You’ve been thinking about starting an ecommerce business and you’ve been doing some preliminary research. The more you look into it, the more you realize that there’s a lot that goes into it.
One of the biggest things you’ve realized you need to understand is ecommerce accounting. You’ve never been a numbers person and you’re not sure how you’re going to be able to keep up with all of the accounting that goes into running an ecommerce business. Well, you’re in luck because I’m going to help you understand everything you need to know about ecommerce accounting. By the time you’re done reading this article, you’ll feel much more confident about your ability to start and run your own ecommerce business.
1. Open a Business Bank Account
When you open an online store, it’s critical to separate your business and personal finances. This is true even if you are a sole proprietor and don’t have a separate legal business entity. Opening a business bank account is a simple and effective way to keep your business and personal transactions separate. It also makes it easier to reconcile your bank accounts and credit card accounts, which is a key part of the ecommerce accounting process. When you open your business bank account, you should also open a business credit card account. Using a business credit card for your ecommerce transactions is a great way to build business credit and keep your business and personal expenses separate.
2. Choose an Accounting Method
Once you’ve set up your chart of accounts, you’ll need to choose an accounting method for your ecommerce business. The two most common accounting methods are the cash and accrual methods.
With the cash method, you record income and expenses when money is actually received or paid. With the accrual method, you record income and expenses when they are billed (regardless of whether money has actually changed hands. Most small businesses use the cash method of accounting because it’s the easiest to understand and maintain. However, the accrual method provides a more accurate picture of your business’s financial health. You’ll want to choose the accounting method that’s best for your ecommerce business. If you’re not sure which method to use, you may want to consult with an accountant.
3. Set Up Your Accounting System
The next step to mastering your ecommerce accounting is to set up your accounting system. There are a few different options to consider when it comes to ecommerce accounting software, but the most important thing is to make sure you choose the right one for your business. The right accounting software will help you keep track of your sales, expenses, and taxes, and it will also help you create reports and make better business decisions. Some of the most popular accounting software options for ecommerce businesses include QuickBooks Online, Xero, and FreshBooks. These platforms are designed specifically for small businesses and offer a wide range of features and tools to help you manage your finances.
If you’re just getting started with accounting for your ecommerce business, you may want to consider using a simple, free accounting tool like Wave or ZipBooks. These platforms are easy to use and offer the basic features you need to get started with ecommerce accounting.
4. Create a Chart of Accounts
Your chart of accounts is the foundation of your ecommerce accounting system. It’s a list of all the accounts you’ll use to categorize the money going in and out of your business.
Each account is assigned a number and falls into one of five categories:
1. Assets: Anything your business owns that has value, including cash, inventory, accounts receivable, and fixed assets like land, buildings, and equipment.
2. Liabilities: Money your business owes, such as accounts payable, loans, and credit card debt.
3. Equity: The money you and your business partners have invested in the business, plus any retained earnings.
4. Income: Revenue generated from the sale of goods and services.
5. Expenses: The costs of running your ecommerce business.
You can use the default chart of accounts provided by your accounting software as a starting point and customize it to fit your business. Or, you can create a chart of accounts from scratch.
The next step in the accounting cycle is to record your sales. This is where you will record the money that comes into your business from selling your products and services. If you use an online shopping cart or e-commerce platform, this step will be easy. You can simply download your sales data and import it into your accounting software. If you don’t use an e-commerce platform, you will need to manually record your sales. This can be time-consuming, but it is an important step in the accounting cycle.
