Ecommerce Accounting Guide (2024)

Tally Solutions| Updated on: October 30, 2023

• What is ecommerce accounting?
• Business account types in ecommerce accounting
• Types of financial statements in ecommerce accounting
• Ecommerce accounting tasks
• TallyPrime for efficient ecommerce accounting

What is ecommerce accounting?

Ecommerce accounting involves gathering, organizing, evaluating, and reporting a business’s financial data. It involves performing a range of accounting tasks for your ecommerce business. It also requires ecommerce bookkeeping, whereby all the financial records are stored and organized. Ecommerce accounting is important for three reasons: determining the business health, making financial predictions, and paying tax liabilities. If you are new to ecommerce accounting then you first need to determine the type of business entity you are and choose an accounting method (cash or accrual).

Business account types in ecommerce accounting

The major business account types in ecommerce accounting are as follows.

Checking account:A checking account limits how many cash deposits can be made in a certain time, typically a month. But it has numerous benefits such as easy access to cash. A checking account generally has low-interest rates compared to other account types and you are not asked to maintain a particular account balance.

Savings account:A savings account can be used in ecommerce accounting because you can earn interest on the money deposited in the account. It can be a savings fund that you keep aside in case your business requires cash in emergencies. Some limitations will be present in a savings account such as how much you can withdraw. You will be liable to pay taxes on the interest earned.

Money market account: For those who want the best of both checking and savings accounts, a money market account is the best option. It applies restrictions such as up to a maximum of six withdrawals monthly, but many benefits exist. You can earn high interest on deposited money so if you deal with large sums of money this can be a good account to choose.

Certificate of deposit:A certificate of deposit is a type of savings account. You can deposit money for a certain time which can be some months or even years. You can earn high interest rates when you do this but the issue is that money must remain until the maturity date. If you wish to remove the deposited money in advance, then a fee will be levied.

Types of financial statements in ecommerce accounting

The three most important financial statements for ecommerce accounting are as follows.

Income statement:The income statement (or statement of earnings or net income statement) shows the profitability of your ecommerce business over a period. It is also called a profit and loss statement when the income statement is generated for internal purposes. The income statement reveals how much profit your business generates by taking the revenue and deducting expenses and losses.

Balance sheet: A balance sheet (or the statement of financial position) shows the business performance at a particular moment rather than a period of time. It has three important aspects; the owner’s equity, assets, and liabilities. Ecommerce businesses can generate it monthly, quarterly, or annually. The balance sheet shows financial health by revealing the accumulated debt and invested money. It is useful for business owners and investors, along with accountants.

Cash flow statement:The cash flow statement is a periodic financial statement that shows the cash available during a certain period. It shows you how much cash you have. If you decided on using the accrual method of accounting, then you don’t have a clear picture of when the money changed hands. With the cash flow statement, you are under the net cash flow which can be useful in decision-making for your ecommerce business.

Ecommerce accounting tasks

Ecommerce accounting consists of numerous tasks. The most important ones are as follows.

Categorize all transactions:You must categorize your transactions into income and expenses because these show the money going out of your business and the money coming into your business. Whether you sell one item or 1000 items, every transaction of your ecommerce store must be recorded accurately every time a sale is made or expenses are incurred. The best way to do this is with an accounting software solution such as TallyPrime. You need to account for all the items purchased and the items sold eventually so it is a good habit to recognize transactions, and organize them by categorizing and storing them.

Categorizing transactions is important because they are organized. Recording transactions without any meaning will not give any value to you and you cannot make any decisions based on those. When you categorize every transaction, you are aware of every dollar coming in and every dollar spent. This gives you better control over your cash flow situation and enables you to improve your ecommerce business. This includes changing processes for better efficiency and productivity to improve sales and earnings.

Track inventory:A critical component of ecommerce accounting is inventory management by tracking inventory. You must know the inventory moving through your store and how much is available at anytime. This task must never be overlooked because it gives a clear picture of inventory in the business. Two ways of tracking inventory are periodic tracking and perpetual tracking. Periodic tracking involves manually counting inventory items in stock and jotting down details about them such as the value and cost. The information can be stored on a computer or paper although the former is a better option for today’s ecommerce businesses.

Perpetual tracking involves the use of accounting software such as TallyPrime. In perpetual tracking, you don’t need to do much to track inventory as the software does it for you. The inventory information is updated as items are sold and you have a clear view of how much inventory is available at any given moment without much effort. With tools like TallyPrime, you can easily set up alerts to ensure you never run out of the top sale items. This saves considerable time and effort so you can focus on your business growth.

