E-commerce Accounting in 2025: A Complete Guide for Sellers
Table of Contents
Disclaimer: Before we dive into the world of ecommerce accounting, it’s important to note that this blog is for informational purposes only and should not be taken as legal or tax advice. Every business is unique, and the laws and regulations governing accounting practices can vary by state and country. We recommend consulting with a qualified accountant or tax professional to ensure that your business is in compliance with all applicable laws and regulations
How to Make the Most of this Guide
This guide is designed primarily for US based ecommerce owners doing at least $1,000 per month in revenue, using accrual accounting (if you don’t know what that means that’s okay too!), and generally willing to budget money or time to do their books right. Additionally, this guide works best for ecommerce businesses that don’t have massive amounts of products- like dropshippers or certain wholesalers with thousands of SKUs- but if you fall outside these bounds you are still likely to learn from this actionable guide!
What is Accounting
Accounting is the process of recording, classifying, analyzing, and interpreting financial transactions and information related to a business or organization. It involves the creation and maintenance of financial records, such as balance sheets, income statements, and cash flow statements, to track the financial performance of a business. Accounting also helps businesses make informed decisions by providing them with accurate financial information and insights into their financial health. Effective accounting practices are essential for businesses to manage their finances efficiently, comply with regulations, and make informed decisions for growth and success.
Accounting vs Bookkeeping
Accounting and bookkeeping are often used interchangeably, but they are not the same thing. Bookkeeping refers to the day-to-day recording of financial transactions, such as sales, expenses, and payments. Bookkeepers are responsible for accurately recording these transactions in the business’s financial records. Accounting, on the other hand, involves the interpretation and analysis of financial data to make informed business decisions. Accountants use the information recorded by bookkeepers to create financial statements, analyze financial performance, and provide strategic advice.
Why is Accounting Important for eCommerce Businesses
Accounting is a crucial aspect of running any business, and ecommerce businesses are no exception. In fact, ecommerce businesses often face unique accounting challenges that need to be addressed in order to ensure their financial health and success. Proper accounting practices help ecommerce businesses to track their sales and expenses, manage inventory, calculate taxes, and make informed business decisions. Without accurate and up-to-date accounting records, ecommerce businesses may struggle to manage cash flow, accurately report financial performance, or even run afoul of tax laws and regulations. By implementing sound accounting practices, ecommerce businesses can gain valuable insights into their financial health and position themselves for long-term success.
Types of Accounting
Vocab: Recognition – Recognition in accounting refers to the process of identifying and recording financial transactions and events in the financial statements of a business once they occur.
Cash Accounting
Cash accounting is a method of accounting that recognizes transactions when cash is received or paid out. This means that revenue is recognized when payment is received from customers, and expenses are recognized when payment is made to vendors or suppliers. For example, if an ecommerce business sells a product in December but doesn’t receive payment until January, the revenue from that sale would be recognized in January under cash accounting. Cash accounting is often used by small businesses and sole proprietors, as it is relatively simple and easy to understand. This can work okay for ecommerce businesses at first, but should quickly be left as it does not provide the most accurate picture on your financials.
Accrual Accounting
Accrual accounting is a method of accounting that recognizes transactions when they occur, regardless of when cash is received or paid out. This means that revenue is recognized when the sale is made, and expenses are recognized when the goods or services are received. For example, if an ecommerce business sells a product in December but doesn’t receive payment until January, the revenue from that sale would be recognized in December under accrual accounting despite cash not coming in January. Accrual accounting provides a more accurate picture of a business’s financial health, as it takes into account all transactions, even if cash hasn’t changed hands yet.
Accrual Vs Cash
Comparing cash and accrual accounting: The main difference between cash and accrual accounting is the timing of revenue and expense recognition. Cash accounting is simpler and easier to understand, but may not provide an accurate picture of a business’s financial health. Accrual accounting provides a more accurate picture of a business’s financial health, but can be more complex and require more record-keeping. Additionally, under cash accounting, businesses may be able to defer taxes by delaying receipt of payments or accelerating expenses, while accrual accounting does not allow for such deferrals. Ultimately, the choice between cash and accrual accounting depends on the size and complexity of the business, as well as its goals and financial reporting requirements.
Example 1: Landscaping
Situation: Bob gives Sally’s landscaping $600 January 1st 2023 to tend to his garden once a month for the first 6 months of 2023. To fulfill this service, Sally’s landscaping has $20 of gas every month as an expense for riding the lawnmower.
Explanation: Under cash accounting, Sally’s landscaping would recognize (record) the entire $600 income when it is recorded January, whereas Accrual would look when the services where delivered. Both have the same total profit at the end, but accrual accounting fives the more accurate picture during the months.
