In 2020, US ecommerce showed an immense 44% growth, the highest for the two latest decades. So the share of online sales in the total retail sales leaped up to 21%, which is quite significant compared to the 15.8% in 2019. Many factors induced this growth, of which the pandemic and its impact on consumer behavior were the biggest contributors. Many existing businesses had to shift to the ecommerce model to stay afloat, and more ecommerce businesses will keep appearing in the future, gradually winning the place from classic retail.
Thus, the demand for ecommerce accounting will only grow, as ecommerce seems to become a long-term trend that neither business owners nor accountants can ignore.
In this article, I want to take a closer look at the peculiarities of ecommerce accounting and share some of the accounting best practices to consider in the changing landscape of the ecommerce business.
Note: also, check our article about the importance of proper SEO for e-commerce to increase online sales.
How does ecommerce accounting differ from traditional accounting?
Changed landscape of the ecommerce business
Without a doubt, the COVID-19 outburst and the crisis that followed changed the landscape of the ecommerce business. And though speaking of the change, we often mean the rise in the quantity of the online businesses, we often overlook the qualitative changes that also took place. What are those changes?
Well, first, let’s speak a bit about why the change happened at all.
The pandemic has drastically changed people’s lives in many spheres, including purchasing goods or services. Self-isolation, social distancing, and other confinement measures made customers look for safe and convenient ways to buy. And here is where online became the answer to their needs, giving them access to a variety of products and services available to purchase without leaving their homes. Moreover, the online demand has drastically changed to comprise products and services that traditionally used purchase offline, such as essentials or basic consumer goods, medicines, cosmetics, books, and many more. Also, the online audience extended to include new consumer segments and groups that previously used to have a pretty low online representation.
So here they are, the qualitative changes: buying habits, online demand, and the audience. Altogether, they stimulated the big shift to online for many (previously brick-and-mortar) businesses and the appearance of new firms with a purely online or ecommerce model, as businesses had to adjust to the changing landscape and find new means of answering customer needs. But also, business owners faced the necessity to review their management practices, including the approach to accounting.
What is ecommerce accounting?
By definition, ecommerce accounting is the way of collecting, analyzing, organizing, and reporting financial data, such as business transactions, assets, etc., for an ecommerce business. The information that business owners get from accounting should provide them with a clear picture of their business finances, sources of profit and loss, and other valuable insights, based on which they can make informed decisions on budgets, growth, fundraising, and many more.
How does ecommerce accounting differ from traditional accounting?
Though the definition of ecommerce accounting looks pretty much traditional, some peculiarities that arise from the nature of an ecommerce business make it stand aside from traditional accounting. First of all, it’s usually higher volumes of transactions to collect and process. Then, the number of sales channels from which ecommerce businesses receive payments, and you need transaction data from all of them consolidated in the books. There are also some aspects to track unique for ecommerce businesses, such as inventory or cost of goods, etc.
All this makes ecommerce accounting a much more complicated process that requires a different approach and more investment of time and effort to avoid the challenges accountants and business owners might face managing the books.
Challenges of ecommerce accounting
As mentioned above, there are challenges specific to ecommerce accounting that business owners or ecommerce accountants need to consider and know how to cope with them. These include data entry errors, sales tax liability, managing refunds or chargebacks, dealing with payment processor fees, and managing inventory. Let’s take a closer look at each of them.
Data entry errors
Unless you are selling something super peculiar or exclusive, like dolphins’ artworks or handmade grunting-ox wool knitted hats by Tibetan monks (and probably, doing it just to please yourself), you need to import loads of transaction data into accounting. Often, this data comes from multiple channels – such as payment processors or ecommerce platforms – that an ecommerce business uses for sales. Manually entering this data is highly error-prone, and there’s also a risk of data loss (leaving aside that manual entry of thousands of transactions is a pure pain in the neck for an accountant, days of pain). As a result, inaccurate books and consequently, incorrect reporting, tax filing, failed reconciliation (and all those nightmares you can imagine).
Sales tax liability
Sales tax is another big challenge facing ecommerce businesses. Due to regular changes and updates that tax authorities introduce, it remains one of the most complicated taxes that ecommerce businesses are liable to.
Conditions and rates are highly dependent on where a business has its nexus – in other words, its presence. For brick-and-mortar businesses, it is pretty clear, meaning they have to report and pay to the tax authorities of the state where it is located (physical presence or physical nexus). But for an ecommerce business – that might have no physical representation at all – we usually speak of the economic nexus. Basically, the economic nexus refers to revenue or sales volume (or both) thresholds set by a state. These thresholds (as well as sales tax rates) may differ from state to state.
So if you’re selling interstate, it complicates your accounting dramatically, as you need to apply correct taxes to sales and also report and pay them to the right states (keeping in mind that some ecommerce platforms do it for you)
Managing refunds and chargebacks
Refunds and chargebacks are a usual aspect of the management of an ecommerce business. They are inevitable, as bought items might not fit, be damaged during the delivery, not work due to spoilage, and for many other reasons. And unless a business doesn’t care about customer loyalty, it’s one of the best ecommerce practices to have a small business return policy. So it is critical to accurately record refunds in accounting not to mess up the books.
At the same time, it can be challenging and time-consuming, as the sale and the refund might occur within different periods, and not all payment systems provide you the details on the refund amounts (saying something like Stripe item), so you can end up manually searching for the corresponding sale and applying the refund to it.
Dealing with payment processor fees
For every payment that you receive through a payment gateway or an ecommerce platform, the service can charge you a commission, usually known as a processor fee. Such fees should be correctly recorded in your accounting so that you could understand the real earned amount from selling this or that item. The amounts of fees can differ from platform to platform. Moreover, they may vary depending on the payment volumes that you’re processing through this or that platform and even the categories of products you’re selling.
For an ecommerce business, it is critical to manage inventory properly and reflect it in accounting correctly. Without it, it will be almost impossible to control business cash flows, plan budgets, make timely supply orders, etc. Besides, managing inventory the right way helps ecommerce businesses avoid such things as overstocking or running out of goods on stock, which can negatively affect sales.
Tracking inventory can be challenging and involves regular monitoring changes in inventory (especially when refunds take place). And selling through multiple channels only complicates things.
Ecommerce accounting best practices
Below, I gathered some of the accounting best practices that might help provide for the peculiar needs of ecommerce businesses.
A note. You will see that some suggest using accounting automation software. But there’s no wonder, as using software remains among the top accounting efficiency recommendations for quite a long time already. It’s hard to overestimate the value that accounting software provides to both business owners and accountants. By undertaking a significant part of accounting tasks, it helps to do books more accurately and efficiently.
So, let’s get to the best practices right away.
- Integrate all your payment sources with accounting software;
- Go with as many necessary details as possible;
- Ensure applying correct sales taxes to your sales;
- Use reporting possibilities of your accounting software to the fullest;
- Reconcile regularly.
Today, the demand in ecommerce accounting is higher than ever before, as more businesses move to the ecommerce model to adjust to the changed purchasing behavior and efficiently address customer needs in a safer and more convenient buying process. But it’s critical to understand the peculiarities and challenges of ecommerce accounting that arise from the nature of the ecommerce business and provide for them.
Using accounting automation software is one of the best practices for ecommerce accountants and business owners. It can help efficiently address these challenges, bringing accounting to a new level with accuracy, better reporting, faster and easier reconciliation, and drastically enhance accounting workflows.