With the rise in technology and the ease of doing business on e-commerce portals such as Amazon, Flipkart and Myntra, it’s no secret that your business has taken success over time. But to retain that success, grow and make your business more efficient, you need to keep track of all your sales, purchases, invoices and customer retention.
Back in the day, so many details were not required. Business and accounting were done in books or Tally, but with the development of economics and businesses, e-commerce accounting is the need of the hour for you and your business!
What is E-commerce Accounting?
As the name suggests, e-commerce accounting is done for your online business. E-commerce accounting refers to collecting, analyzing, organizing, and reporting financial data related to business transactions and assets within an e-commerce business. E-commerce accounting also helps generate reports for tax purposes and calculate the taxes that need to be made.
All the financial information that e-commerce entrepreneurs obtain via these procedures are valuable foundations for making future business decisions. E-commerce accounting is essential for the growth of a business and makes accounting accurate and efficient.
Accounting consists of three key categories:
- Bookkeeping (noting down business transactions) – Bookkeeping is the process of keeping track of all the money coming into the business via various sources and all the money that is going out of the business through different channels.
- Reporting – Once you have accounted for all the money that has come in and gone out, your business needs to generate reports such as profit and loss statement, cash flow statements that mention the use of money in depth and how the business has done over an annual year.
- Submitting tax returns – Once the reports have been made and analysed, the last step is to figure out the taxes due by the business and make proper procedures to ensure the taxes are paid on time.
Types of E-commerce Transactions
- B2B (Business to Business)
- B2C (Business to Consumer)
- C2C (Consumer to Consumer)
- C2B (Consumer to Business)
- D2C (Direct to Consumer)
Basics of E-commerce Accounting
Accounting can be as vast as one would like or as simple and basic, depending on the nature of the business and the knowledge about the subject too. However, there are a few basics that every individual and business needs to know about accounting for their e-commerce business. Without these accounting basics, not only will it be difficult to maintain the books of accounts but also have financial mistakes in the business. These basics are either learnings or ideas that should be adopted by your business.
Some of the basics are:
- Determine the method you want to follow for your inventory. It could be LIFO, FIFO or WACC. Majorly, LIFO is used in India as a majority.
- Try getting yourself adjusted to accounting and inventory software. This will reduce your paperwork and let you concentrate on other aspects.
- Try learning and reading up on the three main accounting reports: the Cash Flow Statements, Profit and Loss Statement, and finally, the Balance Sheet. If possible, for the first month of your business, try creating this yourself to understand the idea better.
- Keep templates for invoices, purchase and sales orders, receipts all ready, filled in with the basic details and according to your business. This will make it easier for you to raise invoices or orders later on in the future.
- Start keeping a track of your inventory. If possible, try inventory management software. This helps you keep a complete track of your inventory, send you alerts when your stock is low, generates business reports and lets you know which are high selling and low selling goods. An inventory management software reduces major admin and paperwork for your business.
Some of the other E-commerce Accounting Tasks
Every e-commerce business owner needs to handle various e-commerce accounting tasks on a regular level. It comes down to the following operations:
- Categorize expenses and transactions
- Track expenses, employee salary and overheads
- Track cash inflow
- Track purchase orders
- Track customer returns and chargebacks
- Calculate break-even sales
- Stay on top of taxes
Why is bookkeeping & accounting important for e-Commerce?
A good bookkeeping system is a foundation for a financially stable and viable business.
Whether you’re selling products through Amazon, Flipkart, IndiaMart, Myntra, you are going to need a good system in place to manage your finances.
Here are some of the benefits and importance of ensuring sound e-commerce accounting for your business
- Bookkeeping will help you build a reliable business and have clear accounting practices
Bookkeeping is the art of ensuring the money in the business flows smoothly, ensuring the business has a strong base to work on. By having strong accounting practices, you can keep track of all your transactions, income and expenses. This gives you a clear idea of where you earn the most and spend the most, and how the business is doing at any given time. Majorly, it helps in pre-planning any unexpected payments that are due, such as tax or employees salary.
- E-commerce bookkeeping will help you grow your business and forecast your business
As mentioned above, with the help of e-commerce accounting you can generate business reports and analyse your cash flow and inventory stock. With the help of these reports, you know exactly what your business is looking like currently and then make projections and predictions of what the course of the business is going to be like in the future. This will help you grow your business in that direction and give you a better idea. After all, the correct numbers never lie.
- Helps in tax calculations and accounting
With the help of e-commerce accounting, the taxes that need to be paid by your enterprise are already calculated before the tax due date has arrived. It also helps you analyse in case of any advance tax payments, Tax Deducted at Source (TDS), making all the paperwork job easy for you, ready in just a few clicks.
Advance tax planning also helps you save on some tax if the accounting is done correctly and there’s no delay in tax payment. Not having to pay taxes last minute, before deadliner gives you the flexibility to explore all the tax deductions you are eligible for. This is a game-changer for your business and taxes. With e-commerce accounting and software, all these issues are taken care of.
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Common E-commerce accounting problems to keep track of
- Delay and waiting till the last minute to analyse the books
Many business entrepreneurs push off the work to check accounts till the last minute as they wish to concentrate on the business. But accounting is a major part of the business and delay in accounting can lead to errors. More so, there are tons of invoices, bills, online payments to sift through and categorise them in different sections. This could lead to mistakes or missing out on important bills. Make sure you do not make this mistake as it could lead to the payment of higher taxes, mismatched accounts or simply just losses.
- Ignoring and missing errors due to lack of time or interests
As mentioned above, sometimes, a delay in checking the books of accounts can lead to mistakes or misplacements of bills and invoices. These can become huge mistakes that you will ignore at the start of the accounting year. Having errors and mistakes is common. It’s human nature. But they’re also fixable. Sometimes accounting can become tedious and paper-work oriented work but don’t ignore errors due to lack of interest or time.
With the latest accounting and inventory softwares, accounting can actually be fun and that too with a few clicks only!
Don’t ignore these common problems that are face by many businesses. We get it, sometimes accounting can just be a lot of paperwork and a back-end job that doesn’t excite you. But it is a part of the bigger picture that will lead to your business’s success.
You don’t have to be a chartered accountant or hold an accounting degree to manage your business’s bookkeeping. With the right procedures in places, good accounting software and diligence, you can get the hang of it and manage and analyse your business far better than current standards with paperwork accounting.
E-commerce accounting consists of numerous categories and subcategories. Online shop owners need to learn what each of these elements refers to and how to implement them in their e-commerce business.
With the definitions, tips, and instructions shared in this article, entrepreneurs working in e-commerce have everything they need to quickly and efficiently handle their accounting duties, making the job easier at hand.