Accounting Equation

As your e-commerce company expands, your finances will get more intricate, and you will need to correctly classify, examine, and then disclose to the tax authorities all in-and-out cash movements. It’s impossible to effectively manage your finances in e-commerce, just like it is in any other business. 

If your financial records are not kept in order, it is impossible to manage your money accurately and this marks the importance of e-commerce accounting.

First of all, let me make it very clear that e-commerce accounting is a huge piece of success for every e-commerce company. So what happens if you don’t understand e-commerce accounting? Poor knowledge of it leads to poor financial data which thus leads to poor accounting and then poor decision making and at least leads your company to mediocrity or complete failure. 

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So e-commerce accounting can make your task easy-peasy likewise through this article I’m trying to make you acknowledge e-commerce accounting in a detailed and easy-peasy way. So listen up!

Before diving deeper into it, let’s have a simple description of e-commerce accounting.

What is E-commerce accounting?

The term “e-commerce accounting” refers to the process of gathering, analyzing, organizing, and reporting financial information on assets and business activities inside an e-commerce enterprise. Consider it a subset of business accounting that is specifically designed to cater to the particular requirements of an eCommerce supplier. Ecommerce accounting, like any commercial accounting, entails both fundamental bookkeeping tasks (such as managing invoices, payroll, and balance sheets) and more complex planning and reporting duties (like preparing financial statements and creating a strategic tax plan). Three main areas of focus are frequently tax management, bookkeeping, and expansion planning. Ecommerce Accountants are Specialists in Ecommerce Accounting.

Nitty-gritty components of E-commerce Accounting

  1. Purchase order: 

 In a legally binding document known as a purchase order, a customer specifies the kind and number of goods they wish to purchase together with their agreement to pay a certain price for those goods. Even though a purchase order is not a payment, it must contain payment information. A client may send you a buy order asking for a certain quantity of goods or services, or your business may use one to seek raw materials from a vendor.

  1. Sales order: A sales order is a document created by the seller that contains all the information about a sale (typically in response to a purchase order). Information on the client, the description and quantity of the goods sold, the price paid, the method of payment, and the delivery address and time should all be included in a sales order.
  2. Accounts payable and accounts receivable:

These terms allude to outstanding bills and invoices, as well as the total amount of expenses and income that have not yet been paid.

  1. Cost of goods sold (COGS):

This represents a product’s entire production and distribution expenses. Shipping, warehousing, credit card processing fees, and any other expenses directly associated with the sale of goods are typically factored in. It excludes overhead costs like staff salaries, marketing, software licenses, and office space.

  1. Ecommerce sales tax:

This refers to the tax paid by an e-commerce business to the state where a customer resides, provided that there is a sales tax nexus between the seller and the state. This means that the state has the authority to tax a company, which it usually does if the company engages in any economic activity there.

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Types of accounting for e-commerce businesses: Cash Basis Accounting and Accrual Method 

So cash accounting and accrual accounting are the two accounting techniques. Both methods are permissible for an e-commerce business, but not simultaneously. Now let’s check it out in detail. 

  1. Cash Basis Accounting: 
  • Any expense or income is only recognised under this system of accounting when there is a cash inflow or outflow.
  • The cash basis is fundamentally simple.
  • The single entry system used in the cash basis of accounting is used to record either the inflow or outflow of cash.
  • Under the cash basis of accounting, the income statement will display a substantially lesser income.
  • The accuracy of the cash basis of accounting is poor.
  • Financial statements cannot be audited while using the cash foundation of accounting.
  • Small to medium-sized firms should use the cash basis of accounting.
  1. Accrual Basis method:
  • Any revenue or expense is recognised under this system of accounting at the time it is earned or incurred, regardless of when it is paid or collected.
  • The nature of the accrual base is complex.
  • It uses a double entry accounting system in which every transaction has two possible outcomes—a debit and a credit.
  • Under the accrual basis of accounting, income levels will appear higher on the income statement.
  • The accrual basis of accounting is more accurate than the cash basis.
  • Only financial statements that have been prepared using the accrual method of accounting can be audited.
  • Large organizations can use the accrual basis of accounting.

What specific information must owners of e-commerce businesses monitor?

Accounting for businesses is keeping track of all transactions, stock, and financial information. This comprises balance sheets, profit and loss (P&L) statements, and metrics like cash flow and gross profits.

  1. Cash flow: Cash flow refers to the flow of cash into and out of your company. By managing your cash flow, you may fulfil all of your commitments while avoiding unwanted debt.
  2. Gross profit: The term “gross profit” refers to total revenue less the cost of products sold and is one of the most important metrics for managing your business. Expressed as a formula, it reads gross profit = revenue – the cost of goods sold.
  3. Gross margins: The same information is used to calculate gross margins as it does for gross profit, however, this indicator is expressed as a percentage of total revenue. Gross margins are calculated as follows: gross margins = (revenue – cost of goods sold) / revenue.
  4. Balance sheets: Three primary categories will be listed on your balance sheet: assets (cash, accounts receivable, and inventory); liabilities (accounts payable, wages, and income taxes); and the combined equity of all shareholders.
  5. Profit and loss: Profit and loss statements give you a thorough understanding of how profitable your company has been over a specific time frame. They compute total revenue minus the operating costs, such as COGS, marketing costs, payroll costs, and overhead charges. If this figure is positive throughout the provided time period, you were profitable. If it’s negative, you’ve made a loss.
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Primary accounting tasks for e-commerce businesses

  1. Identify your business entity:

Your company’s legal structure is called a business entity. Some legal entities, such as sole proprietorships, require very little setup time. (In fact, the government considers you as a single proprietor as soon as you start working for yourself). Some require more work to establish than others, such as partnerships or companies. The kind of business you are running, your long-term goals, and whether you co-own it with others will all influence the form of business structure you select.

  1. Identifying accounting method:

Cash and accrual accounting are the two methods used by business owners. You must follow through with the option you select. Making the appropriate decision at this time is crucial. (Changing accounting systems requires going through a government process, but it is possible.)

When using the cash accounting system, you can record transactions as soon as money comes into or leaves your company. As an illustration, you would only record an expense for a vendor’s invoice after paying them.

Transactions are recorded as they happen using the accrual approach. As a result, even when the money hasn’t yet left your account, you record a vendor’s invoice as soon as it arrives.

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Accounting software for E-commerce

Ecommerce accounting software differs from traditional accounting software. It covers all eCommerce and online store-related issues in order to tax your business efficiently. When selecting the best accounting software, look for features that can benefit e-commerce companies. 

Accounting software that automates much of your accounting labour is essential when running an e-commerce business and the listed are some of the best accounting software for e-commerce. 

Xero:  is a cloud-based programme that is simple to use, has user-friendly components, can be easily connected with other tools, and converts currencies.

QuickBooks: Simple invoicing, cost and bill tracking, clear reporting, simple tax reporting, time and expense management, and payroll.

ZipBooks – Effective expense management, easy credit card processing, accrual and cash reports, unlimited number of customers and vendors.

Sage: Scalability, user-friendly features, customer care centre, inventory and task management, and cash flow management.

FreshBooks: integrated payment choices, reasonable pricing, easy project management, and improved invoicing.

There are many different categories and subcategories in e-commerce accounting. Online store owners must learn what each of these terms means and how to apply them to their e-commerce business. The intention behind composing this article is to make you acknowledge e-commerce accounting services. And the basics related to this topic are clearly detailed throughout the article. 

Here just the basic concepts about e-commerce accounting are given, and more information regarding it is yet to be discussed. So stay in touch with us to learn more about this concept.

Hope you’re happy and healthy!

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