Your Shopify store allows you to track your business and operate online without having to build a physical store. The convenience that Shopify provides to business owners is groundbreaking as it makes operations a lot easier and more flexible. However, what comes with new opportunities are new sets of things to learn.
If you want to make your Shopify business more profitable, you need to avoid these common accounting mistakes:
1. Miscalculating Inventory or Cost of Goods Sold
Cost of goods sold (COGS) is the cost for your inventory. To calculate the COGS and the value of on-hand inventory, you need to determine the COGS for each stock or SKU. Doing this requires that you record the COGS at the time of the sale. However, most sellers record the COGS at the wrong time, making the end values, such as the gross profit margin inaccurate. It’s important to accurately calculate your inventory so that you make informed business decisions.
2. Associating Personal Expenses to Business
A lot of Shopify store owners don’t realise how disastrous it can be to data analysis when they combine personal expenses and business expenses. While it’s understandable that some Shopify store owners run their business on their own, it’s still important to separate personal and business costs. Not doing so can lead to extremely inaccurate data and records, or worst, legal and tax implications.
3. Miscalculating Sales Tax
Sales tax can be super confusing for Shopify sellers, especially those who are in no way familiar with accounting. Having said that, accurately computing for sales tax is imperative. Unfortunately, many Shopify store owners don’t record the value of sales tax collected as an increase in liability. They also tend to record sales tax paid as expenses, not as a decreased liability. Additionally, many Shopify store owners fail to set up their stores to collect sales tax from their customers.
4. Recording Shopify Deposits as Revenue
Most Shopify store owners record their revenue only when Shopify deposits their money in their bank accounts. However, this could lead to some problems, such as violation of the matching concept, which states that transactions should be recorded right when they happen. Violation of matching concept can result in inaccuracies, which is why the Generally Accepted Accounting Principles (GAAP) suggests that every sale should be recorded at the period of occurrence.
Additionally, GAAP states that every amount should be recorded under the proper charts of accounts, for transparency and accuracy purposes.
5. No Accounting at All
While some businesses may experience a lot of inaccuracies as a result of miscalculations, the biggest mistake you can do for your Shopify business is to have a non-existent accounting. No matter how small your store is or how good you think you are in remembering data, not recording and tracking everything will only lead to a disaster eventually. Don’t rely on your memory alone. The secret to a successful business is having complete documentation, which is why you need accounting for your Shopify business.
Without accounting, you could end up making ill-informed business decisions in the future.
Accountants can correct accounting mistakes easily. If you want to have an accurate and detailed accounting for your Shopify business, consider hiring an accountant to do it for you.
Looking for an accountant for your e-commerce business? Book your free strategy session today!