What makes ecommerce accounting different?
Estimated reading time: 5 minutes.
You’ve started an ecommerce store, and you’re slowly getting the different parts of your business sorted – suppliers, inventory, sales and marketing. Then you get to the not-so-simple matter of sorting your accounting.
You remember taking a couple of accounting classes way back in high school, so you could try and muddle your way through if you had to. Then you read it’s recommended ecommerce sellers work with ecommerce accountants – and you wonder, how are they different from traditional accountants?
The basic principles of accounting remain the same, but there are some fundamental differences.
The challenge of using an accountant who doesn’t understand the complexities of ecommerce is that they won’t be able to give you an accurate picture of how your business is performing.
In the long run, this could cost you and have an impact on how successful your business venture is.
Let’s look at the unique aspects of ecommerce accounting, and how each can contribute to the success of your business:
Sales tax is confusing
One of the biggest drawcards of selling online is being able to market and sell to a wider group of people. The downside is figuring out and staying on top of your sales tax obligations .
Most of the time, this depends on where your inventory is stored ( physical nexus ) but more and more countries are beginning to adopt economic nexus, which is determined by where you’re shipping your products to.
In the US, sales tax is different in each state – just to make things even more complicated.
For most traditional businesses, you must file for sales tax in the state or country where you are a tax resident because your products or services are sold or paid for in that state or country. That changes when you’re dealing with international or interstate customers.
For accountants who aren’t familiar with sales tax at an international level, it can cause major headaches.
Failing to comply with sales tax legislation, and not filing your return accurately and on time, will cost you in late fees. In the US, you’ll also find the states like to back-charge for sales tax not paid in previous years – and yes, they add interest too.
Inventory management isn’t simple
Traditional brick-and-mortar stores sell the stock they have on hand to a customer in a shop, but it’s not unusual for an ecommerce seller to sell through multiple channels.
You might even use a third-party logistics company or Amazon FBA to make, store and/or ship your products for you.
The challenge is in keeping track of how much product you have in production, en-route, in customs, at your storage warehouse, in a shopping cart or in a returns pile.
Things get even more complicated as you increase your product range and sell more in other marketplaces.
How is this all relevant to your accounting? Having a good inventory management system is essential if you want accurate financial data.
Often, the result of not being able to manage your inventory is needing to carry extra, which can cause cash-flow challenges. This is something your accountant needs to understand.
A large volume of transactions
Another challenge, one that’s not necessarily limited to ecommerce, is transaction volume. Lots of transactions equal lots of financial data.
Traditional stores have systems that can handle a large volume of transactions. Ecommerce stores have similar cloud-based options – but it’s the data within each transaction that causes things to get a little tricky.
There are several good cloud-based accounting systems you can integrate to pull your transactional data directly from an ecommerce platform. The problem is, those systems can quickly become overwhelmed by the data you’re importing, and will slow down.
That’s why you need additional software like A2X which automatically imports a summary of your transactions – giving you the financial visibility you need, without blowing up your accounting system.
This is where it’s beneficial having an ecommerce accountant who’s familiar and confident using different online accounting tools and software – so you always have financial data you can rely on.
Understanding the numbers
Of course, they should understand the numbers, you say. For businesses outside of ecommerce, finding your business transactions is simple – that’s what bank statements are for.
But for ecommerce businesses, things aren’t quite as black and white.
One of the most common mistakes accountants can make, who aren’t familiar with platforms like Amazon, eBay, Walmart or Shopify, is assuming the deposits companies make into your bank account are income. This causes two issues.
Firstly, those are net deposits, and they’re for a period, not one day.
Secondly, each deposit isn’t solely sales. It’s also affected by sales tax, returns, shipping, seller fees, and more.
To understand each deposit, your accountant needs to know where to look in the back-end of your sales channels to find this information.
It’s this information that helps you make good business decisions. Without it, you could be severely under or over-estimating the financial health of your business.
Get Expert Help Tailored to You
We get it – your ecommerce store is your baby, and just like a child, you must first learn what makes it different and what it needs to develop and grow.
Then, as it gets bigger, becomes more complex, and requires more attention, you bring in the experts to give it the best chance in life.
The online world will always debate the role of ecommerce accountants; some believe traditional accountants do the job just fine. At the end of the day, you can’t deny that ecommerce comes with a raft of accounting complexities that traditional businesses don’t have – and for your business to be a success, you need an accountant who has experience dealing with these.
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