E-Commerce Bookkeeping Guide: all you need to know
Bookkeeping is an essential activity for staying afloat in every business. Overlooking it can be especially painful before meeting tax deadlines and filing statutory accounts.
In this article we will discuss the following:
- How does bookkeeping differ from accounting?
- What are the key tasks?
- What is e-commerce bookkeeping and what challenges does it have?
Bookkeeping vs Accounting: Understand the difference.
These two notions are often used interchangeably, but if you were to look at them from a more technical point of view, you’ll find that there are very distinct differences between them.
Bookkeeping is a day-to-day activity of recording each and every transaction, processing data and categorizing it.
Scattered pieces of information don’t tell you a lot unless they are duly processed. It is like putting each item to its appropriate place on the shelf. Similarly, the bookkeeper codes each piece of information to the corresponding account. As a result, we get well-organized data.
Accounting uses and interprets that information in order to perform budgeting and forecasting, and to give advice. It is not only about preparing a tax return and filing annual accounts. Think of it as gathering the pieces of the puzzle into one solid picture. Accountants can take a “raw material” prepared by a bookkeeper and create a final product – a budget, financial forecast (including the break even analysis) or simply properly read the data and find hidden opportunities or threats.
However, accounting can’t exist without regular and thorough record-keeping.
Therefore, bookkeeping is the initial and basic activity for maintaining a company’s financial health.
Bookkeeping Fundamentals
Imagine a bunch of bills and receipts in front of you. Processing all of that is not as easy as you can assume. The task of a bookkeeper is not only to mechanically enter data like amounts into the system or spreadsheet. One should rely on the fundamental accounting equation and understand the essence of assets, liabilities and equity. It is important to code transactions properly so all balance:
assets = liabilities + equity
Let’s say you borrowed money in a bank. This will not only increase your cash account (receive money) but also your liabilities (obtain debt). So each transaction affects at least two accounts (for more details read here: What is double-entry bookkeeping?).
Assets are all resources business owns or controls and will benefit in the future. These assets may be our capital, our property, our money, our employees, and even our reputation. It might be interesting to read The 6 Key Questions About Business Assets.
Liabilities are what you owe to creditors, the government and employees. In this article, you can find out more: Types of Liabilities – List and How to Classify Different Liabilities
Equity is the value of the property (assets) after deducting debts (liabilities).
What are the tasks of bookkeeping?
Setting up processes. It is better to keep a thorough record of transactions from the very beginning. Some choose to do it by themselves while others prefer to rely on professional e-commerce bookkeepers.
No matter which option you chose the first thing to do is setting up the chart of accounts. It is like the alphabet in bookkeeping. It is a tool for structuring information. Read more here: What is a chart of accounts? (+3 Mistakes to Avoid!)
Also, if for any reason you are not happy with your accounting software it is possible to migrate to another one. If you are interested in moving to Xero this article will help you: How to Set Up Xero Conversion Balances.
Keep track of daily transactions. At this stage the bookkeeper processes supplier’s bills, receipts, and employees’ expense claims. Also, he/she keeps an eye on sales: raises invoices, credit notes or proforma invoices and sends them to customers. For more information go here: Proforma invoice: What is it and how it affects your VAT? and read: Credit Note: What it is and how it can reduce your taxes? – What a Figure!
Performing bank reconciliation. As cash constantly goes in and out of the bank account it is important to match all these transactions with bills and invoices. Ignoring this can result in a real mess in your books. As a rule of thumb, the bank balance must agree with its balance in your accounting system. Without it we can’t proceed with other tasks such as generating reports and providing reliable information. Sometimes reconciling the bank is not that easy. For more information read here: How to do Xero reconciliation – your Bank doesn’t agree?
Post closing and adjusting entries. The bokkeeper helps the accountant in the closing process. It is not enough to process bills, receipts, review transactions and reconcile bank accounts. It is also important to recognise revenue and costs properly. Therefore, adjusting and closing entries is one of the most important tasks.
Read more about adjusting entries here: Adjusting Journal Entry Definition
What is E-commerce Bookkeeping?
At a first glance, e-commerce bookkeeping is just like any other bookkeeping. Debit – left, credit – right 😉
Surely, we should admit that principles are the same everywhere.
However, we can’t ignore that every industry has its own specific feature. As a result, the bookkeeping process is not the same, it uses different tools to meet the needs of each business. That’s why we distinguish e-commerce bookkeeping as a separate field.
As the name suggests, e-commerce bookkeeping serves the online sphere of business. The specific points of it are:
- dealing with a great volume of transactions which makes inventory management the highest priority;
- multi-currency sales when a company goes global;
- international taxation (sales tax)
- handling marketplaces’ fees and other related costs;
- specific logistic that implies dealing with returns and shipping costs;
Let’s review these features more closely.
Multi-channel E-commerce: Bookkeeping Challenges
Sooner or later each successful e-commerce business scales to a global size. Bookkeeping must keep up with a company’s growth.
At this stage, there are a number of bookkeeping challenges you will encounter.
