Ecommerce Accounting: All You Need to Know About It

• Reading Time: 13 Minutes
• Published: October 21, 2023
• Last Updated: February 18, 2025

The unprecedented growth of the ecommerce industry has resulted in fierce competition. It means the sustainability of your business heavily depends on efficiency and accuracy in every process, including accounting. In this blog, we explore everything you need to know about accounting for eCommerce businesses—its unique challenges, and how effective accounting practices can fuel sustainable growth and success.

What is Ecommerce Accounting?

The practice of ecommerce accounting includes recording, organizing, and managing business transactions of an e-commerce company. An ecommerce accountant tracks, records, and categorizes transactions as income or expenses. Here are some key components that are recorded in the books:

• Purchase order
• Vendor Bills
• Website & Portal Sales
• Inventory Movement
• Cost of goods sold
• Sales Portal Expenses
• Marketing, Subscriptions & Other Operational Expenses
• Ecommerce sales tax

Ecommerce Accounting Methods

Cash Basis Accounting

In this type of accounting for ecommerce, transactions are recorded based on actual cash flow. It means you only consider sales and expenses when cash physically flows in and out of the business. It is a simple system to maintain and keeps you updated on how much cash is at your disposal at a given time. Cash basis accounting is ideal for small ecommerce sellers, product-on-demand stores, drop shipping operations, Amazon FBA stores and maker businesses.

Accrual Method

Accrual accounting records transactions as they happen irrespective of whether cash has been released into the business accounts. It is commonly used by medium to large ecommerce businesses. While a more complex method than cash-based accounting, it provides a more accurate overview of the financial situation.

The Importance of Accounting and Bookkeeping for Ecommerce

Irrespective of the ecommerce platform you sell on, the need for a stable financial system cannot be overstated. Here are some of the reasons why ecommerce bookkeeping are significant for companies.

Financial Clarity and Transparency

Accurate accounting for online businesses offers clarity on cash flow, profit margins, and overall financial health. The E-commerce industry frequently deals with high-volume transactions and a clear financial picture will help in informed decision-making. Correct Ecommerce bookkeeping ensures all sales, expenses, and returns are timely and accurately recorded for transparent financial reporting.

Cash Flow Management

Delayed payments, returns, and inventory costs are a few common challenges that impact the cash flow of ecommerce companies. Effective bookkeeping assists in tracking accounts payable and receivable, ensuring companies can forecast cash flow shortages and manage their finances proactively. By understanding cash flow trends, owners can make necessary adjustments to maintain healthy liquidity.

Inventory Management

Hiring a experienced accountant for ecommerce financial management is imperative. Accurate bookkeeping make sure that inventory levels are tracked on time. It helps in avoiding stockouts or overstock situations. This not only has a positive impact on customer satisfaction but also fosters improved financial health. Furthermore, understanding inventory cost and its impact on cash flow can guide sales strategies and purchasing decisions.

Streamlined Operations

The integration of the right accounting software for ecommerce can significantly streamline operations. Automation of tasks such as invoicing, expense tracking, and financial reporting reduces the administrative burden on the business. This enables them to focus on core activities such as marketing and customer engagement, eventually driving growth.

Performance Monitoring

Regular financial analysis enables ecommerce businesses to track key performance indicators metrics such as customer acquisition cost, average order value, and return on investment can be monitored, tracked and evaluated overtime. This proactive approach allows businesses to determine trends, assess the effectiveness of marketing campaigns, and make adjustments to improve overall performance.

Foster Growth and Investment

As e-commerce businesses grow, their financial complexity increases. A solid accounting foundation make it easier to secure funding from investors or lenders. Additionally, accurate and organized financial statements instill confidence in potential investors, making it more likely for them to support business expansion.

Top Accounting Software for Ecommerce Accounting

1. QuickBooks Online

QuickBooks Online is the most popular software for ecommerce accounting that provides seamless automation across the online store. Its automation feature helps in reducing the manual work and improving efficiency in the accounting process. Some of the main QuickBooks Ecommerce accounting features include:

• Vendor Bill management
• Vendor Payments
• PO Creation
• Inventory tracking
• Auto Sync of Sales
• COGS Tracking
• Expense tracking
• Running Payroll
• Sales Tax Tracking
• Automated reminders
• Multi-currency support
• Extensive Financial Reporting

2. Xero

Another popular accounting software for ecommerce is Xero. This easy-to-use accounting application makes ecommerce bookkeeping simple and effective. Some of its main features include:

• Vendor Bill Management
• PO Creation
• Inventory tracking
• Auto Sync of Sales
• COGS Tracking
• Expense tracking
• Multi-Currency Support
• Financial Reporting

3. Zoho Books

Zoho Books, with its powerful inventory tracking features, makes it well suited for Ecommerce accounting. This accounting software helps with managing a wide range of accounting tasks and keeping track of every transaction. Its key features include:

• Vendor Bill Management
• PO Creation
• Tracking Landed Cost of Product
• Extensive Inventory Tracking
• Multiple Warehouse Management
• Sales Tracking
• COGS Tracking
• Expense tracking
• Multi-Currency Support
• Financial Reporting

Also Read: Best Practices for Amazon Seller Accounting

Major Accounting Challenges E-commerce Businesses Face

Sales Tax Compliance

E-commerce businesses often sell products to customers across multiple states or even countries. This can make sales tax compliance complex, as they need to navigate different tax regulations and rates. Ensuring accurate calculation and timely remittance of sales tax can be a major challenge. Entrusting the accounting and tax compliance task to an experienced ecommerce accountant can help streamline the process while ensuring compliance.

