Opening an e-commerce business means giving access to your shop to the consumers 24X7. Conventional retail stores. On the other hand, operate in set hours, differentiating them from online stores. But are the accounting and financing systems of e-commerce different from the traditional stores?
Keeping track of your business is crucial for both offline and online stores. Moreover, it is one of those similarities that falls for both traditional and online stores. Many businesses have now started to acquire automated technology to make the process smooth sailing.
Out of a bunch of activities that come under the umbrella of ‘business,’ one of the crucial segments is Bookkeeping which helps track the record of your business to a great extent.
In this article, we will take you through e-commerce bookkeeping, the financial statements required, and the best bookkeeping software for your business.
What is Bookkeeping?
Bookkeeping is keeping track of the money invested in and out of your business. In other words, bookkeeping contains records of your assets, liabilities, and other expenses that your business covers.
It mainly includes five basic types of accounting. These are:-
- Assets: Resources owned by the company, also known as inventory. It forms the backbone of your financial transactions.
- Liabilities: Any obligations or debts owned by the business to banks, lenders, suppliers, or any other party.
- Revenue or Income: Capital earned by the company through sales.
- Expenses: Cash flow of your business that you pay for the assets.
- Equity: Ownership of your company after subtracting the liabilities.
Retail and e-commerce bookkeeping have common fundamental concepts. But what makes them different from one another? Let’s have a look.
What Makes Retail Bookkeeping Unique?
The retail accounting system is essentially an inventory valuation technique used by retailers. It values inventory based on the selling price rather than the acquisition cost. The five factors that make retail accounting unique are– inventory management, sales tax reporting, payroll processing, report generation, and dedicated software.
Moreover, the main differences between e-commerce businesses and retail stores are:-
- The income is different in retail stores as opposed to online stores. E-commerce stores’ income is slightly more complicated than retail ones.
- The gross margin in the two is calculated differently.
- Inventory management is multifaceted in e-commerce stores.
- Financing rules for traditional versus e-commerce are also different.
The bookkeeping basics involve a few crucial steps to build a workflow for your e-commerce store. One of the most significant steps is-
Maintaining and updating financial transaction records
Consistency is the key to e-commerce bookkeeping. Maintaining and tracking your financial record daily creates an open book for your business. You can see where you’ve overspent and underspent and where you need to invest more and less.
Business owners should check their books at least once a month. However, the entry should be made daily. It ensures accuracy and maintains regulation. It also helps in maintaining transparency. Instead of doing it manually, you can install e-commerce bookkeeping software in your business.
Financial Statements You Need to Know About
Financial statements refer to essential written records informing the state of your business activities and the overall performance of your finances. These financial statements are usually audited by government agencies, firms, accountants, etc., which ensures accuracy.
Having financial records built using primary financial statements allows you to develop and improve your business. Let’s explore these three primary financial statements used in e-commerce bookkeeping.
It provides an overview of the company’s assets, liabilities, and equity in one record. It consists of the date at the top of the sheet, telling you when it occurred. The date is generally taken at the end of the reporting period.
“Assets = Liabilities + Owner’s Equity” is the basic formula used in the accounting equations. A balance sheet should have both the columns of assets and liabilities balanced. It should be able to show total profit and loss at the time in the sheet created since this would determine the success of your business.
In one column, you have all the assets included, such as– inventory, cash funds, and accounts receivable. E-commerce businesses have an edge of not having any physical presence, which makes the inventory and cash funds the greatest assets. It should also include any investments and outstanding invoices.
In another column, you have all the liabilities included, such as– debts and money you owe for business-related expenses.
The next most important financial document is the income statement, which includes the time range– annual and quarterly financial year statements. It generally overviews revenues, expenses, net income, and earnings per share.
The income statement shows both operating and non-operating incomes. Operating income means any money made through business activities such as– clothing, gadgets, etc. The primary source of income is your sales of inventory.
Non-operating income is not directly related to business activities. It includes property sales, equipment sales, or investment returns.
Cash Flow Statement
The cash flow statement (CFS) measures how a business can generate cash to pay the debts, funds, and investments raised for the company. It complements the balance sheet and income statement. The CFS lets investors understand the company’s operations– where the money comes from and how it is spent.