Example 2: eCommerce
Situation: Tom buys $12,000 of inventory December 1st, 2022. It arrives January 15th, 2022. He sells $2,000 worth of inventory for $5,000 revenue every month starting January through June (6 months)
Explanation: Under cash accounting, Tom would recognize his inventory expense once cash leaves his had- December- and income as he gets paid each month. Under accrual, Tom would not recognize his inventory expense until a transaction happens and he sold it. Both models have the exact same total income, expense and profit, but accrual is far more accurate.
Under cash, one might say that in March they made $5,000 with 100% profit margins, but that reality via cash doesn’t make sense. In reality, they sold 1/6 of their $12,000 order, or $2,000 in cost, for a profit of $3,000 that month.
Inventory is the biggest reason why it is critical for ecommerce owners to do accounting using the accrual method.
Simple Cash & Spreadsheet Accounting
For smaller or new companies, going with the cash method may be okay for a short period of time, but again is strongly discouraged. This method is simple and fast, and uses just a spreadsheet instead of accounting software to track expenses.
To do it with a spreadsheet, there are just 6 pieces of information you should track:
- Transaction number
- Date
- Description
- Amount
- Account paid with
- Other notes
Create a spreadsheet with these 6 columns, and as cash changes hand, record all transactions. Using pivot tables, you will be able to summarize transactions by date, and account, and can make some financial statements from.
Another column recommended to add is ‘cash balance’, and this keeps a running total of your cash/ income. You would take the previous cell and add/ subtract the income/ expense to get a new total.
This method is not recommended unless you are starting out very small, but is the minimum amount of information you should track and only takes 2 minutes every time a transaction occurs.
The 3 Main Financial Statements
Profit & Loss
The income statement, also known as the profit and loss statement (P&L), is a financial statement that provides an overview of a business’s revenues and expenses over a specific period of time. It shows the company’s net profit or loss by subtracting expenses from revenues. The income statement is structured to start with the business’s revenue, followed by the cost of goods sold or direct expenses, which are deducted from the revenue to yield the gross profit. Then, indirect or operating expenses, such as salaries, rent, and marketing costs, are subtracted from the gross profit to arrive at the operating profit or loss. Finally, other income or expenses, such as interest income or taxes, are added or subtracted to arrive at the net profit or loss for the period. The income statement is an essential tool for assessing a business’s profitability and financial health.
Balance Sheet
The balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. The balance sheet presents a business’s assets, liabilities, and equity. The assets are the resources that the business owns or controls, such as cash, accounts receivable, inventory, and property. The liabilities are the obligations that the business owes to others, such as accounts payable, loans, and taxes. Finally, equity represents the residual interest in the assets of the business after deducting liabilities. In other words, equity represents the value of the business that belongs to the owners or shareholders. The balance sheet follows the accounting equation, which states that assets must equal liabilities plus equity. The balance sheet is an essential tool for assessing a company’s financial health and determining its ability to meet its financial obligations.
Cash Flow
“Revenue is vanity, profit is sanity, but cash is king”.
For most new sellers the income statement is the most important report to follow, followed by the balance sheet to see inventory, but once you start to grow the cash flow statement becomes #1. Trying to grow fast even when profitable might be impossible if you don’t have enough money, so this report tracks how the money flows in and out your business.
The cash flow statement is a financial statement that shows the inflow and outflow of cash from a business’s operations, investments, and financing activities over a specific period. It provides information on the sources and uses of cash, and how changes in the balance sheet accounts affect cash and cash equivalents. The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. The operating activities section shows the cash flows from the business’s core operations, such as sales, payments to suppliers, and employee salaries. The investing activities section shows the cash flows related to the purchase or sale of long-term assets, such as property, plant, and equipment. Finally, the financing activities section shows the cash flows related to the business’s financing activities, such as borrowing or repaying loans, issuing or buying back shares, and paying dividends. The cash flow statement is an essential tool for assessing a business’s liquidity, solvency, and ability to generate cash.
Basic Accounting Lesson
The Accounting Equation
For the rest of this guide, we are going to discuss more advanced accounting, but starting with the basics.
The accounting equation, also known as the balance sheet equation, is a fundamental principle of accounting that states that a company’s assets must equal its liabilities plus its equity. This equation is expressed as: Assets = Liabilities + Equity. Assets refer to the resources owned by the company, such as cash, inventory, and equipment. Liabilities are the company’s debts and obligations, such as loans, inventory payable, accounts payable, and taxes owed. Equity represents the ownership interest in the company, and includes retained earnings, common stock, and additional paid-in capital. The accounting equation is used to ensure that a company’s financial statements are accurate and complete, and provides a clear picture of the company’s financial position. Knowing this equation is critical to understanding the rest of advanced double entry accounting.