Inventory Management

Effective inventory management is crucial for e-commerce businesses to avoid stock outs or overstocking. Accurately tracking inventory levels, managing product variations, and handling returns can pose accounting challenges. Implementing robust inventory management systems can help address these issues.

Revenue Recognition

Revenue recognition can be challenging for e-commerce businesses, especially if they offer subscription-based services for digital products, where revenue is recognized over the subscription period. For product-based sales, revenue is recognized when control of the goods has been transferred to the customer. In the case of gift card sales, revenue is recognized when the card is redeemed. Correctly recognizing revenue and understanding when it should be recognized can require proper understanding and careful implementation of accounting principles and practices.

Cost Allocation

E-commerce businesses often incur various allied product costs that must be allocated correctly to the cost of the product. Product costs include shipping costs, custom duty, import duty, insurance cost and other direct overheads. Properly allocating these costs across different products or services can be complex, but it is essential for accurate financial reporting.

Handling Returns

E-commerce businesses must carefully track, and record returned and damaged goods in their accounting systems while ensuring accurate inventory valuation. Accounting for returns requires meticulous attention to detail, as businesses must assess the condition of returned goods and determine if they can be resold. Automation tools and integrated software solutions to streamline the return process can help businesses maintain accurate financial records while providing excellent customer service.

International Transactions

For e-commerce businesses operating globally, dealing with international transactions introduces additional complexities. Foreign currency exchange rates and compliance with international tax regulations must be considered when recording and reporting financial transactions.

Payment Reconciliation

Correct reconciliation of payments from multiple sales channels and payment methods indeed challenging. In today’s multi-channel and multi-method e-commerce environment, effective reconciliation ensures accurate financial reporting, fraud detection, and smooth operations.

Tracking Seller Fees

Tracking seller fees is an essential aspect of e-commerce accounting as it helps businesses accurately understand their financial performance and make informed decisions.

There are various types of seller fees, including transaction fees, subscription fees, referral fees, fulfillment fees, and advertising fees. These charges can add up quickly and significantly impact a business’s profitability if not properly tracked and managed.

Manual Data Entry

As an intricate process that involves recording and transferring vast amounts of data, it is prone to human errors, such as mistyped numbers or incorrect calculations. These errors can lead to discrepancies in financial records, impacting the accuracy of financial reporting.

To overcome this challenge, businesses can leverage technology solutions like automated data entry tools or integrated accounting software, reducing errors, improving efficiency, and enhancing overall financial accuracy.

Access to Data Analytics

The accounting process becomes hindered when there is a shortage of access to comprehensive data. Without a holistic view of customer behavior, sales trends, and other crucial metrics, it becomes challenging to accurately forecast revenue, manage inventory, and optimize pricing strategies.

Overcoming this challenge requires implementing robust data collection and analysis systems, leveraging technology, and investing in skilled an ecommerce accountant who can extract meaningful insights from the available data.

Addressing these accounting and bookkeeping challenges faced by e-commerce businesses requires them to invest in modern accounting software, implement robust internal controls, and stay updated with changing regulations. Hiring in-house ecommerce accounting professionals or partnering with experienced outsourced accounting services providers can also help navigate these complexities effectively.

Best Practices in Accounting for Ecommerce Businesses

Ecommerce accounting has a lot of variable aspects, and if not tracked and monitored regularly, the process can quickly become chaotic. Here are some of the best practices that ensure efficiency in ecommerce bookkeeping.

Select the Right Accounting Software

Investing in powerful accounting software for ecommerce can save a lot of time and reduce the chances of errors. Consider key features that will make your ecommerce platform smarter such as automated data syncing, inventory management, easy billing, and multi-currency support.

Categorize and Track All Transaction

Tracking transactions is the baseline of good ecommerce accounting. Transactions are categorized as income and expenses. Accurate recording of these transactions forms a basis for all other accounting tasks. Some of the key transactions to record include:

• Sales Revenue from all your channels such as websites and marketplaces.
• Recording purchase cost of the products and their direct costs such as freight, duties
• Cost of Goods sold for the product sold
• Operating expenses such as portal expenses, marketing, and software subscriptions.
• Occasional expenses such as equipment purchases and on-time services.

Implement a Consistent Bookkeeping Schedule

Bookkeeping for ecommerce must be performed timely to maintain consistency in the approach. Setting a dedicated time for updating records, reconciling accounts, and reviewing financial statements can help ensure the approach’s efficiency. Depending on the volume of transactions, the accounting team can set the schedule for daily, weekly, or monthly.