There is no set formula to calculate CFS. However, it contains three sections that report cash flow for various activities. These are– operating, investing, and financing activities.
Operating activities include transactions such as– wages, income tax payments, interest payments, rents, cash receipts, and so on.
Investing activities include the company’s investment in the long run, such as– property, plant, and equipment (PPE).
Financial activities include cash paid to the shareholders, such as– debt issuance, equity, loans, dividends, and many more.
Why Is Inventory Cash Flow Crucial for Retailers?
Inventory cash flow, as described, includes the overall cost of your inventory purchased by the business. If we dissect inventory CF, it would include the total cost of your inventory, its maintenance cost, actual sales from that inventory, and the inventory losses (if they happened).
Creating an inventory cash flow prior gives you ample opportunity to enhance your profit margins. Since it exclusively includes inventory-related cash flow, it becomes more critical for e-commerce entrepreneurs to keep track of it.
For instance, if you have a business of frozen snacks, then your cash flow would include the total inventory purchased, maintenance cost, any losses or damage that happened to the stock, and the sales made from those inventories.
How to Master Small Business Bookkeeping?
E-commerce bookkeeping services have become even more popular for small businesses. It is as essential as any other component in business because:-
- It helps you organize the information linked with financial data.
- It helps you maintain a record of your taxes, purchases, travel, and other expenses that occurred.
- It helps you make the perfect budget for your company.
- It gives you a clear idea at the time of decision-making.
Since e-commerce bookkeeping holds such importance, how can you master keeping a record of everything?
Here’s a stepwise guide that will help you manage your bookkeeping.
What to do daily
The first and foremost thing that should be taken into account regularly is– receipts. As simple as it sounds, keeping track of receipts helps you benefit from tax claims. Anything you put into the business, such as coffee expenses, email receipts of the last record, and so on, should be kept in your folder.
What to do weekly
The two things that come under weekly surveillance are– cashflow and variable expenses.
Pay attention to your cash flow
Cash flow here means– how much money you have in your bank account. How much has been spent? How much is yet to be covered? While you can calculate the components you need for business daily, maintain a weekly cash flow ledger to redeem overall insights.
Keep an eye on new or variable expenses
Another critical component is calculating variable expenses. Instead of calculating the monthly expenditures, calculate them every week to closely monitor the expenses. Make sure the money spent aligns with your expectations.
What to do monthly
Get a business snapshot
Review your book at the end of the month to evaluate how much money you’ve spent and made in a month. Don’t forget to look at the sales, income, and cash flow. You can use e-commerce bookkeeping software to track the development of your business and discover the pattern followed each month.
Adjust based on your needs
Components like expenses, variable operations, and so on are bound to differ slightly each month. Therefore, obtaining a similar book or record for every month is not necessary.
By having a financial book at all times, you can even assess areas that need more attention. For instance, if low product quality has led to a reduction in cash flow, you can improve the quality of your inventory by making relevant decisions, which may include funding manufacturing and marketing endeavors for better performance.
Inventory Costing Methods
There are four main ways to calculate inventory costing methods. These are as follows.
First in, first out is an inventory costing system that sells the firstly arrived item. This method is often used for perishable goods and is prominent among food retailers. Let’s understand this with the help of an example.
Suppose you have purchased the inventory in the first quarter– January, February, and March. According to FIFO, you would calculate your inventory as follows:-
- For Jan, the inventory of 2000 costs AUD$4 each
- For Feb, the inventory of 2000 costs AUD$6 each
- For March, the inventory of 2000 costs AUD$8 each
If you have received the order of a total of 5000 inventory, you would start from January’s stock and then proceed to March. Based on this, your cost for the first quarter would be–
(2000 X AUD$4) + (2000 X AUD$6) + (1000 X AUD$8) = AUD$28,000.
LIFO stands for last in, first out, which suggests selling the stocks that arrived late at the storage location. Simply put, the latest commodities received at the location are sold first. This method is used for non-perishable items like books, jewelry, etc.