Moreover, the formula can be expanded namely in the equity variable. Equity = share equity + retained earnings. Retained earnings is profit caried forwards, and can be rewritten again as revenue – expenses.
The final expanded formula that we must always track is then: Assets = Liabilities + [Share Equity + Revenue – Expenses]
Double Entry Accounting
Double-entry accounting is a system of accounting in which every financial transaction is recorded in at least two accounts, with equal debits and credits. This system provides a complete and accurate record of a business’s financial transactions, and ensures that the accounting equation (assets = liabilities + equity) is always in balance. For example, if assets increase, so must either liabilities or equity. If liabilities increases, either assets must rise as well, or equity could go down to remain equal to assets.
Chart of Accounts
A chart of accounts is a list of all the accounts used by a business to record its financial transactions. It provides a systematic and organized way to categorize and track all the financial activities of the business. The chart of accounts typically includes a list of account names, numbers, and descriptions, and is organized according to the financial statements of the business, such as the balance sheet, income statement, and cash flow statement.
Each account in the chart of accounts represents a specific category of financial transactions, such as cash, accounts payable, inventory, and sales revenue. The accounts are typically organized into categories and subcategories, such as assets, liabilities, equity, revenue, and expenses. The chart of accounts helps businesses to organize and track their finances, and provides a standardized way to record and report financial transactions.
Here is an example COA (chart of accounts) for an ecommerce seller:
| Account # | Account Description | Account Type | Normal Balance (Increase) | Statement |
| 1010 | Cash | Asset | Debit | Balance Sheet |
| 1020 | Savings Account | Asset | Debit | Balance Sheet |
| 1110 | Car Asset | Asset | Debit | Balance Sheet |
| 1310 | Inventory Asset | Asset | Debit | Balance Sheet |
| 2010 | Accounts Payable Inventory | Liability | Credit | Balance Sheet |
| 2020 | Accounts Payable | Liability | Credit | Balance Sheet |
| 3010 | Owners Equity | Equity | Credit | Balance Sheet |
| 3020 | Retained Earnings | Equity | Credit | Balance Sheet |
| 4100 | Amazon | Income | Credit | Income Statement |
| 4110 | Amazon Income | Income | Credit | Income Statement |
| 4120 | Amazon Refunds | Income | Debit | Income Statement |
| 4130 | Amazon Credits | Income | Credit | Income Statement |
| 4200 | Website | Income | Credit | Income Statement |
| 4210 | Website income | Income | Credit | Income Statement |
| 4220 | Website Returns | Income | Debit | Income Statement |
| 5000 | Cost of Goods Sold | COGS | Debit | Income Statement |
| 5100 | Inventory | COGS | Debit | Income Statement |
| 5101 | Product A | COGS | Debit | Income Statement |
| 5102 | Product B | COGS | Debit | Income Statement |
| 5103 | Product C | COGS | Debit | Income Statement |
| 6000 | Expenses | Expense | Debit | Income Statement |
| 6100 | Operating Expenses | Expense | Debit | Income Statement |
| 6200 | Marketing Expenses | Expense | Debit | Income Statement |
| 6300 | Subscription Expenses | Expense | Debit | Income Statement |
| 6400 | Other Expenses | Expense | Debit | Income Statement |
| 6410 | Tariffs | Expense | Debit | Income Statement |
| 6420 | Professional Expenses | Expense | Debit | Income Statement |
| 6500 | Foreign Subcontractors | Expense | Debit | Income Statement |
| 7000 | Loans | Liability | Credit | Balance Sheet |
| 7100 | Loan - Amazon | Liability | Credit | Balance Sheet |
| 7200 | Loan - xyz Bank | Liability | Credit | Balance Sheet |
Debits & Credits
Debits and credits are the two primary types of transactions in double-entry accounting. In double-entry accounting, every financial transaction affects at least two accounts: one account is debited, and another account is credited. The terms “debit” and “credit” may seem confusing at first, but they simply refer to the direction of the transaction.
A debit transaction is one in which an account is increased or decreased on the left side of the accounting equation. For example, if an ecommerce business purchases inventory with cash, the inventory account is debited (increased), and the cash account is credited (decreased). Similarly, if a business pays for advertising expenses with a credit card, the advertising expense account is debited (increased), and the credit card account is credited (increased).