Monitor Inventory Closely

Efficient inventory management is crucial for the ecommerce business. Regularly tracking stock levels, turnover rates, and inventory costs helps in:

• Managing cash flow better
• Making informed purchasing decisions
• Avoiding stockouts or overstocks

Regular Reconciliation of Accounts

Regular bank reconciliation ensures your financial records are aligned with your bank statement. This practice helps in determining discrepancies, preventing frauds, and ensuring accurate financial reporting. It is important for an ecommerce accountant to set a monthly schedule to perform reconciliations of bank and other payments methods to maintain consistency.

Prepare for Tax Seasons

• Understanding sales tax obligation, their payments and to ensure timely monthly/quarterly/yearly filings
• Tracking deductible expenses and maintaining accuracy in records for year-end compliance filings
• Consult a skilled tax professional to navigate complexities

Foster Decision Making

Harness financial reports to gain useful insights into the performance of the business. Key financial reports such as profit & loss statement, cash flow statement and balance sheet must be recorded accurately. Furthermore, regular reviewing of these reports is also paramount to facilitate informed decisions regarding budgets, investments and growth strategies.

Stay Updated with Ecommerce Trends

Trends in ecommerce and accounting are constantly evolving, driven by changes in tax regulation, payment processing technologies, and advancement of e-commerce platforms. Staying up-to-updated with these changes is essential for businesses to remain compliant, competitive, and efficient. Subscribing to industry newsletters, attending webinars, and engaging in professional forums can provide valuable insights into emerging trends, best practices, and regulatory updates

Leverage Outsourcing Services

If accounting is not your forte, why not outsource accounting services? Hiring an ecommerce accountant can free up your time to focus on growing your business. You will be leveraging the expertise of a professional to ensure your financial area to make critical business decisions.

Also Read: Mastering Your Shopify Finances: Step-by-Step Guide to Shopify Accounting

What is the Role of an E-commerce Accountant?

An ecommerce accountant is a professional responsible for managing financial data and transactions of online businesses. The core responsibility of an accountant for ecommerce include:

• Recording and organizing financial transactions
• Reconciling Portal statements
• Managing and reconciling inventory
• Correct Recording of COGS
• Preparing financial reports i.e Profit & Loss, Balance Sheet
• Cash flow reporting
• KPI Reporting i.e Sales Trends, Stock Movements, Profitability
• Ensuring tax compliance and filings
• Providing strategic advice

Tips to Outsource Accounting Services for Ecommerce

1. Identify Your Needs

Before you start looking to outsource accounting services for ecommerce, take the time to identify your needs. Some important consideration factors include:

• The business size
• Volume of transactions
• Kind of ecommerce accounting services required, some of the major functions are

Ecommerce Bookkeeping
Financial Reporting
Sales Tax Filing
KPI Reporting
Inventory Management and Reconciliation

2. The Experience of Ecommerce Accountant

Ecommerce is a vast industry, and all accountants may not be familiar with its intricacies. When looking for an accountant for ecommerce business, consider the experience the professional has with ecommerce accounting. It is crucial they understand inventory management, payment platforms, and sales tax regulations. Here’s what to check:

• Verify the accountant Qualifications and Credentials, including an Accounting Degree, CPA certification or a similar professional designation.
• Ensure the accountant has experience of working with the ecommerce businesses
• Ensure that the accounting functions previously performed and the experience gained align closely with the specific requirements of the job
• Positive feedback from previous clients

3. Evaluate Technology and Software

Accuracy and consistency in accounting for ecommerce business heavily depends on the right technology. Ensure to enquire the potential about:

• The kind of software they use
• How well they can integrate with your current ecommerce platform
• Whether they provide cloud-based solutions for easy access and collaboration

4. Assess Communication and Support

Effective communication is vital for remote accounting. Ensure the potential partner is responsive and available when you need assistance. Moreover, check the communication tools they use. A reliable outsource partner will provide regular updates and insights instead of waiting for you to reach out.

5. Understand the Pricing Structure

The price of ecommerce accounting can vary based on the kind of services you use. As a business owner, you must be clear about the pricing models (hourly, per service or monthly). Additionally, ask about additional fees for services such as financial reporting and tax preparation. When you outsource accounting services ensure the cost aligns with your budget without compromising on quality.

6. Establish Clear Expectations

Accounting for ecommerce is a practice that needs consistency, accuracy, and reliability. Once you have hired accounting services, establish clear expectations from the get-go. Set clear expectations regarding:

• The kind of services they will be providing along with any limitations
• Set timelines for deliverables like monthly reports
• Schedule periodic meetings for performance review and conflict resolutions.

Key Takeaways

Establishing a solid understanding of ecommerce accounting is crucial for the success of any online business. By following this guide and implementing these tips, you can ensure that your financial records are accurate and organized, leading to better decision-making and growth in your e-commerce venture. At Whiz Consulting, we take your accounting woes away and help you maintain accurate and consistent financial reports. Our ecommerce accountant has the experience and expertise to tackle various challenges with ease and ensure you always stay on top of the game.

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