Taking the previous example, suppose you have received the order of 5000 cup stocks again. Your calculations would then be–
(1000 X AUD$4) + (2000 X AUD$6) + (2000 X AUD$8) = AUD$32,000
This inventory system takes the average cost of your inventory, irrespective of what came first. You have to calculate the cost of items you currently have. Retaking the previous example, first, calculate the total value of the whole inventory.
- 2000 X AUD$4 = AUD$8,000
- 2000 X AUD$6 = AUD$12,000
- 2000 X AUD$8 = AUD$16,000
Now, add the total cost and divide the answer by the total number of units of inventory you have.
(AUD$8,000 + AUD$12,000 + AUD$16,000) / (2000 X 3) = AUD$6
Your average order value is AUD$6. If you’ve again received the order of 5000 cup units, your weighted average would be– 50000 X AUD$6 = AUD$30,000.
The Retail Method
Lastly, we have a retail method, which first calculates the cost-to-retail ratio. In the previous example, suppose the items you purchased for AUD$4 now sell at AUD$6.40 per unit. Your cost-to-retail ratio would be 0.6 or 60%.
Now, let’s determine how many sales have been made for this quarter. If you have again sold 5000 units, costing AUD$30,000. At 60%, you generated AUD$48,000 in revenue. Dividing the total revenue by the markup percentage and then minus the new sum from the calculated cost, you would get:
- AUD$48,000/ 0.6 = AUD$28,000
- Total inventory cost = AUD$30,000
- AUD$30,000 – AUD$28,000 = AUD$1,200. This would be your closing inventory cost.
Inventory Tracking Methods
The method of tracking inventory requires high accuracy and consistency. To keep track of inventory, there are two primary methods.
Periodic Inventory Tracking
This tracking method performs the physical inventory calculation at set intervals. You can physically count and record each item’s cost and sale value. Periodic inventory tracking keeps your book updated with cash flow and tells you how much money has been spent and earned in a specific period.
Perpetual Inventory Tracking
The perpetual inventory system records every purchase and sale automatically and immediately. The items entering the inventory storage are scanned, and the software updates the item automatically under the inventory count, purchase account, and overall cash flow.
Sales Orders, Invoices, and Sales Receipts
Apart from financial statements, there are some other documents as well that need to be considered. These are:
Sales order is often used in e-commerce, where a customer orders one or more products on your website or marketplace. However, your inventory count still remains the same as the item takes some time to get dispatched. Sales order in traditional retail keeps the inventory count and item sold on the same page.
Invoices are different from sales order as it is needed to request payments. It contains information about separate costs involved in making, such as material, components, and any other costs associated with it. Compared to sales orders, invoices are less often in e-commerce.
A receipt is given to the customer at the end of the purchase. Although it might look similar to sales orders and invoices, it consists of the list of items that have been purchased. In e-commerce, sales order or invoices are sometimes interchangeable with receipts.
The Best Bookkeeping Software for Small Businesses
By 2026, the global accounting software industry is expected to hit AUD$20 million, implying its significance in keeping company finances up and running.
To keep your bookkeeping more accurate and up to date, here are some of the best e-commerce bookkeeping software you could use in your business.
- Quickbooks: It lets you update your orders, inventory, customers, and shipping and ensures accuracy. Quickbooks is used to post e-commerce order information, batch entries, granular order level posting, and so much more.
- OneSaas integrations: It connects business apps across different vertices such as accounting, CRM, billing, email marketing, etc. Business owners can even build their workflow and create a bookkeeping system.
- Zipbooks: This software lets you get invoicing and billing features. You can even utilize competitive intelligence features, giving you the edge in making data-driven decisions.
- Holded: It is a powerful solution for keeping your accounts, invoices, projects, and inventory in one place. Moreover, it connects your bank account, transactions, entries, and many more with a ledger.
Bookkeeping is Key for Small Business Growth
Bookkeeping entries are evidence of a good business. For small companies, having all the numbers before you become imperative to trigger growth without hindrance. Moreover, it is easier for start-ups to enter their finances into the ledger regularly.
Whether you have hired a finance team to look after your statements or use an e-commerce bookkeeping software, it helps you understand your business more. It also enhances transparency and gives you more control over cost-cutting, prudent spending, investment, etc. Hence, making it a vital feature for all businesses.