A credit transaction, on the other hand, is one in which an account is increased or decreased on the right side of the accounting equation. For example, if an ecommerce business sells a product on credit, the accounts receivable account is credited (increased), and the sales revenue account is debited (increased). Similarly, if a business receives a loan from a bank, the cash account is credited (increased), and the loan liability account is debited (increased).
In double-entry accounting, every transaction must have at least one debit and one credit, and the total debits must always equal the total credits. This system of debits and credits helps ensure the accuracy and completeness of accounting records, and provides a clear picture of a business’s financial health.
Each account has a normal balance which tells which type of transaction increases it’s balance. The 5 main categories and their normal balances are as follow:
General Expenses
Now that you understand the basics of accounting we can start to look at applying these rules to ecommerce business’s. Here we will discuss some example transactions and how you would record them.
Starting with non-Amazon related transactions, you are likely to use journal entires to log your double entry accounting transactions. A journal entry is a record of a financial transaction in a company’s accounting records. It includes the date of the transaction, the accounts affected, and the amounts debited or credited. Journal entries help to ensure the accuracy and completeness of a company’s accounting records by providing a detailed record of every financial transaction. They are often used in double-entry accounting to record both the debits and credits of a transaction, and are an important tool for preparing financial statements and generating reports.
Examples: (Hint: go back to the debit/ credit chart for reference)
Bought $20 office supplies (expense = debit) with cash (asset = debit). Debit office supplies $20, credit cash $20
Paid $500 for rent (expense = debit) with a credit card (liability = credit). Debit rent expense $500, credit credit card $500.
Paid off that $500 credit card (liability = credit) with debit card (cash/ asset = debit). Debit credit card $500 (decrease it), credit cash $500.
Bought $700 inventory (asset = debit) with cash (asset = debit). Debit inventory $700 to increase it on the balance sheet, and credit cash $700 as an expense.
Inventory
Accounting For Inventory on Accrual
Buying inventory is a core activity for ecommerce owners, and one that must be accounted for correctly. For this- and most inventory related business- we will use the accrual method for optimal tracking.
In accrual, purchased inventory is not expensed until it is sold. So if you spend $10,000 on inventory with cash, that is recorded on the balance sheet as an asset of $10,000 until you begin to get sales. Only once you sell the product, do you begin to decrease the inventory asset, and increase the cost of goods sold in the expense account.
So a simple transaction might be:
Bought 100 units at $100 each for $10,000 total inventory cost with wire transfer (cash = asset). Inventory increases with a debit of $10,000, and cash decreases with a credit of $10,000.
Then, say the first day you sell 3 units, you would expense COGS (cost of goods sold = debit account) $300, and decrease cash with a credit of $300. In this situation, you would only have $300 of inventory ‘expenses’, as the remaining $9,700 is still an asset you own waiting to be sold.
Purchasing Inventory Journal Entries
However, most inventory transactions are not that simple, as we may buy with payment terms not all up front. This is a multi step accounting transaction, and is where software makes it much easier to track. For this first example, we won’t discuss software, but just how the transactions connect.
Example: Buy 500 units at $40 for a total of $20,000 with 30/70 terms (pay 30% up front, 70% at time of arrival).
We track everytime money moves hands, so that would start with the 30% payment of $20,000 for a total of $6,000. So you send a wire transfer for $6,000, but does that mean you instantly get $6,000 inventory you own? Well it is yours, but it wouldn’t be fully correct to call it your normal sellable inventory, so we would put it in a different asset account called “inventory in production”. Still an asset, but breaking this out makes it better to analyze your financial health.
Additionally, the other $14,000 is also inventory in production, but it is payable that you owe them- if you guessed liability you would be correct!
So start with the debits, inventory in production increased $20,000. You then paid with cash $6,000 so credit to decrease it. Additionally, to balance the equation, you still owe $14,000 as a liability which is a credit normal account, so credit inventory payable $14,000.
Then some time later they finish, ship your product and it gets delivered. You owe the remaining 70% or $14,000 so you send it with a wire transfer again. Now to account for this, you need to not only track the cash sent, but also re-arrange inventory in production so that you have the full $20,000 as a regular inventory asset and decrease the liability payable you owed.
Starting with the debits, you now have $20,000 in inventory assets- so debit that. Additionally, you are paying off the $14,000 inventory payable liability so debit to decrease it, and on the converse side credit cash to decrease it that $14,000. Finally, you need to decrease the $20,000 inventory in production with a credit to zero it out.
The end result is you paid $20,000 in cash, hold a $20,000 inventory asset, and fully paid off your inventory payable liability.
