Simple Guide on Accounting for Ecommerce Businesses

Introduction:

Accounting for e-commerce companies is an important part of having a successful online store. With the particular challenges and complexities of selling things online, having a reliable accounting system in place is critical. In this blog, we'll look at the fundamentals of e-commerce accounting, providing insights and ideas to assist businesses navigate this critical sector successfully.

What is E-commerce Accounting?

Ecommerce accounting refers to the process of recording, managing, and evaluating an online business's financial information. Unlike traditional accounting, ecommerce accounting deals with many different sales channels, digital transactions, and, in many cases, export sales. Understanding these nuances is essential for proper financial reporting and decision-making.

Accounting for ecommerce entity necessitates an eye for detail and knowledge of various accounting and tax standards. In this blog seeks we will provide a detailed guide to ecommerce startups who want to handle their finances efficiently, stay compliant with tax requirements, and maximize profits.

Setting up accounting Function for E-Commerce

Setting a functional accounting system is the first stage in handling the accounting complexity for any e-commerce startup. Selecting the proper accounting software is essential since it should work in in tandem with your digital store. The accounting connectors offered by Shopify and ZohoBooks are popular options. By automating various accounting procedures, these technologies lower the possibility of mistakes and save significant time.

Creating an charts of accounts chart that specifically suit your online store is very important when setting your your accounts department. Sorting your financial activities into the appropriate accounts—such as sales income, cost of products sold, operating expenses, and taxes—is part of this process.

A complex chart of accounts makes financial reporting difficult to understand and will never give you a clear picture of your financial situation.

Recording your Income or Topline for E-Commerce

Accurate tracking of sales transactions is very important function of ecommerce accounting. Ecommerce will have various sales or distribution channels to market and sell their product, it is vital to have a automated system in place that consolidates all sales data at one dedicated place for review and post that posting in accounting system. This also includes sales made through your website, online marketplaces such as Amazon, Flipkart, Ajio, Myntra etc. and various other social media platforms like Facebook ,WhatsApp etc..

When you start accounting for sales in system, it is important to rightly account for discounts, refunds, and rebates. Also, frequently  reconciliation of sales information with bank statements and payment gateways will ensures that your financial records are correct and up to date and revenue leakage can be avoided.

Inventory Management

Another important feature of any e-commerce accounting is the effective management of inventory. FIFO, LIFO, and weighted average cost are few examples of the inventory valuation methods that will influence profitability. It is important for e-commerce startups to keep track of stock levels. This means managing stocks in a way that avoids stockout situation and overstocking that can have a negative impact on the financial performance of the company. Those firms which use third parties’ logistics (3PL) or dropshipping should ensure that their accounting systems reflect their inventory transactions accurately. Always update inventories either weekly or monthly.

Managing Expenses for Ecommerce

Managing expenses is an important part of ecommerce accounting. Operating expenses, including as marketing, software subscriptions, and shipping costs, must be carefully classified and tracked. Proper expense management aids in understanding a company's profitability and minimizing costs.The cost of goods sold (COGS) is another significant expense. It comprises all direct expenditures incurred when making or purchasing the things you offer. Calculating COGS correctly is critical for predicting gross profit and developing effective pricing strategies. Furthermore, shipping and fulfillment costs should be recorded individually to assess their impact on total spending.

Managing Taxes

Understanding Tax complexity in India is a major difficulty for ecommerce startups, particularly those that operate in many states or countries. Your finance team should understand various direct and Indirect Taxes such as GST requirements to ensure that company is always compliant, this includes collecting and depositing GST in states where you have a tax nexus, as well as handling international taxes for cross-border or international transactions.

Preparing for tax filings during due dates by gathering all essential financial documents and verifying that your records are correct. Accounting firm with Ecommerce tax experties can help to streamline this procedure.

Managing Cashflow

Cash flow tracking is critical to the long-term success of any ecommerce company. Positive cash flow states that you have enough funds to cover operating costs, invest in assets, and get through periods of poor sales. Implementing cash flow improvement techniques, such as early payment discounts or efficient inventory management, can have a big impact on your financial stability.

AP/AR management is also critical components of cash flow management. Ensuring timely collection from customers and excellent payables management will help to build to a sustainable cash flow. Monitor your cashflow regularly to get actionable insights into cash inflows and outflows.

Conclusion

E-commerce accounting has special challenges, such as establishing an efficient system and controlling income, inventory, costs, and taxes. Businesses can assure compliance and streamline operations by utilizing technology and comprehending important financial data. Long-term success and strategic decision-making depend on regular financial reporting and efficient cash flow management. Putting these strategies into effect will support e-commerce companies in thriving in a cutthroat industry. Our audit and accounts services in Mumbai can help you navigate these complexities. Are you set to simplify your accounting for online sales?

Make an appointment for a Jordensky demo today to see how our technology and service can revolutionize your e-commerce accounting.

‍Frequently Asked Questions (FAQs) 

1. What is accounting for ecommerce?

Ecommerce accounting is the process of documenting all financial transactions for ecommerce companies or startups, it includes updating all financial transactions, managing taxes, handling stocks and cashflow management.

2. Why accounting for Ecommerce is important ?

Maintaining accurate accounting is important for an ecommerce business as it helps track financial performance, manage cash flow, and make informed business decisions.

3. What are accounting challenges faced by ecommerce businesses?

Common challenges faced by ecommerce business include tracking sales accurately online and offline, managing inventory levels, handling refunds and returns, and being tax compliant.

4. Top Ecommerce accounting software

Jordensky is expert in managing ecommerce business with experience of handling more than 100 ecommerce startups and business.

5. Which accounting software is best suited for an ecommerce business?

Popular accounting software options for ecommerce businesses include Jordensky, Zoho Books and Tally in India. These platforms offer features tailored to ecommerce businesses, such as integration with platforms and automated transaction tracking.

7. Which is top CA firm for accounting in Mumbai

Jordensky is tech powered financial back office for startups and growing businesss and have experience of handling more than 200 startups and growing business in India. Schedule a demo