Bookkeeping 101 for eCommerce Business Owners

Over the past few years, the eCommerce industry has been expanding at an incredible rate. The internet is incredibly conducive to commercial activity and business owners of all kinds have found ways to quickly establish a competitive advantage by conducting their business online.

However, even if your business primarily (or entirely) takes place over the internet, this does not remove the need to carefully manage your books. In fact, due to the multi-state and multi-national commercial network enabled by the internet, eCommerce accounting can sometimes present a few additional details that will need to pay be paid attention to.

Once your business is able to get its books in order, you can begin focusing on your longer-term, more important objectives. If you haven’t already developed a reliable accounting system, then now is the perfect time to do so. In this post, we will briefly review the fundamentals of eCommerce accounting and discuss the specific aspects of this industry that make it unique.

Accounting is a Personal and Continuous Activity

Though many business owners wait until the end of the fiscal year to update their books, doing this is generally considered a bad idea. By failing to actively monitor your financial records, the consequences of any errors will compound over time and your business will be forced to face a series of unwanted interruptions. Because of this, most accounting experts would recommend entering all new entries as they occur (even if you are working in the eCommerce space).

Furthermore, it is also important to recognize that—despite GAAP—there are a lot of subjective decisions that will need to be made. For example, your business may find itself in a situation where you can lower your tax obligations via various business tax deductibles, but this may also result in your business appearing less profitable (to potential investors) than it actually is. Whether you are working in the eCommerce space or not, developing a consistent set of principles and habits is undeniably important.

Choosing a Specific Company Headquarters

One of the subjective decisions that many eCommerce businesses may be asked to make is where, exactly, they want to claim their headquarters to be. Changing the state—or even the country—that your business is operating out of may have an impact on your annual tax duties as well as the regulations governing your business.

Here are a few guidelines that can help you determine where you should claim as your headquarters:

• Where do you live for the majority of the year? Is this where most of your employees live as well?
• What state did your business acquire its LLC, partnership, or corporation status in?
• Does your business have a physical office that is different than your residency?

Due to the globalized nature of the internet, this particular dilemma is much more common in the eCommerce industry.

The Same Principles of Ordinary Accounting Apply to the eCommerce World

As stated, most accounting norms are derived from the Generally Accepted Accounting Principles (GAAP). This means that, despite their structural differences, most of the accounting principles that apply to physical, brick and mortar businesses will also apply to eCommerce businesses as well.

The purpose of accounting is to have a continuous understanding of your business’ financial health and to also be able to share valuable financial information with relevant stakeholders (potential investors, the government, etc.). Usually, most businesses will focus on their balance sheet and their income statement as their primary reporting tools.

• Your balance sheet demonstrates what owns and owes in the status quo. When creating a balance sheet, use the formula: Assets = Liabilities + Owner’s Equity
• Your income statement shows how your business performed over a specific period of time (usually one fiscal year). When creating an income statement, use the formula Income = Revenue – Expenses

Adhering to these formulas will be very important. If one side of the equation does not match the other, then you know that an accounting error has been made. Drawing from your income statement and balance sheet will also help your company with necessary tax forms. If you are uncomfortable balancing your books on your own—which, admittedly, is perfectly reasonable—then you may want to consider outsourcing your accounting duties to a professional firm.

• but There are Still a Few Nuances that Need to be Paid Attention To

Despite the fact that the accounting principles and formulas mentioned above are seemingly universal, there are still some components of the eCommerce industry that create a unique set of challenges for business owners.

• Knowing which fees need to be reported as part of your income
• Determining which states you must pay sales taxes to
• Avoiding double taxation (due to transactions taking place in multiple states)
• Delays between completed sales and accounts receivables
• Issues created by the return of goods or rejection of services
• Ambiguous items of your financial reports

Unfortunately, GAAP is a bit behind the times and has not yet been fully adapted to address the challenges of the eCommerce space. With time, however, eCommerce accounting is likely to get much easier.

Conclusion

Many professional accountants spend years trying to perfect and improve their craft. Because of this, many eCommerce companies prefer to outsource their accounting obligations. However, if you are determined on balancing your books yourself, paying attention to these fundamental principles can help you get moving in a positive direction.