Purchasing Inventory Using Software
Alright, the real deal. Once you understand the above, you can confidently use accounting software to track everything easier.
For this example, let’s say you have better payment terms with 5/95 meaning 5% up front and 95% at delivery. You purchase 40 units of widget A for $300 each, and 500 units of widget B for $25. A total of 40*$300 + 500*$25 = $24,500.
The first thing you do is create a purchase order in your software. A purchase order is a document that outlines the details of a purchase transaction between a buyer and a seller. It usually includes information such as the type and quantity of goods or services being purchased, the agreed-upon price, and the agreed-upon delivery date. A purchase order is typically created by the buyer and sent to the seller as a formal request to purchase goods or services. Once the seller has received and accepted the purchase order, it becomes a legally binding contract between the buyer and seller.
So the purchase order would include the items, units, cost, and other information like the date, transaction number, shipping address, payment terms, other details and more. This is both a tool for you, as well as a document you can send to your manufacturer for official business.
Once you send them that PO (purchase order) and they agree to begin you need to send your 5% payment; 5% * $24,500 = $1,225. Also, your bank charges you a $30 wire fee so we need to account for that.
Starting with the order, we are going to create a bill linked to the purchase order. Different softwares do it differently, but it will pull in the details of the transaction and have the amounts you owe. Once you create the bill, you can begin to pay it off.
You will go to the bill, and pay off the $1,225. With software here it will automatically handle all the debits and credits, but it’s helpful to still understand the example above this.
Additionally, there was that $30 wire fee which is a general transaction and we can make a journal entry of debit bank fee expense $30, credit cash $30 as it decreased.
What the software does is track inventory in production of $24,500 and the amount you owe: now $24,500- $1,225 = $23,275.
A few months go by and the inventory arrives and you are ready to pay it off. You go back to the bill, pay the remaining balance you sent and potentially do another journal entry for bank fees.
Expensing Inventory
As you may have learned in the above examples, accrual accounting does not expense inventory until it is sold. It remains an asset until it you decrease it with a credit and increase the expense with a debit – COGS account for that specific inventory item.
Depending on the level of detail you want, you might expense inventory at a different frequency. Potentially yearly for tax purposes, or we recommend at least once per month. Figure out the total units of each product you sold and expense them at the desired frequency.
There are a few types of expensive inventory that are designed to take into account price changes over time. The main 3 are FIFO (first in first out), LIFO (last in first out), average costing. Most people choose FIFO as it is logical (sell the oldest first), but depending on taxation strategies some may choose other options. Average costing is popular if prices change frequently, and LIFO is not used very often anymore. As accrual does not necessarily reflect cash changed but transactions, choosing an option may increase your profits on paper and increasing your tax bill, or decreasing your profit and corresponding tax bill.
However, it is important to note that once you decide your expensing method, the IRS does not allow you to change it without substantial reason and filing forms- so think carefully if you might want to change.
Also, the general assumption is that prices rise over time, and that usually older units are cheaper than new units. That’s not always the case as we’ll discuss, but is how people plan to reduce their profit & taxable income.
For these 3 types, we are going to compare this example: Assume we have 100 units of Widget A for $50 bought in 2022, and another 70 units of Widget A bought in 2023 for $55. Assume that the retail price is $200, and that we have no sold 10 units for $2,000 in revenue.
FIFO
FIFO (first in first out) assumes that the first items put into inventory are the first ones sold. So, the cost of the oldest items is matched with the revenue from the most recent sales. This is the most common strategy and logical that you sell the old stuff before the new.
Example:
Using FIFO, if we sell 10 units, we would expense the oldest units first- so 10*$50 cost = $500 COGS expense. Netted against or $200 price * 10 units = $2,000 revenue we have $1,500 in gross profit.
LIFO
LIFO (last in first out), on the other hand, assumes that the newest items put into inventory are the first ones sold. So, the cost of the most recent inventory is matched with the revenue from the most recent sales.
Example:
LIFO would take the latest cost- 2023- of $55 * 10 units for a cost of $550, and gross profit of $2,000 revenue- $550 = $1,450.
Average Cost
Average costing as the name implies takes the average cost of the inventory across multiple purchases. It sums up the total inventory value and divides by units in the asset. It is not just a simple average but weighted to the amount of units at that cost. Software makes it easy, but it isn’t too hard to calculate either.
Example:
For average cost, we would first need the total inventory valuation. Do that by multiplying 100 units *$50 cost + 70 units *$55 cost = $8,850. Then the total quantity = 100 + 70 = 170, so the average cost is $52.06.
