporting and regulatory compliance.
Nimbl-y Navigate eCommerce Accounting
eCommerce accounting can make or break your business—particularly regarding tax obligations and multi-channel sales. Cloud-based accounting software like QuickBooks and Xero helps simplify the process by automating some workflows and eliminating repetitive tasks.
But too many eCommerce businesses still discover that implementing an accounting platform doesn’t suddenly resolve their issues—or they realize they’ve outscaled their accounting software and personal knowledge.
Partnering with Nimbl offers a true strategic finance and accounting solution. Our team of Accounting Specialists and in-house technology experts will certainly clean up backend accounting complexities and perform platform integrations that provide you with more granular data and new insights—but do you plan to close up shop after tidying your books?
If not, Nimbl takes all the integrations and data we’ve worked with for 15 years and adds forecasting and planning expertise you’d only find elsewhere at the C-level or from controllers and finance directors.If you plan to stay in eCommerce long, let’s talk about staying Nimbl.
