The ease of online shopping obscures how revolutionary it really is. It has fundamentally changed the way people buy products, and it has also opened new pathways for merchants to sell their wares.
Online shopping, also known as e-commerce, is the buying and selling of products and services over the internet. It’s commonplace today, but some of the world’s most successful e-commerce brands (including Amazon and eBay) launched as entrepreneurial startups. Now, they tower over a retail environment and even big-box brick-and-mortar giants such as Walmart and Target have integrated e-commerce into their marketing strategies.
Small business owners may look to e-commerce as an opportunity to reach a broader consumer base. However, implementing an online retail strategy requires careful attention to e-commerce accounting, which allows entrepreneurs to grow their revenues while maintaining full tax and regulatory compliance.
The Importance of E-commerce Accounting
With proper e-commerce accounting, entrepreneurs can develop strategies to boost their profits while also ensuring they are following all pertinent laws and regulations.
Unique Rules of E-commerce Accounting
There is ample overlap between e-commerce and traditional accounting; for example, in both disciplines, it’s important to keep thorough records of sales and chargebacks, monitor inventory, and keep track of cash flow, ensuring the business is solvent.
However, some unique rules and regulations can complicate e-commerce accounting, mostly pertaining to taxes. Consider:
E-commerce vendors may be responsible for collecting sales tax on the items they sell and then paying that sales tax to the appropriate government agencies. Specifically, sales tax must be collected any time the company has a “sales tax nexus” in the relevant state. This can get complicated.
Normally, sales tax should be paid to the state in which delivery occurs. If this differs from the state in which the business has its primary operations, the company must have a “sales tax nexus” with that state to collect sales tax; otherwise, the vendor should charge no sales tax and the customer is responsible for paying the sales tax, unless exempt. The definition and requirements of a “sales tax nexus” vary by state. For example, historically, a common rule has been that e-commerce stores must pay sales taxes on sales to customers who live in a state in which the e-commerce store has a physical storefront. Today, many states will also charge sales taxes if the e-commerce vendor maintains a significant amount of inventory in that state. As the requirements vary by state and can get complicated, it’s wise to speak with a local accountant or attorney for guidance. Several software offerings could also be integrated into your e-commerce business processes to facilitate appropriate sales tax compliance.
Income Tax Deductions
Entrepreneurs who sell their products or services online may also qualify for income tax deductions, including “home office” deductions, deductions for any professional accounting services they use, and more.
Challenges of E-commerce Accounting
Determining sales tax implications can be a major e-commerce accounting challenge. Some additional obstacles for entrepreneurs to be aware of include:
In order to find clear records of e-commerce transactions, entrepreneurs may need to familiarize themselves with back-end dashboards and reporting functions within their e-commerce platforms, such as Amazon.com Marketplace.
Entrepreneurs need to keep track of more than just transactions and cash flow. It’s also important to monitor inventory flowing through the business.
E-commerce platforms tend to attract customers from overseas, but there are often fees associated with processing international credit or debit transactions. Entrepreneurs may need to do some research into the most cost-effective ways of welcoming non-U.S. customers.
Keeping Accounting Data Secure
One of the most significant e-commerce accounting challenges is keeping data secure. Accounting records may include sensitive information about customers, including their names and credit card numbers, or proprietary information about the business’s financial status. Businesses need proper information technology security to maintain this data securely. Key considerations include:
- Using a cloud-based accounting platform that offers reasonable security protocols
- Logging in only from trusted and secured networks, not from public Wi-Fi
- Using robust and secure password protection
- Training any employees or team members on safe internet use (e.g., avoiding phishing attacks that could allow hackers entry)
Impact of Laws and Regulations
Finally, when setting up an e-commerce strategy, entrepreneurs should carefully consider the implications of laws and regulations. In addition to tax laws, some additional considerations include:
- Duties or customs, which may need to be paid on products shipped internationally
- Privacy laws, especially the General Data Protection Regulation (GDPR) that impacts any business selling products or services in Europe
- The Child’s Online Privacy Protection Act, which requires businesses to put safeguards in place, ensuring they are not collecting payment or personal information from anyone under age 13
Additional Information About E-commerce Accounting
For additional insight into the challenges, requirements, and implications of e-commerce accounting, consider these resources:
- Accounting Today, “GDPR Can Have an Impact on U.S. Accountants.” Learn more about European privacy laws and their impact on e-commerce.
- com, “3 Legal Challenges for E-Commerce Businesses.” Find out more about some of the legal complications that e-commerce businesses can anticipate.
