e-commerce accounting guide by expertise accelerated

What is E-Commerce Accounting? A Comprehensive Guide!

As of 2022, E-commerce has become the fastest-growing industry worldwide. In fact, in its article titled “Global E-Commerce Market to Expand by $1 Trillion By 2025”. Forbes reports that projections indicate that half of the absolute value growth for. The global retail sector over the 2020-2025 period will be digital.

This is largely due to the Covid-19 lockdowns. As well as the very low barriers to entry into the E-commerce industry. With just a laptop at home, the average person today can start up their very own. E-commerce business with far less difficulty than opening a brick-and-mortar store.

While the industry is immensely accessible, it is important to remember that E-commerce comes with its own unique obstacles to overcome. Many entrepreneurs underestimate these obstacles and end up having to close up shop for good. Of these obstacles, accounting is one of the trickiest to overcome. While a brick-and-mortar store can get away with a simple cash-based accounting system, E-commerce presents a whole host of issues in accounting and finance thanks to the digital nature of the industry.

What is E-Commerce accounting?

In a prior publication titled “Debit Vs Credit: A Comprehensive Guide To Double Entry Accounting”, we explored the process of business accounting in detail; providing a step-by-step guide to how it works and why it is important.

E-commerce accounting is not much different from regular business accounting. The processes remain the same conceptually, the problems arise in the logistics and methodology required to facilitate the digital business. These are the main areas where E-commerce accounting differs from traditional accounting, and must take extra steps to function optimally:

Inventory management

inventory management

The first major area of concern lies in inventory management. E-commerce is an inventory-based industry, which means robust inventory management is required for the business to function. Inventory management is already very difficult in a traditional retail store, but in the E-commerce industry, it gets much more difficult to manage.

For one, the inventory is not physically present with the entrepreneur running the business most of the time. Whether it be sitting in a foreign warehouse, in transit from a vendor, or en route to a customer; the bottom line is that the inventory is not in your hands. This means that the inventory’s movement must be strictly monitored and recorded remotely.

This problem is further exacerbated by the speed at which the E-commerce industry operates. You may end up with hundreds of shipments simultaneously and tracking and recording each movement of inventory into the business’ accounts can become nigh impossible for one person to handle.

Software has become the primary method to deal with this issue, however, maintaining subscriptions to high-quality inventory management software can be too costly when starting out. It is also important to highlight that just because software exists does not mean it is easy to operate. Learning the operation and optimal usage of any software can also prove to be a troublesome hurdle.

In EA publication titled “Inventory Management Strategy”, CEO Haroon Jafree provides great insight into inventory management, offering a unique and valuable perspective as a 20-year veteran CPA in the US CPG industry.

Tracking transactions

tracking transactions

Because of its digital nature, tracking down E-commerce transactions is far more complex than a physical store. With the sheer volume of transactions that can occur due to the fast-paced consumer activity in E-commerce. You may have to track hundreds if not thousands of transactions for a variety of different products. This can become a massive problem if you are unprepared and can lead to problems down the road if not dealt with preemptively.

While software and E-commerce storefronts can record transactions as they happen. It is important to remember that there is a degree of separation between the business and the customer. The income ultimately received in the bank after sales are often provided net of. All taxes, fees, and returns by storefronts like Amazon and Shopify. This means that the bank statement will not reflect these accounts, and. They must be manually input and balanced in the business’ book of accounts.

This can make the simple automated transaction recording process tenfold difficult and consume a large portion of time and energy that could otherwise be spent to better the business.

Sales tax management

sales tax

Unlike a brick-and-mortar retail store which only needs to collect sales tax based on its location, E-commerce stores must fulfill tax obligations in multiple areas and jurisdictions where they have an Economic Nexus.

According to The Journal of Accountancy, “From a sales tax perspective, economic nexus, simply stated, requires sellers to collect sales tax in states where the seller’s sales exceed the state’s monetary or transactional threshold.”

In essence, every state has its own threshold for E-commerce business sales. If the business’ sales in a state cross that threshold, they must collect sales tax from customers and file tax returns. The Sales Tax Institute maintains a handy chart detailing Economic Nexus legislation by state.

Managing all this sales tax can become immensely cumbersome, and any error in this matter can have negative impacts on the business. Of all the various accounting functions, taxes are by far the most sensitive. It is highly advised to delegate tax research and management to an industry professional CPA to mitigate the risk of error and potential harm to the business.

Business and financial analysis

business and financial analysis

The E-Commerce business landscape is the most dynamic business landscape there is. With an abundance of businesses, all occupying and competing in the same market, staying ahead of the curve is what separates success stories and failures.

Staying ahead of the curve is only possible through thorough market research and financial analysis. Growing an E-Commerce business means constantly thinking of new and more optimal ways to generate sales while minimizing expenses. Frequent financial evaluations and strategic shifts in response to the market are necessary to keep the business growing.

Because trends in the traditional retail industry do not change as frequently or on as large a scale as its digital counterpart, start-ups can afford not to have expert market analysis at their fingertips. For E-Commerce, having a dedicated CPA on the team as a CFO or fractional CFO is a requirement if long-term success is to be achieved.

Conclusion

While E-commerce businesses may be operable from the comforts of home, entrepreneurs must realize that managing the accounting is far more integral to success in the digital landscape than the traditional retail landscape.

E-commerce accounting in essence is regular business accounting with a few additional roadblocks to overcome. The most effective way of tackling these roadblocks is by hiring a dedicated accountant, preferably an industry expert.

Expertise Accelerated’s Remote Accounting Solutions

Expertise Accelerated understands that despite its importance for the business, hiring a dedicated accountant is simply impossible for the majority of E-Commerce entrepreneurs due to the cost. To help overcome this dilemma, EA offers its own remote E-Commerce accounting solutions.

Based in Connecticut, EA is an outsourcing and staff augmentation specialist in accounting, finance and supply chain management. EA’s upper echelon of veteran industry experts promises entrepreneurs access to highly qualified remote accounting professionals at 40% of the cost of their US counterparts.

For E-Commerce business owners who do not have a physical office set-up nor the financial capability to maintain an in-house accountant, EA’s outsourcing and staff augmentation services provide the best alternative solution at a fraction of the US cost.