It’s important to highlight that it is not 52.5 – the average of 50 & 55 – because it is weighted and there are 100 units at $50 vs only 70 at $55, so it is slightly lower.
Then back to 10 units at $52.06 cost = $520.6, for a gross profit of $2,000 – $520.6 = $1479.4 gross profit.
Comparison
Situation: prices rose
FIFO gross profit: $1,500
LIFO gross profit: $1,450
Average cost gross profit: $1,479.40
In this example, the price rose over time. Using FIFO we had more profit on the books which does mean more taxes to pay. LIFO used the more expensive newer inventory and had less profit and a lower tax bill, whereas average cost was right in the middle.
If the costs were switched where the prices dropped over time, the reverse would happen.
In accrual, we are concerned with our book profit like with these options, but it is also critical to understand the cash flow that these assets have likely already been paid for.
If you are struggling to pick a method, just go with FIFO for a logical first in first out method. Only choose average costing/ LIFO if you know what you are doing and have a specific strategy
Tracking Inventory
As you might have realized with all the various accounting transactions for inventory, it is critical to have an accurate count of all products at any given moment. There are a few methods to do so, and software can make it much easier.
Firstly, you should be aware all the locations your inventory is located – starting with in progress at a manufacturer. Then it might be in transit, at an Amazon FBA warehouse, 3rd party warehouse, your own location, or more.
Simple Tracking Spreadsheet:
If you want a quick way to track inventory, make a spreadsheet with each row as a product, and the columns are inventory locations like in progress or FBA warehouses. You should sum up available inventory and total inventory and once a week update everything.
Inventory Forecasting:
With that spreadsheet, you can use various formulas to estimate when you need to reorder. Based on past sales velocity or upcoming estimates, you can divide your current inventory by estimated daily sales to figure out how long you have left.
Example: 780 units sells 14 per day. 780/ 14 = ~56 days left.
Then determine what your average lead time (time from order to delivery) for your manufacture is an subtract it.
Example continued: 40 day lead time: 56 – 40 = 16 days. In 16 days you should reorder more inventory.
How much inventory:
You don’t want to run out, but also don’t want too much inventory as it ties up cash that could be used on more productive activities like marketing or new products. Most business’s should aim for roughly 4 turns per year- or 3 months/ 90 days of stock at a time. Figure out your lead time, subtract it from your desired in stock duration, and determine how often you should reorder. If in doubt, more smaller orders is better for cashflow, though it may add additional logistical complexity.
Using Software:
As we will discuss below, using software has many advantages in being able to analyze large amounts of data and quickly plan orders for many SKUs at once. Depending on what you use it can take in your parameters like order frequency (4/ year), lead time (40-70 days for most), look at recent sales history, look at prior year history, and take into account holiday & seasonality into account. It may allow you to improve your cashflow by running a tighter inventory window with maybe 5+ turns per year ordering more frequently giving more cashflow.
Shipping
Shipping costs are a major expense for most ecommerce sellers as they frequently source products from overseas. Cost of Goods Sold – COGS – generally includes all direct fees related to manufacturing and getting that product available to sell: that includes tariffs & shipping fees (note: this does not include shipping to the end customer- that is an operational expense)
As with accrual accounting, you might be realizing that expensing it all up front doesn’t make a ton of sense. With a 100k inventory order and 10k of shipping fees, accrual wouldn’t expense that shipping expense until the products start to sell.
Therefore, we can move shipping into an asset account to be expensed per unit as items are sold. You can break up shipping how you want- but remain consistent. Either divide shipping by total units if they are similar size & type, or you can distribute cost by weight/ volume more evenly.
Example A: Order 450 units of A, 200 units B – both a similar size & weight. Shipping costs $1,400.
450 + 200 = 650 total units. $1,400 / 650 = ~$2.15 per unit. Then as you sell products, say 10 units of A and 5 of B, you would reduce the asset account with a credit, and increase the shipping expense account with a debit of (10+5)* $2.15 alongside their own inventory expense. Good accounting software makes this easy to lump them together.
Example B: Order 450 units A, 200 units B – but A is twice as heavy & large- so we want to reflect that in shipping. High school algebra: 450*x + 2*200*x = 1400. 450x + 400x = 850x = 1400, x = ~$1.65. So A = $1.65, and B = 2x that at $3.3.
To check 1.65*400 + 3.3*200 = 1400, yes it works. Again, accounting software makes it easy. And when these sell, you would expense them appropriately reducing freight asset increasing freight expense.
Refunds
Refunds are part of business, and something that must be properly accounted for. Not all refunds are alike, and some return the product new, while others don’t return the product at all.
