Accounting and bookkeeping are important irrespective of the business you deal in. For business owners, it is critical to have healthy and spot-on accounting practices to have a clear knowledge of where the business stands. For e-commerce businesses, it becomes all the more crucial because of the rapidly changing landscape.
Accounting in e-commerce needs careful observation as the oversight might lead to detrimental decision-making, leading to overspending or hefty penalties. Impeccable accounting is important for the long-term success of e-commerce businesses. Unclear tax laws, combined with the possible growth opportunities can be lucrative, yet leading to regrettable decisions.
In this blog, Finsmart Accounting – globally trusted for outsourced accounting services – will explore some key aspects and important things to note for accountants in e-commerce.
Let’s start by learning about the types of accounting for ecommerce businesses.
Types of Accounting for E-commerce Businesses
There are majorly two different types of accounting in e-commerce. As an accountant in this business, it is important to understand what model works best for your clients.
1. Cash-based accounting: This type of accounting records transactions as soon as they land in the account, or is considered an expense when left untouched. The books will help showcase transactional information across all payment methods and accounts. When an e-commerce business is in its initial stages, cash basis accounting works the best, because of its simplicity. All the ecommerce industry accountants need to do is track and report the movements based on the accounts and notice how much is left for other purposes.
For new businesses, it is especially beneficial as they do not have to pay income taxes on the payments they have not received yet. Some of the top kinds of businesses that can choose this method include:
– Smaller eCommerce sellers
– Maker businesses
– Products on-demand businesses
– Dropshipping operations
As businesses continue to scale, the ability to use this method becomes rare.
Recommended reading: Cash flow management reporting tips and ideas for CPAs.
2. Accrual Method: In this method of accounting, transactions are recorded as they occur, not when the money reaches or leaves the account. This form of accounting gives a realistic representation of the monthly income and expenditure. They also allow accurate forecasts of upcoming and future obligations.
However, one downside of this method is that it might make your finances look better than they are. And that is why, there is a need to monitor the finances closely and regularly. Despite its shortcomings, as e-commerce businesses continue to grow beyond a revenue of 5 million dollars, this is the only method that can be used. Ecommerce industry accountants should make note of this.
Effective E-commerce Accounting: Best Practices
There are a few principles in common that help determine if e-commerce accounting is on the right track. Here are the key components:
1. Organization: A disorganised accounting book will make locating financial records and reports difficult. The generated KPIs and benchmarks will most likely be inconsistent and even incorrect as the businesses lack the means to measure financial success. An organized accounting system keeps track of it all, making financial data accessible at all times. An organized system also eliminates the risk that comes with auditing faulty finances.
2. Clearly defined roles: Whether the business has an in-house accounting or has outsourced it to an accounting firm, there should be well-defined roles. During your growth journey, it is very common to lose important data and facts and leave the important yet smaller things behind. This would not happen when everyone involved knows what they are doing.
That is why, most e-commerce business owners tend to outsource such tasks to accounting firms, where there is a dedicated team to handle the finances. Ecommerce accounting should be the responsibility of individuals who can solely focus on the finances and outsourcing makes it possible.
Recommended reading: Learn everything about auditing in accounting.
3. Strategic allocation of resources: Resource allocation is incredibly important to make effective accounting procedures for your e-commerce business. By appointing accounting firms to cater to their finances, e-commerce business owners can take advantage of the services as and when they need them and not pay year-round salaries.
Now, you have an idea of top ecommerce accounting types. So, let’s learn about the top challenges of the ecommerce industry accounting and tips to tackle them.
