What is ecommerce accounting?
Ecommerce accounting is how ecommerce businesses record, track and manage transactions and financial data. It’s not to be confused with ecommerce bookkeeping, which simply records expenses and invoices every month. Instead, ecommerce accounting uses those numbers to better understand a company's financial health and help you make future decisions.
Components of ecommerce accounting
Purchase and sales orders
Purchase orders originate from buyers and specify their requirements from their vendors. For example, a manufacturer might send a purchase order to their supplier for the products or materials they need.
In contrast, sales orders are despatched by sellers to detail outgoing sales. These orders list the products sold, the quantity purchased, delivery information and payment methods. A business may generate a sales order in response to a purchase order.
Accounts payable and receivable
Accounts payable appear in your finances as outstanding obligations. These figures represent the unpaid invoices that you owe suppliers and vendors.
Conversely, accounts receivable refers to the funds your customers owe your business..
Cost of Goods Sold (COGS)
COGS outlines the expenses you incur to produce products during a specific timeframe. These fees include materials, storage, labour and any additional costs directly associated with producing your goods.
COGS is an essential factor in calculating your gross profit. To determine this, simply subtract the COGS from your total revenue during the equivalent period.
Sales tax
Understanding the tax implications of the markets that you sell in is crucial if you sell products internationally. You may need to manage multiple sales tax rates. For example, Goods and Services Tax (GST) is currently charged at a rate of 10% in Australia and 15% in New Zealand.
Choosing the right accounting method
Cash accounting
Cash accounting is a method used to record revenue and expenses when they are received or paid, reflecting the current balance in your business account. This approach provides a real-time view of your financial health.
While this is a straightforward way to track your finances — and is often the preferred method for smaller businesses — it doesn’t account for future income or obligations. As a result, it may present an inaccurate picture of your business's profitability.
Accrual accounting
Accrual accounting, however, records invoices and bills regardless of whether the money has physically entered or left your account. For example, if you get an invoice from a vendor or supplier that remains unpaid, the accrual accounting method will consider the money already spent.
This accounting method provides a more comprehensive view of your finances because you can foresee upcoming payments and obligations. However, it’s also more time-consuming because you have to keep track of all invoices and bills in addition to monitoring your actual bank balance. Plus, this method might lead to paying taxes on income you haven’t yet received.
Hybrid method
A blend of the two accounting methods is also an option, using the accrual method for significant financial decisions and the cash method for tracking day-to-day finances.
Self-accounting vs. professional accountants
Navigating industry jargon can be challenging, leading many business owners to engage an accountant to manage their finances.
This can save you considerable time, especially if managing finances isn’t your strong suit. Your accountant can help you comply with tax and reporting requirements and maintain up-to-date, accurate accounts. The main benefit of working with a finance professional is their capacity to provide you advice and insights, answer queries and help you keep your books in shape and your business compliant.
Conversely, if your ecommerce business is relatively small, managing your accounts yourself might be a viable option. This approach cuts costs — particularly helpful if you’re operating on a limited budget — and provides direct oversight of your finances, ensuring you closely monitor your bank account activity.
Best practices for small business ecommerce accounting
Choose the right software
Opt for cloud-based software to get instant access to your financial data wherever you are. Ecommerce accounting software can also automatically track sales, calculate tax and send invoices, saving you significant time and reducing the chance of human input errors.
Ensure your ecommerce software integrates with any other business software you use for invoicing, expense management, tax management, inventory management and financial reporting.
Put automation to work
Automating your accounting processes minimises the risk of human error and keeps your financial records up-to-date, even when your attention is elsewhere. Automated software can import transactions and record your expenses in real time. With everything digitised, you no longer need to maintain a paper trail.
Keep your books up to date
Accurate accounting requires diligently maintaining your books. Maintain a clear view of your financial position by choosing accounting software that allows you to accept payments, scan and store receipts, connect bank accounts and track income and expenses.
Maintain an accurate inventory
Your inventory is central to your ecommerce business, and integral to accurate accounting. Real-time visibility of your inventory levels and carrying costs offers valuable insight into the current performance of your business.
There are two primary inventory tracking methods: periodic and perpetual tracking. Periodic tracking involves manual counts of in-stock products, recording their value and cost. In contrast, perpetual tracking uses inventory management software to automatically track inventory levels.
The method you choose depends on your business size and inventory volume. Smaller, early-stage businesses may find periodic tracking sufficient, but a transition to perpetual tracking may become necessary as your business and product range expands.
Reconcile accounts regularly
Regular account reconciliation involves matching the transactions in your account with supporting documentation, such as invoices, receipts and bank statements. Compare the transactions captured in your accounting software with those in your bank accounts to identify any discrepancies. You’ll need to investigate anything that doesn’t match up to make sure your financial records are accurate.
Integrate your ecommerce platform with MYOB
Integrate your ecommerce system with MYOB to keep your ecommerce accounting in tip-top shape.
MYOB is a business management platform that allows you to connect all the workflows you need to run your business — your customers, suppliers, employees, projects, finance, accounting and tax. As a result, you can run your whole business online, with your accounting system reflecting transactions in real time.
Check out the MYOB App Marketplace to discover which e-commerce systems integrate with your MYOB business management platform. Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.