In recent years, the popularity of the eCommerce industry has skyrocketed because it allows users to purchase their needs without having to go outside. For this reason, eCommerce businesses go above and beyond in providing exemplary service.
However, running an eCommerce business is no easy task because everything must be accounted for. As for most companies, accounting is a necessary practice. It's only more important for eCommerce businesses because of the complicated nature of the industry. Conversely, the good news is that eCommerce accounting is relatively more straightforward because digital transactions are almost always recorded immediately; it's just a matter of tracking them down.
Regardless, eCommerce accounting has many important concepts that one must be aware of. These include:
#1 - Business Entity
A business entity is anything that can be recognised as a separate business. It can be a sole proprietorship, a partnership, a corporation, or even a trust. For eCommerce businesses, a business entity can be a limited liability company (LLC) or a corporation. You need to know that the business entity will be classified according to the business structure.
#2 - Cash Flow
Cash flow is a business' ability to convert net income into cash. Cash flow is an essential aspect of the accounting equation because it will give the business owner an idea of whether or not they can afford to pay bills, buy inventory, and so on.
#3 - Accounting Methods
There are two methods for accounting for profits: the cash method and the accrual method. With the cash method, a company accounts for its income and expenses at the transaction time. A company follows the cash method when involved in a high volume of sales and purchases.
On the other hand, the accrual method concerns itself when a company accounts for income and expenses incurred, even if they are not paid or received until a later date. A company follows the accrual method when there is less involvement in sales and purchases.
#4 - Seasonal Budgeting
Seasonal variation is a natural part of eCommerce, as it is with brick-and-mortar businesses. This means that there are times during the year when companies have more sales and other times when revenues are lacking. In these instances, eCommerce businesses have to adjust their seasonal budget.
#5 - Cloud-Based Accounting Software
Depending on the size of the business, cloud-based accounting software may be beneficial. Cloud-based software is advantageous since it allows access to all the information a business needs. It also allows the company to work remotely without being physically connected to software or hardware.
#6 - Shipping
Shipping is a crucial aspect of the eCommerce industry. It's one of the staples of the eCommerce industry and is often the point where a sale could be made or not. For this reason, the shipping practices of an eCommerce business are often a determining factor in whether or not customers will purchase goods or services.
There are three things to keep in mind regarding shipping. These include:
The shipping rate is dependent on the packaging of the product.
The shipping rate is dependent on the location of the destination.
Shipping rates also depend on the logistics carrier.
#7 - Averages
Averages are important in the eCommerce industry because there are often multiple transactions happening at any moment. In these instances, standards are used to get a better idea of numbers, which helps give a more accurate representation of a business's financial status and forecast future sales and revenue.
#8 - Balance Sheets
A balance sheet is a financial statement that shows the assets, liabilities, and equity at a given time. A balance sheet provides a business owner with a good idea of how much they have and owe. In a way, it's similar to averages because it can help determine the financial status of an eCommerce business.
#9 - Cost of Goods Sold (COGS)
COGS are the costs associated with goods sold. They are directly tied to the sale of a product. For an eCommerce business, it's what the merchant sends out to their customers. The COGS are broken down into three primary categories:
Cost of goods - The costs directly associated with the goods themselves.
Freight costs - The costs associated with the transportation of the goods.
Inventory costs - The costs associated with storing goods.
#10 - Profitability
Profitability is the measure of how well a company utilises their assets. It's often used to determine whether a company made a profit or if they are still making a profit. It can also help forecast future sales and revenue.
#11 - Sales Discounts, Returns, and Allowances
Discount, return, and allowance policies can differ among eCommerce businesses. For some, it's a part of their core return policy. Others see it as a way to keep customers happy. Ultimately, returns, discount, and allowance policies are business decisions that should be executed according to the company's best interests.
#12 - Taxes
Taxes are an inevitable part of running a business. When it comes to eCommerce, this is no different. E-commerce is more heavily taxed, primarily since eCommerce businesses deal with state, federal, local, and international tax laws.
There's no denying that the eCommerce industry has become a significant part of the modern economy. It's only growing more and more in popularity, which means many companies will enter the market. As such, accounting isn't something that an eCommerce company can ignore because it's crucial to the business's success.
If you’re looking for an accountant for eCommerce businesses, The ECommerce Accountant has got you covered! We offer comprehensive accounting and bookkeeping services specialised for online businesses, all for affordable rates. Contact us today to get a quote!