Top Challenges of Ecommerce Accounting + Solutions
Accounting in general, and e-commerce accounting in specific, is posed with many challenges. It is important, not just to understand the issues but also to know about the right ways that can help address them:
1. Sales Tax
The understanding and payment of sales tax is often difficult for business owners. To put simply, they are the additional taxes that are added to the costs of products when they are sold to the customers. Businesses add these costs to the amount that needs to be paid by the customers. Businesses then pay these taxes to the relevant authorities. The challenge with sales tax is that their rules vary greatly based on where the business and the customer are located. This is challenging in itself and doing it manually makes things worse. As an accounting firm, you can solve this by:
– Understanding the when and who of the payment of the sales tax
– Referring to third-party marketplaces like Amazon to see how they handle sales tax
– Using accounting software that automatically calculates and applies sales tax
– Letting your client know how much they need to pay to the authorities, well in advance.
2. Costs and overheads
There are a wide variety of costs involved in e-commerce. Businesses have to add up all the costs and pay them off the margin of every product that is sold. Understanding each of the costs is equally important for the accountant as it is for the business owner. This helps in making a reasonable profit margin and pricing products accordingly. To enable this, accountants should:
– Encourage business owners to track the cost of all selling products
– Categorize these costs as a part of bookkeeping
– Check the profit and loss report regularly and alert the business owner in case something unusual pops up
– Keep track of the cost of each of the items at all times
Once all of these are clear in the books, you can advise the business owners to adjust margins and pricing to cover all overheads. This is a great practice when you are working with ecommerce accounting!
3. Fees of third-party marketplaces:
As e-commerce businesses grow, they tend to make use of third-party marketplaces like eBay, Amazon, and Etsy. When businesses sell through these platforms, they also need to pay the platform fees. The fee structures vary greatly for each of these platforms. For example, Amazon has different fee structures, including “fulfillment by Amazon”. Although this does a lot of heavy lifting for the business, there is also a huge expense involved. On the other hand, eBay and Etsy charge listing fees and a percentage of the final selling price.
These are additional prices that put a huge pressure on the profit margins of the businesses. To help businesses with this, commerce accountants should:
– Encourage the business owners to read through the seller agreement thoroughly and decide on the third-party marketplace based on the fee schedule
– Help businesses take into account the extra fees while calculating selling prices
– Make sure of advanced software or assist the businesses in doing so to calculate the total fees that they will need to pay
– Talk to businesses about bulk listing and other promotions to reduce listing fees
4. Payments in different currencies:
This is one of the major challenges e-commerce businesses, that sell products globally, face. As a global seller, giving the option to shop in the buyer’s currency is essential. When it comes to conversion, there are a lot of hidden charges that businesses have to incur. That is where an ecommerce accountant plays a role.
– Encourage your clients to use software that gives options of currency while they are in the cart. It will showcase how much they are being charged and how the customer pays
– Take a deeper look at the credit card payment processors to see what the exchange rates are and how they compare to the market prices
– Use accounting software that can handle multiple currencies and bank accounts
Recommended reading: Learn about the cost of outsourcing accounting services in India!
5. Meet forecast and demand in terms of stock:
The supply chain has been in question forever. This has become more of a concern after the pandemic. E-commerce businesses often suffer here as there are rarely enough products to meet customer demands.
Here’s how ecommerce accountants and businesses together can solve this issue:
– Analyze the demand of each product, based on the business, talk to the suppliers and manufacturers, and have a clear idea of when they would remain available
– Have on-point forecasting and predictions to manage the increasing demands of the customers, especially during the peak seasons
– Accountants should help businesses keep track of when and where they are spending money with the suppliers. This will make sure that there is rotating money and not just money sitting in the inventory
In case there is a recurring issue with the supply, it might be wise to look for alternative suppliers altogether.
Staying on Top With E-commerce Accounting: Endnote
With accurate e-commerce accounting, businesses can identify and deal with financial challenges early on. Accounting firms play a key role in helping businesses find the right software or get through the complexities of the small prints of the agreements. Accounting firms should be prepared to handle the challenges that the complicated books of the business possess. They should also advise businesses on the right thing to do to make more profit and lose less on the different layers of taxes.
If your accounting firm is struggling with bookkeeping for e-commerce businesses, it might be wise to outsource such tasks with Finsmart Accounting.
To talk in detail, write to us at connect@finsmartaccounting.com
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Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
