3 Reasons Why You Need an E-commerce CPA
You could be thinking of starting an online business, or maybe because of the pandemic, you might want to migrate to an online platform. Whether you have an established accounting system or not, working in eCommerce is a whole new ball game.
In 2019, eCommerce contributed $3.5 trillion in retail sales worldwide. Since then, especially during the pandemic, that amount has ballooned. Recently, it’s no longer a question of whether or not you’re going into e-commerce, but a question of when. With the inevitable rise of eCommerce, you have to prepare yourself and your business.
Bookkeeping and e-commerce accounting
But first thing’s first, let’s talk about the difference between bookkeeping and accounting, both used interchangeably in the industry.
Bookkeeping refers to the everyday task of recording transactions. It is a menial and routinary task. It is part of the everyday activities of the business, one which should be done in real-time. The end goal is to keep your daily records organized which will eventually be used in filing taxes.
Accounting encompasses the analysis of financial data from bookkeeping. Good bookkeeping produces accurate and valuable financial data which in due course, achieves the long-term goals of the business.
Each of these components has its functions and both are needed to achieve financial success. One cannot be successful without the other, and so, we breakdown the best practices in eCommerce bookkeeping and accounting
eCommerce bookkeeping holds roughly the same principles as any other bookkeeping. Here are the things you need to remember to maintain your financial health.
Near-perfect recording. The first thing you need to be mindful of is to record any transactions that your business makes, as accurately as you can. This means your transactions should be recorded in real-time, as they accrue.
You need to track the money you collect, the money you pay to run your business, the assets the company owns, liabilities the company owes, your equity, and the returns and chargebacks.
Why aim for near-perfect bookkeeping? The data you gather from bookkeeping will eventually be used to determine your tax liability. Better bookkeeping will pave the way for better estimation and even reduce your tax liability.
It also provides information for your gross profit. Did you sell enough to gain back what you spent on making your inventory? This is essentially the first step to determine your financial health.
Returns and Chargebacks. All companies have a Refund Policy, each different from the next. It is used when a customer wants to return something to get a full or partial refund. This transaction has an account of its own. Just because you are taking out money from your funds does not mean it is an expense. It is recorded in “Returns and Chargebacks” which should be subtracted from your revenue. That’s a deduction not only above operation expense but even above the cost of goods sold. Proper documentation of this transaction is necessary to determine your true sales and could affect how you forecast revenue, price your products, or plan your cash flow. Your refund policy should also include how to deal with the item that was returned. Should it go back to inventory? Offered at a lower price? Or totally discarded?
On the other hand, chargebacks are situations when a credit card company asks you to return money to a customer’s credit card because it was a fraudulent payment. They usually include an additional processing fee which should also be recorded to returns and chargebacks. You should also subtract money from revenue, but only the amount paid back to the customer and not the processing fee.
Tracking Inventory. Good data will allow you to track your inventory better. Whether you are a traditional business or an eCommerce company, you will need to track your inventory so you don’t find yourself in a position where you could be short on inventory and can’t meet customer demand or worse, be forced to stop operations due to lack of inventory.
Preparing Financial Statements. Nowadays, even small businesses have access to cloud-based accounting which can save the owner ton of time to process their financial information.
E-commerce Accounting Procedure
While the essential accounting principles remain the same for traditional retail and eCommerce, there are a few nuances in eCommerce that you have to know.
Elect the right business entity. Choosing the right business model for you is key to better management of your business because some are just too burdensome and impractical to apply. Most small businesses will either choose a sole proprietorship, limited liability company (LLC), or S Corporation.
Determine your eCommerce Accounting Method. There are two accounting methods to choose from, cash or accrual basis accounting.
Cash accounting means that you only record transactions the moment money enters or leaves your business. The accrual method records transactions the moment they occur.
Most small businesses do cash accounting because it gives them a better idea of what their cash flow looks like and their transactions are simpler. If you use the cash method, you will only be taxed on money that is currently in the bank and leaves out money still going into the bank.
Accrual accounting is more complicated because you have to take into account future revenue and expenses but have not yet affected your cash flow. Meaning you will have to record revenue when cash is not yet received and expenses that are not yet paid in cash. Accrual accounting although not as helpful to a small business’ everyday decisions will impact your long-term goals. It is in the accrual method that needs a stricter handle in order to for your books to remain organized and accurate.
Cutting costs. One straightforward way to improve profitability is to cut costs. The trick is in knowing which one to cut. When to cut. When to stop. This is where a good record of your expenses will allow you to make good decisions. If you don’t record your expenses on time, you could be missing some small expenses you spent on. And these small expenses could easily bubble up into something big. By correctly categorizing them, you will know which ones are the heaviest spending and if they are worth keeping or not.
There could be subscriptions left over the pandemic-stricken 2020 that are no longer relevant today. Even if these are only small deductions they will build up over time and the longer they stay on your expenses the more it takes from you and you don’t even really need them.
Conduct Seasonal Budgeting. Small businesses often experience slow periods. By using your income statements, you can determine which time of the year are your peaks and lows. Using this information, you can budget accordingly. You won’t have to buy as much inventory during your lows or you can hire seasonal employees to help during the peak seasons.
Maximize Your Tax Savings. Pay special attention to claiming tax deductibles or credits. Some businesses when they choose to handle their own finances come across the problem of passing up some great tax breaks because they failed to recognize its applicability to their business or simply because they were not even aware of it. This is where an outsourced accountant will come in handy to handle the tax end of the business so you don’t have to miss out on any tax break.
Prepare the right tax for your customers. The biggest change in eCommerce would be the expansion of sales tax applications. Before, if you don’t have a physical presence you don’t have to collect and remit sales tax. Now, as long as you hit a certain amount or a certain number of transactions, you become liable for sales tax.
This change will be detrimental for you if you are not aware of the nuances of sales tax in a region you have substantial transactions in. it will also cause problems for your customers if they suddenly find themselves paying for more than what they are used to. This one is a little too much to handle on your own and with 51 states and federal rules on top of that, considering an independent accountant will save you a lot of trouble in the future.
eCommerce has steadily taken over the primary mode of doing business. Not venturing into it is the same as waiting to become obsolete. One way or another, we have to deal with an online platform, and getting into it now will save you trouble later. Don’t hesitate to contact us to entertain the idea of venturing into eCommerce or even when you just need a little help with organizing your new start-up. We can provide experts who are seasoned in eCommerce accounting. No business is too small. And success is given to those who dare to make sense of the senseless. So make the decision now and we can talk about how we can help you achieve financial success.