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Starting an Ecommerce Business? Bookkeeping Basics You Need to Know

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Although you may not have a brick-and-mortar store, ecommerce is still a retail business. As such, you’ll need a bookkeeping system for essential business activities such as recording revenues and expenditures, managing inventory and filling out your tax forms.

Choose an Accounting Method 
For tax recording purposes, you must first choose from one of two accounting methods:
 
• Cash Basis — Records transactions at the time money actually leaves or enters your bank. So if you receive an invoice in December but pay it in January, the debit would be entered into your books in January.
 
• Accrual — Records transactions at the time of the transaction. An invoice dated December would be entered in the books in December, regardless of when it gets paid.
 
If you, like most small business owners, choose cash basis, you may have to adjust your accounting software. QuickBooks, for example, defaults to accrual. Also, once you choose a method, you must stay with it unless you go through government red tape to get it changed.
 
Now here’s a rundown of the ongoing accounting tasks ecommerce owners perform.
 
Record Transactions 
Whether it’s a sale of merchandise, a payment to a supplier, a debt installment and so on, every time money enters or leaves your business, it must be recorded in your “books.” Those books could be anything from an old-fashioned paper ledger to an Excel spreadsheet to accounting software.
 
If you use your own manual bookkeeping method, you’ll import that information from your online bank account. Good accounting software will sync with your bank and automatically enter bank transactions in the books. Obviously, it’s crucial to stay on top of data entry in order to know how much money you actually have at any given time; so having software that does it for you in real time is a big help.
 
Categorize Transactions 
Every transaction recorded in the books must also be categorized for purposes of generating financial reports and tax returns. The two most basic categories are revenues (income) and expenses. You’ll probably need further sub-divisions, for example to identify whether the expense was overhead (i.e. rent), purchase of inventory, debt payment, distribution of profits to company owners, etc.
 
Another category you’ll likely deal with as an ecommerce seller is merchandise returns. When a customer returns an item they decide they don’t want, it’s not categorized as an expense. Instead, you would enter it as a debit to your revenues, categorized as something like “Revenue — Returns and allowances.” 
 
Similarly, chargebacks would be entered under the category of Revenue — Returns and Allowances. A chargeback is when a credit card company asks you to return funds you charged to a customer, usually because the charge is believed fraudulent or the credit card was stolen. You’ll probably also incur a chargeback fee from the credit card company, which would be categorized as an expense.
 
Monitor the Budget
We’re assuming you’ve already done the planning necessary to create a realistic budget: projected sales (especially important if you expect big sales swings by season), inventory stocks needed to support sales, overhead and operating expenses. Once the budget is in place, the company’s actual performance must be checked against the budget’s figures on a regular basis.
 
This task is made easier by the use of a budget calculator spreadsheet. For example, you might create a monthly budget, then every month enter the real revenues and expenses to see how they compare. Thus you can see at a glance where your budget might need adjusting.
 
Reconcile Bank Statements
This is where you compare what the bank says you have with what your books say you have. Any discrepancies should be identified and resolved. It’s usually done once a month when you receive your bank statement.
 
Check Cash Flow
If you use the accrual (as opposed to cash based) accounting method, your books may show that you have more cash than you really do at the moment. That could be a problem if this is the moment you need to pay a big invoice. Weekly or monthly cash flow statements give you the real amount of money you have on hand.
 
Save & Organize Records
You never know when you might need that piece of paper. It may be just to refresh your memory if you’ve gotten behind in your data entry, or to validate your tax return in the event of an IRS audit. 
 
Keep these records in a filing system where you can easily find them:

File Sales Tax
Depending on the regulations of each state where you’ve sold merchandise, you’ll be required to file sales tax monthly, quarterly or annually. (“Tax nexus” rules have mostly changed, and you are no longer exempt if you’re shipping from another state.)
 
This is a very time-consuming activity for ecommerce businesses who could find themselves dealing with 50 different tax forms, calculations and remittances. Consider an automated sales tax service to save yourself a major headache.
 
Pay Income Tax
Most business owners pay estimated quarterly taxes, in addition to filing the annual tax return in April. To figure out how much to pay each quarter, estimate how much income you’ll have in the coming year, calculate how much tax you would theoretically owe on that income, and divide the total tax amount by four.
 
The IRS has worksheets to help you figure your tax: Form 1040-ES for individuals or Form 1120-W for corporations.
 
Generate Financial Statements
You’ll be doing this either manually with your DIY bookkeeping system or automatically with accounting software. 
 
With analytical documents such as a profit and loss statement (usually created monthly), you’ll plan how to adjust your business model for even greater success. Among other things, the P&L statement reveals:
• Administrative expenses (too high if they’re more than 20% of gross revenues)
• Cost of goods sold (should be less than 75% of gross revenues
• How much money you can reinvest in the business
 
The balance sheet shows the company’s total assets and liabilities, including debt and equity. With these numbers in hand, you can calculate key ratios such as:
• Assets to Liabilities Ratio — the company’s solvency or ability to pay bills
• Debt to Equity Ratio — financing from creditors in relation to stock holders
• Asset Turnover Ratio — how efficiently you generate sales from assets
 
At Xendoo, we specialize in small business accounting and can help new ecommerce business owners every step of the way from automatic bookkeeping entries to tax reporting to financial statements. With an affordable, flat monthly rate, we set you free from accounting hassles to focus on growing your new business.

Your numbers, now.