Maintain a budget:An ecommerce accounting task that must be given attention is budgeting. You can start budgeting by reviewing your cash flow. This can be done by ensuring you know how much you spend on business banking, inventory purchases, returns, refunds, website hosting, shipping, supplier payments, and so on. You want to include unplanned expenses that can happen. You can even create a budget calculator so you know where your money is going. You can cut down on expenditure on certain aspects and set up a savings fund so that the money can be useful in emergencies.

Track inventory cash flow:As an ecommerce business, you must be aware of your inventory whether you are storing it at your premises or you use drop shipping. At any given time, you must know the inventory cash flow to better assess and improve your business. The inventory cash flow is essentially the costs to store inventory including manufacturing costs and production costs. If you are also the manufacturer of the products you sell on your ecommerce store, then have details of maintenance, raw materials, and equipment acquisition with you. These must be a part of the inventory cash flow.

The inventory cash flow is important because it will reveal how effective your inventory efforts are and whether you need to look for an alternate option. For example, if you realize that there is increased spoilage of particular items, then drop shipping or improvement in the storage of such items is key. If you realize that you are losing money on damaged products in the production stage, then you can add processes to ensure this happens less often. Inventory can cost you extra money if you are not careful so it is best to keep an eye on inventory cash flow at all times.

Proper recordkeeping:The essence of ecommerce accounting depends on how well you store the financial records of your business. You must store certain records for a few years as is mandated by law. For example, you should have records of previous tax returns, bank account statements, invoices, receipts, bills, debit and credit card statements, and revenue records. In case any discrepancy occurs or you need to make a claim, you must have all the records available with you at all times. How you store these records is up to you but you must ensure a soft copy and hard copy (if required and possible) are stored in a safe place.

Track returns and chargebacks:Ecommerce accounting includes keeping track of customer returns and chargebacks. If you don’t organize these properly, your balance sheet won’t be balanced. Customer returns will not be recorded as expenses. Rather, you will subtract the value of the returned item from the revenue and then place it under ‘Returns and allowances’. Let us say a customer returned a $100 item. You will record the account ‘Revenue – Returns and Allowances’ and have a debit of $100 while the account ‘Assets – Cash’ will have a credit of $100. The $100 will be in debit because you are sending a refund to the customer.

A chargeback can happen due to a variety of reasons such as fraudulent purchases, the customer forgetting their purchase, and so on. Chargebacks occur after a customer purchases a credit card but the credit card company requests you to return the funds paid. The chargeback can come under ‘Returns and allowances.’ When a chargeback is made, you must pay processing fees too. The fee can be a business expense or chargeback fee expense. Let us make it clear with an example. Let us say a chargeback of $500 has occurred and a fee of $50 was levied which you must pay. Here is how it will look.

Pay sales and income taxes:Taxes need to be on your mind at all times even when business is not running as well as you had hoped. You have to make sure you are aware of two main types of taxes; sales taxes (including state-level and local taxes) and income taxes. You must know which taxes you need to be paying and how much you need to be paying based on sales. You need to also know about the income taxes that must be paid to the authorities. Other taxes may be levied so it is best to know all about taxes after you register your ecommerce business.

The sales tax must be paid either monthly, quarterly or yearly. The first step to filing taxes is knowing how much tax to collect and then reporting the tax collected. You must specify the source of your tax i.e. where you collected the tax from. Then you need to ensure the tax is remitted to the right state in the US. It can get confusing when you are selling items globally on various channels. Filing taxes, both income and sales tax, will take time and understanding from your end. You need to understand the process completely before you can file the taxes.

Analyze financial statements:An e-commerce accounting activity that deserves your attention is an analysis of financial statements. This gives an overview of your business performance, how much your business has, how many debts your business has, and the cash flow. The three main statements that you must analyze regularly are cash flow statements, balance sheets, and income statements. In the case of small businesses where over one shareholder or owner is present, you should also analyze the statement of changes in owners’ or shareholders’ equity. It is best to generate financial statements by reliable software like TallyPrime and then make decisions based on that.

TallyPrime for efficient e-commerce accounting

E-commerce accounting requires effort and time but when you have an automated accounting software solution like TallyPrime, you are unstoppable. You can do so much with TallyPrime as it is a business management software with robust features. TallyPrime enables you to create in-depth reports, manage inventory, automate processes, manage payroll, manage cash flow, and automatically reconcile bank statements. It is the perfect accounting and business management software for MSMEs. Try it today.

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