- com, “Is Your E-Commerce Business Overlooking These Security Basics?” Familiarize yourself with some of the cybersecurity best practices for e-commerce stores.
E-commerce Accounting Strategies for Entrepreneurs
Given the importance of e-commerce accounting, as well as the various challenges and legal concerns, entrepreneurs will benefit from focusing their accounting efforts on robust systems and processes.
Strategies and Tips
A few essential e-commerce accounting practices include:
Developing a Workable Inventory Management Strategy
Inventory management can have a major impact on the bottom line; for example, entrepreneurs must think critically about their target product turnover rate as well as their depreciation schedule, both of which can affect revenues. Small-scale businesses may succeed with manual inventory management, but most companies will want to ensure their accounting software offers inventory management integration.
Tracking Business Transactions
Entrepreneurs need to monitor key transactional components: invoices, receipts, and sales orders. An automated invoicing system is the easiest way to accomplish this.
Managing Cash Flow
A successful business has a healthy cash flow. Businesses use cash flow statements to gauge money coming into the business and money going out. Entrepreneurs who have never generated such a statement could ask an accountant or bookkeeper for a primer.
Determining When to Hire a Bookkeeper
Entrepreneurs shouldn’t hesitate to enlist a professional to help them make the right choices about accounting methods, set up basic reporting functions, or address questions about tax laws. As e-commerce sales grow, it may even be wise to hire a full-time bookkeeping assistant.
More Insights into Effective Accounting
To learn more about effective e-commerce accounting, check out these resources.
- NeilPatel, “10 Accounting Basics You Need to Know to Run a Successful E-commerce Business.” Brush up on some basic accounting principles that can be relevant to an e-commerce business.
- Next Insurance, “ECommerce Accounting Tips to Run Your Business Smoothly.” Study some key terminology and concepts associated with e-commerce accounting.
- AllBusiness, “5 Simple Ways to Improve Your E-Commerce Accounting Practices.” Learn a few basic tips related to accounting in an e-commerce setting.
Software Tools for E-commerce Accounting
To streamline the accounting process, businesses should invest in basic software tools. Entrepreneurs can choose from several e-commerce accounting platforms.
Intuit Quickbooks provides real-time data, analytics, and insights, making it easy for entrepreneurs to quickly assess their current financial situation. The program emphasizes tax preparation and provides automated functions that make it easy to consolidate key information for tax filing. To learn more about Intuit Quickbooks, consider these resources:
- QuickBooks, How It Works. This brief video provides an overview of the platform’s key features.
- QuickBooks, “All You Need to Know About eCommerce Bookkeeping.” This article advises on QuickBooks’s functionality in an e-commerce setting.
- Houston Chronicle, “Pros & Cons of Quickbooks.” Review some of the major benefits and potential drawbacks of this platform.
FreshBooks is a suite of accounting tools designed with entrepreneurs and self-employed businesspeople in mind. It offers secure cloud services, bookkeeping management, invoice templates, and other features that can streamline the accounting process. For further insight, check out these resources:
- FreshBooks, Accounting Software. Review some of the key features that come with the FreshBooks program.
- PC Magazine, “6 Secret FreshBooks Tips for SMBs.” Consider some advanced strategies for optimal FreshBooks use.
Zoho Books provides a number of reporting options that make it easy for entrepreneurs to get financial snapshots, including insight into their e-commerce activity. It offers audit reports to help ensure tax compliance. Additionally, Zoho Books can be integrated with many of the most common e-commerce platforms and apps, which can provide entrepreneurs with a seamless approach. Learn more by consulting these resources:
- Zoho Books, Welcome Guide. Get introduced to some of the key features that the platform offers.
- Zoho Books, “How to Sign Up and Get Started.” Learn more about beginning to use Zoho Books with this helpful video tutorial.
Xero is known for providing simple and intuitive reports, making it easy to get an accurate picture of cash flow. Additionally, automated accounting functions minimize manual data entry and other time-consuming tasks. To find out more about the benefits of Xero, use the following resources:
- Xero, Why Online Accounting Is Good for Business. Review the major advantages of using a program like Xero.
- Xero, “Intro to Xero: Small Business Accounting Software.” Watch this short video for an introduction to Xero’s usability and features.
Become a Master of E-commerce Accounting
E-commerce opens up many potential pathways for revenue growth. It also comes with some challenges that must be addressed, including legal compliance, tax implications, and more. To start, review some of the best practices for e-commerce accounting and find a software solution that’s right for your business needs.
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