Why eCommerce Accounting is so different?

By Ciro Scianna, January 15, 2022 – In this blog we will discuss the reasons why ecommerce accounting  is so different from traditional accounting. We will explore four main areas which will allow you understanding why ecommerce accounting is unique.

An overview of ecommerce accounting

Congratulation on starting your ecommerce business! You are now selling on Amazon, or paraphs Shopify, Ebay, or any similar ecommerce platforms. Negotiation with the best suppliers, ordering inventories, managing them, and shipping them have kept you awake at night. You are now trying to drive traffic to your website and build a brand. And of course, you are very busy posting those beautiful images in the social media. 

However, you have not thought about doing your ecommerce accounting. You know you have to do it, but that is not a priority, and certainly not your favourite task, right?

When the times comes, before the tax season, you will watch a youtube video or browse the web and job done!

After all, bookkeeping and accounting are not that difficult! Correct? Not until you realize that your financials show a profit but you have run out of cash. This approach can be very risky and put your business under serious financial difficulties.

You also assume that you can prepare your accounting by relying on the traditional accounting method you learnt in school. But the reality is that ecommerce accounting is just different from accounting applied to other businesses. 

Applying traditional accounting to your ecommerce accounting will likely give you a very inaccurate picture of your business performance.  So, what do you need to know about accounting for ecommerce?

Here is what is unique about accounting for ecommerce

Every industry is unique, so it is crucial to understand the nature of each industry. And ecommerce isn’t an exception; it can help accountants producing accurate accounting records that can then lead to informed decisions-making.

Incorrect accounting records will not reveal the true business performance. This can lead to wrong strategies, impact cash flow and ultimately lead to failure.

 

The chances are you are working on your bookkeeping yourself and not applying the unique accounting techniques for ecommerce businesses.

This is why in this blog we will share our knowledge in preparing accounting for ecommerce businesses like yours. We will mainly concentrate on four main areas including:

  1. How to calculate costs of goods sold (COGS) and how to manage inventory.
  2. How to extract business transactions from the correct channels.
  3. Understand and manage the impact of foreign exchange fees.
  4. Tax implication, mainly VAT, when selling online.

1. How to calculate costs of goods sold (COGS) and how to manage inventory

As an ecommerce business, you are very much inventory dependant.

It will not come as a surprise to you to learn that getting the inventory number correct is extremely important.

You will need a deeper understanding of this area of accounting than any other typical business owner including:

  • The process of calculating the COGS for each stock-keeping unit (SKU).
  • Inventory management.
  • The accounting principles for inventory and COGS .

It is important to look at the way people record the costs of purchasing new stock. Unexperienced people would record them on the day of purchasing and paying for new stock. This method is incorrect. This is because that stock is not sold yet; it will be sold in different stages. 

For example, 10% of it could be sold on the following day, 25% a week later and so on. You should recognise the costs of stock only when you sell it. And that’s the reason why it is called cost of goods sold, and not cost of goods purchased. 

 

Recognizing the cost of your stock in one go on the day of purchase will distort your accounting records. Your accounts will only show a big expense and no revenue on that day/period. Similarly, when the stock is sold, your accounts would only show revenue and no costs. 

 

You could use inventory software such as Zoho Inventory Management or seek assistant from an accountant expert in ecommerce accounting.

2. How to extract business transactions from the correct channels

In a traditional business, to identify daily transactions you would simply look at the business bank account/s or/and credit cards. However, for an ecommerce business it is not business as usual. Your business transactions will be sitting in your selling platform (E.g. amazon). This is perhaps the most unique aspect of accounting for ecommerce.

You would  be tempted to treat bank transactions that appear in your bank statement the same as in other industries. For instance, you will simply record deposits received from Shopify or Amazon as “revenue” on the day of the deposit

There are two fundamental problems with this approach:

a) The deposit received from your channel platform is not ‘’real’’ revenue:   

This means that the selling channels have deducted numerous transactions before arriving at the amount deposited in your bank account. In fact, in most cases they deduct up to 30 or more charges which you can’t see from the deposits. Therefore, a deposit represents total revenue less returns, chargebacks, referral fees, closing fees, account fees, shipping fees, etc.

If you wanted to identify the actual sales or fees, you would need to dig into the backend of all your sales channels.         

b) The date of the deposit is not the date when your revenue was generated:

The second issues is about timing. In fact, those deposits represent a combination of revenue transactions that have taken place over a period of time. And that period of time could overlap over two months, distorting your accounting records. You could have underestimated previous’ month revenue and overestimated current’s month revenue.

For example, if you received a deposit from amazon on July 7th, you would record it on that date. But the majority of those transactions occurred in June, meaning that you are overestimating revenue in July.

It might not be a big issue if your business is small. However, as your business grows, incorrect timing of transactions will impact your accounting reports and ultimately strategies and decisions.

The most efficient solution would be using a sofware which integrate your selling channels with your accounting sofware. Dext Commerce or A2X are better placed to assist you with that.

Understand and manage the impact of foreign exchange fees:

As an ecommerce business, most likely you are selling to foreigner customers. Your business is therefore highly exposed to foreign exchange fees comparing to a typical business.

Reducing foreigner exchange transaction fees should be part of your strategy as adverse exchange might impact your profitability.

There are various methods you could apply to mitigate adverse foreigner exchange including using Wise, Revolut (Or similar) bank accounts.

Tax implication, mainly VAT, when selling online:   

This might not be your favourite topic, but we need to face it. And the fact that legislations are constantly changing, it makes VAT less attractive and a bit painful for business owners.

The latest important development is of course the introduction of EU reforms to the VAT obligation for B2B ecommerce sellers and marketplaces.

These included: 

a)  the One-Stop Shop (OSS) single EU VAT return; 

b) withdrawal of the €22 import VAT exemption with the introduction of the Import One-Stop Shop (IOSS); c) and marketplace deemed supplier obligations.

Unless you have an accountant who is expert in the ecommerce space, you most likely will struggle to keep up with VAT requirements. And more concerning, you will face fines for not complying.

Conclusion

It is therefore very important to understand the four areas mentioned in this blog.  In fact, understanding these areas and implementing the correct approach will lead to accurate accounting record. This in turn will lead to strategic business decisions and ultimately to business success. You could apply these techniques yourself however to free up your time you should engage an accountant who specializes in eCommerce accounting. Here at Accontext we can help with your accounting for ecommerce.

Author Bio:

Ciro Scianna is the Founder of Accontext, an innovative and virtual accounting firm for ecommerce and online businesses.

Ciro is a professional Chartered Accountant who has gained over 15 years experience in small, medium and multinational corporations. 

In 2018, after completing 5 year of continuous development, Ciro became a Fellow of the Association of Chartered Certified Accountant (FCCA). Ciro continued developing his skills by specialising in accounting for ecommerce.

If you have any question of how to maximise your cashflow or require any support, please feel free to reach out at ciro@accontext.com for a FREE friendly chat.

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