Refunds are a contra income account. They are counted with the income, but contra means opposite kind of like expense there.
So when you get a refund, you add it as a debit and reduce cash/ whatever it is you used to pay that refund.
If they don’t return the unit, that product was already expensed and doesn’t change. However, if they do return the product and it is sellable again, you may add it back to your inventory by reducing your COGS expense and increasing your COGS asset. Increase inventory with the debit, and reduce expense (money back) with a credit.
Revenue
Now that we’ve discussed inventory & expenses it’s time to talk making money!
Accounting for Revenue Using Accrual: Under accrual we recognize revenue as it happens, not when cash exchanges hands. For example, if you get a $100 sale April 2nd on your website, but Stripe doesn’t pay you until 14 days later the 16th when would you record revenue? Accrual would be the 2nd- when the transaction happened. Cash accounting which we don’t’ recommend would have said you made revenue on the 16th.
Amazon
Making sales on Amazon is great, but their settlements can be confusing to track. Generally, Amazon pays out every 14 days, though you can request sooner. These are payment reports, and you can generate a summary payment report by date when you do your accounting.
When you get this report, it will have between 5-50 lines of expenses! If you are doing it manually, you can group some to save time from typing them all in. The key is to be consistent, but some of the main things to track separately are: revenue, refunds, FBA fees, advertising fees; then you can lump the others together as you see fit. Using software provides the most accurate picture as it can instantly get every single line item. For a small/ mid line seller, breaking out gift wrap credits probably isn’t too critical, so focus on the main categories and analyzing them. Make this as a journal entry to keep it simple for your settlement periods.
For Amazon, they are considered a marketplace facilitator so they collect & remit sales tax on your behalf. Their reports show sales tax, and you can largely ignore them.
However, in dual entry accounting you need a balanced journal entry. If you are accounting manually by Amazon’s settlement periods, you can lump the remaining balance into an ‘Amazon Holding’ asset like a bank account. So a hypothetical journal entry would look like this: (best practice is to put debits first, but in a large journal entry isn’t the end of the world to not do).
This recognizes revenue, but we also do need to track when we actually get paid!
At the end of Amazon’s settlements they often pay you (or you can request it more frequently), and this is when we will make a new journal entry.
Keeping with the Amazon holding asset account, you will debit cash, and credit the Amazon holding to effectively move it from Amazon to your own bank account.
If you use software that syncs by transaction, this might be unnecessary.
Other Websites
Shopify, WooCommerce, Wix- or any other eCommerce platform follows the same principles. You recognize revenue when it happens, and record when you get paid as well albeit separately. Use whatever reports they provide, and at a regular cadence you should do the accounting for them.
Reconciliation
Reconciliation is the process of comparing two sets of records to ensure that they are accurate and in agreement. In the context of accounting, reconciliation refers to the process of comparing an organization’s financial records, such as bank statements, credit card statements, and accounting ledgers, to ensure that they match and are accurate. The goal of reconciliation is to identify and resolve any discrepancies or errors in the records, and to ensure that the financial statements accurately reflect the organization’s financial position
Reconciliation is an important process for ecommerce businesses, as it helps to ensure the accuracy and completeness of their financial records. By reconciling bank statements, credit card statements, and accounting ledgers, ecommerce businesses can identify errors or fraudulent activity, ensure that all transactions have been recorded accurately, and maintain the integrity of their financial records. Reconciliation is typically performed on a regular basis, such as monthly or quarterly, and may involve the use of accounting software or other tools to automate the process.
Taxes
Sales Tax
Sales tax is a tax that is levied on the sale of goods and services. It is typically a percentage of the sale price, and is charged at the point of sale. The rate of sales tax varies by state and locality, and may also depend on the type of product or service being sold. In ecommerce, sales tax is often collected by the seller and remitted to the appropriate taxing authority. Failure to collect and remit sales tax can result in penalties and fines.
Amazon & Etsy are considered marketplace facilitators, and may collect sales tax automatically for you. If you only sell on those platforms you are unlikely to need to do anything else- though consult a tax professional if in doubt.
If you sell on your own website like Shopify or WooCommerce, at minimum you are now required to collect sales tax on your home state and likely file quarterly tax payments. It might be possible you need to file for other states, so check with a professional.
Generally, sales tax is determined by nexus- having a physical presence or often surpassing an amount of transactions/ revenue. Consult a professional for the latest rules, but for example, if you sell on your website into Arizona, if you have a physical presence or sell more than $100,000 per year in revenue you are required to file- so most of the time you will be safe. Most states are physical presence/ employees or minimum 100k OR 200 transactions, but this changes year to year.
