Keeping Books in a Digital World: A Guide to eCommerce Accounting

Written by
Rebecca Smith

Published
Jan 4, 2019

Jan 4, 2019 • by Rebecca Smith

There's nothing more exciting than seeing your eCommerce business take off. But, it can easily come crashing down if you don't keep careful track of your finances! 

Between all the startup costs you've accrued, the inventory you have on hand, and the logistics of running your business, you need to know how all of your money is coming and going. The better you understand the finances behind your business, the more you can unlock new opportunities and expand your products/services even further. 

Here are all the steps you need to take to master eCommerce accounting. 

1. Identify the Tracking Method You Want to Use 

Before you get into crunching numbers and allocating finances, you need to choose a tracking method. This will set the course for how the rest of your eCommerce accounting operations will go.

The tracking methods you have to choose from are: 

  • FIFO 
  • LIFO
  • Weighted Average
  • The Retail Method

FIFO stands for First In, First Out and LIFO means Last In, First Out. FIFO works well if you're selling perishable items or seasonal goods. LIFO is better for non-perishable items. 

Weighted Average and the Retail Method can both be used for perishable and non-perishable goods, though. These tend to be more straightforward when tracking inventory costs and sales. They're simple accounting methods that you can start implementing right away.

2. Establish Daily, Monthly, and Quarterly Tracking Processes 

The tracking method you choose sets the stage for how all of your accounting processes will be done. But, it's up to you to decide what things you're going to do daily, monthly, quarterly, and yearly to keep all your finances in order. 

You should be holding onto all of the receipts and invoices you get every day. It's also good to keep a folder of any emails involving these expenses and sales.

These will be a big help come tax time. They'll identify the business expenses you're able to write off and they'll provide all the supporting documentation you need to claim your deductibles. 

Another benefit of tracking daily expenses and income is that it helps you stay on track to reach your long-term financial goals. But, it's also good to sit down every month and take a closer look at your entire budget.

This will ensure that you're on track or it will tell you where your budget has gone wrong. Either way, it's better to make this realization on a month-to-month basis rather than waiting until the end of each quarter to realize you're way off budget. 

Tracking monthly expenses makes quarterly processes much easier to handle. This is when you should be setting aside money to pay your year-end taxes.

Not to mention, it's when most eCommerce businesses start thinking ahead for new products and sales campaign. Having a clear understanding of your finances makes it easier to figure out how much new product you can create and the marketing opportunities you have the means to access, too.

You can read more now about booking processes to make your daily, monthly, and quarterly operations easier. 

3. Learn How to Track and Write Off Inventory

Writing off inventory is an accounting task that is going to come up again and again in your business. It helps you differentiate between inventory that has created sales and items that have perished, broken, or otherwise not brought financial value to the business. 

You need to have a clear understanding of how much product you have on-hand at all times. This prevents careless miscalculations, theft, and it also maintains the quality of your products.

After all, you wouldn't want to send customers an expired item or mark a product as "sold out" on your website if you have more of it sitting in your warehouse! 

4. Invest in eCommerce Accounting Software

You can go the old-school way and do everything manually when establishing process and handling write-offs. Or, you can invest in eCommerce accounting software to help you figure out your finances. This is the much easier way to go. 

Such software takes care of many mundane accounting tasks for you. It can automatically organize the expenses and sales you track every day and make it easier to calculate how much you owe in taxes each quarter. It also helps you track inventory as it's ordered and sold, and monitor what gets written off. 

5. Get Your Financial Statements in Order

The final step in eCommerce accounting is to prepare your financial statements. The 3 statements to focus on are your balance sheet, cash flow statement, and income statement.

These documents are crucial to the success of your business and they're an invaluable help when it comes time to do your taxes. 

A balance sheet is the overview of a company's finances. It ensures that all of your assets equal your liabilities and business equity. When the two sides of your balance sheet aren't equal, it's a sign that you've miscalculated something along the way.

Working the numbers on both sides of the statement makes it easier to identify where the error occurred. 

Your cash flow statement is a detailed recording of all the expenses and income you've accrued over a certain period of time. It helps you identify how all of your money is coming and going, which can point out if there are certain unnecessary costs you need to cut. 

An income statement tells you how much money you've made in sales. This mostly applies to the sale of your eCommerce company's inventory, but it can also include equipment sales or returns on investment. 

Additional eCommerce Insights

As important as it is to figure out your eCommerce accounting needs, you also need to keep an eye on everything happening in your industry. The more you pay attention to shifts in how consumers shop online and what major eCommerce companies are doing, the more likely you are to succeed. 

Click here to access all the eCommerce news you need to know about!