An Insightful Guide to E-Commerce Accounting Basics
This insightful guide is a revised and adapted version of the article “Ecommerce Accounting Basics: Principles for a Successful Store” by WooCommerce. This guide has been enhanced to ensure reader engagement and to help ecommerce businesses better understand their financial status.
Bottom Line: Debunking ecommerce accounting basics and principles is critical for every successful ecommerce business. Whether you’re an ecommerce business owner or manager, it’s essential that you understand the financial transactions and procedures linked to your trade. The rest of this article will provide a deep-dive into ecommerce accounting to empower you to manage your store’s finances more effectively.
The future of ecommerce accounting is dynamic and might feature further automation and artificial intelligence in tracking and analyzing financial transactions. Additionally, ecommerce businesses may soon witness an increase in integrated platforms that can handle both ecommerce sales and accounting functionality, streamlining financial management for stores.
A Deep Dive into Ecommerce Accounting
Ecommerce businesses involve transactions, inventory, sales, and purchases requiring a comprehensive and sound system for recording and reporting transactions such as orders, expenses, and taxes. A professional accounting firm then utilizes this data to prepare financial statements, enabling the detailed analysis and reporting of the financial health of the business.
The financial impact of a single sale on an ecommerce platform can be multi-faceted, influencing various aspects of the financial records and resulting in transactions that might need to be modified or reversed, should the order be returned. Thus, understanding the basic principles of ecommerce accounting has become increasingly important.
Key Accounting Terminology for Ecommerce
For successful self-management, ecommerce store owners need to be familiar with terms such as transactions, debits, credits, assets, liabilities, and equity, among others.
A transaction is made any time money is spent, received, or requested by a business or vendor. Some examples include:
- Investments made in the business by the owner
- Revenue from sales
- Fixed expenses like wages, marketing, travel, and building costs
- Purchased assets such as vehicles, office equipment, property, or materials
Properly managing these transactions is vital, as it helps remove any complications that could cloud the financial picture of your ecommerce business.
Tracking Transactions: Debits and Credits
All financial transactions are tracked through debits and credits. Some fundamental definitions to note are:
- Debit: A record of money subtracted from your bank account.
- Credit: A record of money added to your account.
- Assets: Property owned by an organization.
- Liabilities: Future obligations of a business.
- Equity: The sum of assets after deducting the debts.
The Importance of Ecommerce Bookkeeping and Accounting
Ecommerce bookkeeping involves primarily recording transactions, records, and financial institutions, such as processing invoices, sending receipts, and recording income and expenditures. Meanwhile, ecommerce accounting goes a step further to study the financial state and health of your ecommerce business. This includes operations like financial forecasting, tax planning, and cash flow reporting.
Understanding Accrual and Cash Basis Accounting
Accrual and cash basis accounting are two primary forms of ecommerce accounting. The key difference between them is when a transaction is recognized. Cash basis accounting recognizes transactions when money changes hands, while accrual accounting identifies transactions when the service is completed and the invoice created.
Generating Financial Reports: Boosting Your Ecommerce Business Success
One of the great advantages of having accounting software is the ability to generate three basic financial statements; income statements (profit and loss statement), balance sheets, and cash flow statements. These statements are essential in achieving a well-rounded financial evaluation of an ecommerce business.
Accounting Metrics: A Crucial Factor in Ecommerce Business
Accounting doesn’t only focus on keeping financial records; it also provides an understanding of your business’s financial status and growth or decline. Some of the most essential accounting metrics for ecommerce bookkeeping include revenue, gross margin, profit, conversion rate, customer acquisition cost (CAC), lifetime value, average order value, cart abandonment rate, and the return rate.
Final Notes: Taking Control of Your Ecommerce Accounting
It’s crucial for ecommerce business owners to understand and control their basic accounting tasks to avoid difficulties later. Create a separate business account to account for all business-related expenses and income. For businesses with tons of transactions, accounting software like QuickBooks Online, Xero, or FreshBooks may be crucial to ease the accounting process. It is also essential to ensure all transactions have supporting documentation, understand your tax requirements, and consider hiring a bookkeeper or accountant as your business grows.
Regardless of the complexities involved, accounting basics remain a critical aspect of running a successful ecommerce business. For insightful resources and extensions to automate key accounting processes, ecommerce entrepreneurs can refer to WooCommerce’s list of accounting extensions for WooCommerce stores.