Payments reconciliation and revenue recognition
The cash cycle in e-commerce is quite long. You don’t receive the cash immediately when a customer paid for your products. For example, Amazon deposits come through approximately every two weeks and these deposits include returns, fees, and refunds. Therefore, the revenue does not necessarily refer to the month you received this deposit.
Even though you can better manage your cashflow by not taking ownership of products, it’s still a challenge to reconcile vendor payments, credits, sales, and returns, especially if you’re using credit cards to help you finance payments to suppliers.
Dealing with multi-currency sales
Selling globally means setting prices in different local currencies. Keeping track of multi currency sales and expenses might seem overwhelming. But not with modern accounting software solutions like Xero. For example, a Xero premium plan can access more than 160 currencies. You can find out more about multi-currency bookkeeping in Xero here.
If you sell abroad it is important to understand what foreign currency gains and losses are and how they impact the business.
International Taxation
Don’t forget about another elephant in the room for e-commerce sellers – international Sales Tax.
Selling globally means that you have to be compliant with international tax requirements. It might be challenging to understand all of them for each market you are operating in. Let alone keeping pace with all legislative changes.
UK and EU online sellers need to pay attention to Brexit impact on retail and the new EU VAT rules for e-commerce that came into force on 1st July 2021.
Additionally, bear in mind that if you decide to sell products to customers abroad at some point you will have to register for VAT in that country. This is once your sales exceed the local threshold. It means that you need to charge VAT on top of your product price (in the UK it is 20%) and submit VAT returns to the local tax authorities.
Within the EU the rules are simplified: there is a single threshold of €10K for all member countries. Furthermore, you don’t need to have multiple VAT registrations around the EU (enough to be registered in one member state only) and consequently file a single EU VAT return.
The question of taxation is not an easy and we will cover all possible scenarios in our future posts.
Keeping track of inventory
Inventory requires constant updating (receipts and sales of goods). This is one of the top tasks for each e-commerce seller to know their accurate inventory level at any given point in time. Otherwise, it is very easy to run out of stock, fail fulfilling orders and collect many negative reviews. Overstocking can be just as damaging.
Therefore, all data should be synchronized from all sales channels.
Handling marketplaces’ fees
No matter what platform you choose you have to pay platform fees (or merchant fees). The situation becomes more complicated when you sell through different platforms to reach more customers (Amazon, Shopify, eBay, etc.). Each of them will take a percentage of every sale you make online. This amount will be already deducted before depositing your sales revenue into your account. So one of the biggest challenges is getting a true understanding of your costs of doing business on the platform.
While recording these transactions a bookkeeper must keep it in mind in order to show the correct figures of gross and net revenue.
To get an idea of Amazon fees you can go here.
Shipping costs
This is another factor to consider for a product-based e-commerce business. Most online sellers don’t manufacture products by themselves, but order on the wholesale market. So it is not a surprise, that shipping can be of a high share of total expenses. Tracking these costs accurately allows you to decide how much to charge for shipping your customers and how to price your product.
Read more here: The Beginner’s Guide to Ecommerce Shipping and Fulfillment (2021)
Thankfully, there are plenty of tools for handling all these challenges.
What tools to use in e-commerce bookkeeping?
The most popular cloud-based accounting tools include Xero, Quickbooks, Fresh Books, Sage, FreeAgent, etc.
The good news is that nowadays there is no need to upload each sale transaction into the system (it may be hundreds of them each day and will take forever to reconcile each one). To do so you will need to integrate a 3-party software to automate the process.
If your choice fell on Xero check out some more information here: A2X for Amazon Sellers (plus a cheaper and better alternative!)
These tools will aggregate sales data, separate fees, and make the reconciliation process a lot more efficient and accurate.
Having an accounting software in place that processes your online sales and keeps track of your expenses, is a central point. However, if you are selling hundreds of SKUs throughout different channels it might be overwhelming to keep your inventory in order. Thankfully, there are plenty of inventory management software to choose from:
- Dear systems: designed for small businesses that sell throughout multiple channels (Amazon, eBay, etsy)
- Zoho inventory systems: works with Amazon, Shopify, eBay; has a free version with limited features;
- Unleashed: numerous features, but is expensive and primarily used by business-to-business traders.
- InFlow: user-friendly, easy to use, can be integrated with Shopify and Magento.
If you are using Xero cloud accounting, check their add-on page to see which inventory apps could be integrated with it.
Last but not least, setting up a cash flow forecasting tool is essential. You will not only receive money with a delay after every sale, but you have to plan ahead for purchasing inventory. Therefore, timing is one of the key challenges of e-commerce. Overlooking it could put your business at risk.
One of the best cash flow solutions for Xero users is Float. Read our article on how to set it up here.
Once you set up your accounting software, integrated an inventory management tool and found the best approach for keeping eye on cashflow you are ready to cope with any possible difficulties. These tools are indispensable and can help you put most of the process on autopilot.
We hope the above article gave you an insight into e-commerce bookkeeping. Please share your questions and thoughts in the comments below!