For many businesses, having a website online offers an opportunity to grow your business by reaching a much larger market than any geographical location. You might be deciding to open an e-commerce business or may be considering expanding your business through e-commerce. However, you might be wondering how that impacts your tax accounting.
Working with a consulting accounting firm with a strong background in public accounting, you can successfully manage any accounting requirements or compliance issues that result from expanding e-commerce. Here is what you need to know about accounting for an e-commerce business.
What Makes E-Commerce Accounting Unique?
Within every industry, there are various accounting nuances. If you do not have the right information, you run the risk of lacking accurate numbers and making poor financial decisions. Your accounting helps you to understand how your business is cash flowing and whether it is profitable or not.
Four Main Areas of E-Commerce Accounting
There are four main areas of e-commerce accounting that are critical to making sure that your financial data is accurate. First, you need to know where to find the transactional data. In many cases that data can only be found in the business’ selling transactions, instead of the bank accounts and credit card statements. Simply put, working with a knowledgeable consulting accounting firm can help you to find this data.
- Using your back in reports from your selling channels, an experienced accountant can find the data you need to make sure you have all the necessary financial data to understand your business’ financial position.
- Second, you need to use the inventory tools available to track your products and COGS. Inventory management and controls are going to help you account for the flow of inventory throughout your business.
- Third, sales taxes are a part of doing business. Unfortunately, it gets more complicated when you are in online sales, simply because these rules are complicated and change constantly from state-to-state. Your consulting accounting firm can help you to navigate these rules or you can work with a sales tax consultant.
- Finally, you need to understand that there are foreign transaction costs. In a stand-alone store, you are going to have no foreign transaction costs, but with a wider global marketplace, you now will have to deal with different foreign transactions and the associated costs.
What You Need to Understand
With e-commerce, you need to recognize that a deposit from Amazon is not the same as traditional income. These are net deposits, which mean other transactions have impacted that final deposit amount, including sales taxes, returns, and shipping. Therefore, you need to break down your journal entries to accurately reflect what is happening in your business.
Then there are chargebacks, which could occur when a credit card company asks for funds to be returned, especially if there are questions of fraud. Chargebacks come with processing fees, which can be recorded as a general business expenses or you may choose to set up a specific expense category for chargebacks. Businesses might do that because they want to track how much they are spending on these categories over a period of time.
Another thing to remember is that the deposit may have been posted on one date but involve transactions that occurred over the past month. As your business grows, having accurate knowledge of when transactions are occurring is key to planning for growth and knowing your profit margins, as well as making sure that you have the inventory to meet the needs of your customers.
Our team is knowledgeable about all the various aspects of e-commerce accounting. We can work with you as you learn what those back-end reports are actually telling you about the financial health and well-being of your business. Contact us today to help you in setting up your accounting for your e-commerce business.
Parker Business Consulting & Accounting, P.C. is a unique firm with more than a combined 75 years of experience in private industry, coupled with a strong background in public accounting. This combination enables us to provide valuable assistance based on direct experience with many of the same issues faced by our clients.