Shopify accounting for dummies - Get your books set up for accounting success
Most people don’t start a Shopify store to spend hours dissecting financial data, but it doesn’t take long for this to happen. Even if you have accounting experience, e-commerce comes with certain nuances that make the job more complex.
Although Shopify offers one of the easiest ways to open and manage an online store, lots of business owners struggle to keep on top of their books. With Shopify, this is mostly due to a clunky flow of financial data. As your online store grows, the data becomes overwhelming, and you’re left reconciling bank accounts at all hours of the night.
We’re here to tell you there is a better way.
To grow a successful business, you can’t avoid your accounting. But with a good system in place and integrating tools that reduce manual data entry and time-consuming processes, you can benefit from up-to-the-minute, reliable accounting information.
Here are the basic steps you need to take if you’re to stay ahead of the accounting game – and improve the overall financial wellbeing of your business.
1. Start by deciding on your business structure
This might seem like an overly basic place to start, but business structure plays a much bigger role in accounting than most people think. It essentially determines what your business financial obligations are, i.e. what paperwork you need to file, when your taxes are due, and how any profit your business makes is distributed.
Business structures can differ slightly between countries (sometimes states too for those in the US). The options available to you will be determined by your tax home, but usually they fall into one of three buckets.
*Sole trader or proprietorship –*any business profit or loss is declared as part of your personal income
Partnership– when two or more people or organisations form a business, and they share profits, debts and work
*Company –*a separate entity where directors and shareholders are responsible for paying company debts and are entitled to a share of profits
2. Choose an accounting method
Cash accounting – transactions are recorded when money enters or leaves your account – a super-easy way of understanding cash flow.
Accrual accounting – transactions are recorded when a bill is received or an invoice created, even though money may not have exchanged bank accounts. This method is most suited to businesses dealing with inventory, and a great way of understanding the longer-term impact of inventory transactions on financial performance.
Modified cash accounting – a blend of both cash and accrual accounting. It allows you to match your revenue with the cost of goods sold, so you can understand what your true gross margin is.
3. Set up a business bank account
Create a separate bank account – then use it to pay for all business-related expenses (like your monthly Shopify plan), and make sure it’s where your Shopify Payments pay-outs are received.
4. Invest in good accounting software
Shopify doesn’t come with a full bookkeeping solution, so you’ll need to integrate an app that can help. The two best accounting systems for Shopify are Xero and QuickBooks.
Both are cloud-based accounting software with features to help you run every part of your Shopify business – from quotes and invoices to reports, payroll and inventory. They can be synced directly with Shopify by downloading the integrations from the Shopify App Store– but this can cause some complications down the line.
5. Use A2X to pull summarised data – and reconcile your bank account
When you connect Shopify with Xero or QuickBooks, your accounting system will automatically pull every sales transaction, for every customer, from your Shopify account.
All this data can quickly bog down any accounting system – so the trick is to only pull summarised transactions. To do this, you’ll need A2X for Shopify which acts as a bridge between Shopify and your accounting system, pushing summarised transactions that can then be automatically reconciled against the Shopify pay-outs you receive in your bank account. You’ll be able to sleep soundly knowing at month-end, reconciliation will take minutes instead of hours!
For the accountants among you, A2X for Shopify will also make sure all sales, fees, tax, refunds, and any other adjustments are coded to the right accounts.
6. Categorise income and expenses
Here you’ll want to ensure that your business bank account and accounting system are linked, so that whenever money enters or exits your account it’s recorded automatically.
Then you’ll want to work through categorising your expenses. Set up bank rules so recurring expenses like Shopify fees are automatically categorised. Not only does this keep your expenses tidy, it also makes sorting through your expenses a whole lot quicker when filing your tax returns.
7. Sales tax
Sales tax can get complicated fast – and it’s not something we can easily condense into a quick paragraph! Your sales tax obligations – what you must collect, file and remit – will be influenced by several factors – where you sell your products and your annual sales turnover, to name a couple.
Don’t worry, we’ve got you covered. We’ve written a sales tax series that breaks it down for you for.
8. Analyse your financial statements
Lastly, be sure to use financial information to your advantage. With automated processes in place, at the touch of a button, you’ll always have accurate financial information that you can rely on. Utilise it to inform business decisions – keeping an eye on your cash flow, forecasting revenue, and planning for the future of your business.
You’ll find these three reports come in handy:
Balance sheet– otherwise known as a snapshot in time. It shows you the assets, liabilities and equity in your business on a certain day.
Income statement– how much money your business has gained or lost over the month. It provides a true representation of your actual profit or loss (remember, revenue doesn’t equal profit!)
Cash-flow statement – cash flow is the lifeline of your business, so keep this report handy. It shows the amount of money flowing in (income) and out (expenses) of your business.
Do Shopify accounting like a pro
Accounting often gets a bad rap, but the truth is – it doesn’t have to be all doom and gloom.
Set yourself up for success right from the get-go. Find integration tools that can help you speed up and automate time-consuming processes. Learn about your financial obligations and stay organised. Use reports to understand the financial wellbeing of your business.
And if in doubt, reach out for expert help.
If you’re looking to dive a little deeper into all things Shopify accounting, then you’ll find our definitive guide to Shopify accounting useful.
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