Income Taxes
Income tax is a tax that is levied on the income earned by individuals and businesses. It is typically calculated based on a percentage of income, and is paid annually to the federal and/or state government. In ecommerce, income tax is typically paid by the business on its net income, which is calculated as revenue minus expenses. Income tax rates vary by income level and by state, and may be subject to deductions and credits.
Generally for ecommerce owners, this means once a year you need to file taxes in your home state. Talk to a CPA to learn more.
Accounting Habits
There are numerous benefits of keeping clean and accurate books, and with just a small amount of continuous effort can save yourself big headaches down the road. It’s much better to spend 10 minutes a month doing this vs sorting through old emails and invoices come tax time in a rush. Here are some guideline frequencies that we recommend you follow at a minimum:
Manually
Quarterly:
- Pay estimated federal taxes
- File state sales tax return
- Run quarter reports to see how you are progressing
Monthly:
- Journal entries for all other expenses like website hosting/ insurance/ supplies expense
- Reconcile your bank account + inventories across locations
By settlement period (roughly every 2 weeks):
- Record income
- Adjust & expense inventory
As it occurs:
- Purchase orders
- Paid bills/ large transactions
With Software
Depending on what you use, a good ecommerce accounting software like SellAnalytix can take care of all ongoing market revenues & inventory expensing. You still need to manually enter other transactions like paying virtual assistants or insurance as journal entries, and reconcile, but ongoing settlement accounting is no longer needed.
Record Keeping
Keeping records is critical in case you are audited and to ensure your accuracy. It’s best practice to keep all financial documents in both a secure paper location, and digital copy for at least 7 years. Anything that has numbers should probably be kept and organized by date/ category.
CPAs: How to Make them Happy
If you want your accountant to love you, bring them clean accrual reports come tax time. There are a few reports they will need to file your taxes, and if you bring them all ready they will be super happy. They are:
- Balance sheet at the start of the year (Jan 1st) + final date of the year (Dec 31)
- Profit and Loss of the entire year
- General ledger of the entire year
- Trial balance of the entire year
- 1099 received from Amazon / channels
You don’t need to send documentation for it, but should be ready to provide it. Also if you made estimated tax payments should share all that information.
Overall though, a crisp PNL reconciled properly is going to make your accountant happy.
Analyzing the Numbers
Accounting is the language of business, and if done properly can tell a wonderful story. This leans into finance more which is a bit more the analysis of the numbers, but making informed decisions starts with having accurate data. Discussed below are some areas that you should regularly be analyzing. Remember, different industries have different numbers so don’t be alarmed if you sell shoes and your return rate is far higher- that is expected.
Vertical Analysis
For most of these reports, we will be using a PNL & Balance sheet to analyze. You should regularly be checking it at least once per quarter, if not monthly.
Vertical analysis looks at that given period, and compares the numbers as a percent of revenue or total assets for the balance sheet.
Income Statement
Either get your PNL to a spreadsheet or if using software can likely enable this feature. Next to that time period, have a column next to it as a percent of sales, like the image below:
Benchmarks:
Refunds: In generaly, you want refunds below 5% of total income. This company is high, so they should take steps to improve it; first read the return report to see customer comments. Then, address the 2 main culprits: Bad product, or inaccurate listing.
COGS: In general, you want at least a 65% gross profit margin to compete on Amazon though higher is better. This company is well below that. They should work to raise prices, and reduce costs.
Amazon Selling Fees: Under 17% is good, so 10.79% is fine. These are the fulfilment costs to ship to a customer. To improve, make sure you don’t have too much inventory eating into storage costs, and see if you can reduce the size or weight of your products to fall into a lower category; polybags are notorious for getting flagged as larger than they are, so the added cost of a box is often worth it for a smaller fulfilment cost.
Advertising: TACOS = total advertising cost of sale. For Amazon, under 12% is ideal, and 9.1% is great. They also spend some on other platforms, so overall you shouldn’t be spending more than 15% on ads unless you have a good reason like early growth.
Referral Fee: Amazon takes a flat 15% off all sales, so this is expected.
Other Expenses: Most of these are under 4% which is good, and overall shouldn’t be more than 8-10% for a good margin.
Net Income: 5-15% is a good target to aim for.
Overall: They have low operational expenses, but very high inventory costs, they should work to improve their gross profit margin.
Balance Sheet
Horizontal Analysis
If the vertical analysis looked down the spreadsheet, horizontal analysis looks sideways to other periods of time to see how you are progressing. Growing revenue sounds good, but if expenses are rising disproportionally, that is something that should be addressed as soon as possible.