If you are a new ecommerce business, you may have started finding products and even selling. You are now worried about what you need to do when it comes to accounting and tax. Some people rush to get an accountant but when you have not proven your business works then you do not need an accountant and you definitely do not need a business accounting function!
What we want to show you is what accounting software to use, how to store your financial data, what accounting system to use and what accounting tasks you need to do, including digital bookkeeping. The idea here is that for the first few months as you prove your business you do not need to waste money on accountant who would only have to deal with a few transactions and not really add any value.
Layering up software and services before making sales is what we see small business owners do over and over again. You want to find out quickly and as cheap as possible if you are going to have financial success with this business model before getting value add services like accounting.
What is E-Accounting?
Definition of E-Accounting
E-accounting, also known as online accounting, is the application of online and internet technologies to the business accounting function. It involves the use of computer-based accounting tools and internet-based accounting software to perform regular accounting functions, accounting research, and accounting training. Essentially, e-accounting is a digital version of traditional accounting, allowing for the recording of financial transactions and data in a secure and efficient manner. This modern approach leverages traceable accounting processes, making it easier for ecommerce businesses to manage their finances without the need for extensive manual input.
Benefits of E-Accounting for Ecommerce Businesses
E-accounting offers numerous benefits for ecommerce businesses, including:
Improved Efficiency and Accuracy: Automating financial transactions and data management reduces errors and saves time.
Enhanced Cash Flow Management: Real-time tracking and analysis help you keep a close eye on your cash flow.
Increased Accessibility and Convenience: Online accounting services allow you to access your financial data from anywhere, at any time.
Better Decision-Making: Timely and accurate financial information supports informed business decisions.
Regulatory Compliance: E-accounting helps you stay compliant with regulatory requirements and international web-based materials.
Cost-Effectiveness and Scalability: Using accounting software and computer-based accounting tools can be more cost-effective and scalable as your business grows.
Types of Accounting Systems
Overview of Accounting Systems for Ecommerce
There are several types of accounting systems that ecommerce businesses can use, including:
Cash Basis Accounting: This is a simple and straightforward system that records financial transactions as they occur. It’s easy to manage and understand, making it ideal for small businesses just starting out.
Accrual Basis Accounting: A more complex system that records financial transactions as they are earned or incurred, regardless of when payment is made. This method provides a more accurate picture of your business’s financial health but requires more detailed record-keeping.
Modified Cash Basis Accounting: This hybrid system combines elements of both cash and accrual basis accounting. It offers a balance between simplicity and accuracy, making it suitable for businesses that need more flexibility.
Hybrid Accounting: This system combines different accounting methods to suit the specific needs of the business. It allows for customization and can be tailored to fit the unique requirements of your ecommerce operations.
Each type of accounting system has its own advantages and disadvantages. Ecommerce businesses should choose the system that best suits their needs and operations, considering factors like business size, complexity, and financial goals.
What is e accounting
We have coined the term e accounting, this is e commerce bookkeeping and e commerce accounting. Why have we labelled it e accounting. Well, its simple, this is not the same as traditional accounting. This is because an ecommerce business owner can be fully online and can utilise computer based accounting tools to take advantage of traceable accounting processes. You no longer have to keep a day book of all sales in paper based form. Ecommerce accountants or business owners can connect directly into your platforms and link directly into your bank to get all your financial data and financial transactions. Not many other businesses can take advantage of online and internet technologies as easily as ecommerce businesses and you need to make sure you take advantage of that.
What e accounting Software do I need to use?
Internet Based Accounting Software
The power of ecommerce is that you can use the latest technology. However, you need to choose the correct accounting software to take advantage of this. There is no point getting cheap software like Freeagent or Pandle because they do not connect into the apps you need to really understand your financial data.
Xero or Quickbooks
So firstly, what e accounting software should you use? There are two, Quickbooks and Xero. The reason we suggest these is becuase they are like apple and Android but easier to intergrate. Everyone develops apps for them first and forget about other platforms. This means you can be sure if you choose either of these you will be able to save time by using the latest apps to get real time access to your information.
Quickbooks and Xero are basically the same, at the moment Quickbooks is cheaper than Xero. Both are very good but accountants normally suggest Xero as its built with accountants in mind rather than business owners. However, you get the exact same outcomes from each of these software. What I would recommend doing is watch a few videos of each software and go with the one you like the look of.
Connecting your marketplace to your accounting software
Next you need to look at the platforms you sell on and figure out the best way of connecting this to your accounting software. Now not all of the connection apps are as good as each other. Software like LinkmyBooks and A2X do sync your marketplace data but accountants especially traditional accountants do not really understand this data as its not built for accountants. What we recommend is using eComledger. This has been built with accountants in mind so when you connect and auto post your sales into your e accounting software, it saves an excel working file for your accountant to look at. This means you do not have to go back and resend them a raw report to check it against poorly presentated data such as linkmybooks or a2x.
Once you have sorted your marketplace connector, you now need to connect your business banks to the e accounting software. This will bring in all your transactions to the software so you can then allocate in the correct codes. As these link are real time you can use this to even build up cash flow forecasts.
So you now have your sales channels and banks connected to your e accounting software, so the next thing to do is learn how to deal with your financial transaction so you can focus on efficient decision making.
How to deal with my Financial Transactions
I am going to imagine that you are not VAT registered yet as at this point we would normally recommend getting an accountant involved.
So you are Not VAT registered and you have connected your bank to Xero or Quickbooks, all your transactions are coming into the feed and you now need to go through that list and code to them an accounting code. This will be how it is presented on a profit and loss, balance sheet and cash flow.
Financial reconciliation is an important step in dealing with financial transactions. It ensures that all records are accurate and consistent.
As an ecommerce business your profit and loss should look something like this:
Sales £2000
Cost of goods sold £500
PPC – advertising £200
Platform fees £600
Gross Margin £700
Other costs £50
Subscriptions £100
Operating Margin £550
Therefore if you do not see these codes, you want to add them to your system. So now when you go through your bank you can classify these as they come in.
Example e accounting for Amazon Sellers
You have Xero and you have connected into eComLedger, you have turned on autopost so that all your sales and platforms fees are automatically being dealt with in the system.
That means you just need to go through your bank to categorise the remaining items. Any payments from Amazon will be coded against the Amazon Debtor account or clearing account.
For cost based items, these will depend on what they are, so if you have bought 10 items to sell on Amazon you would code these to cost of goods sold or Stock. (if an accountant was doing this it would be stock – but keeping it simple is fine at the minute).
For your subscription to Helium 10, you would code this to Subscriptions.
Once you have finalised all those you can then go to your profit and loss and see your profit for the month!
Remember, your accountant will do things slightly different but you will got 90% of the way there and be able to make decisions with getting an expert in e accounting.
What do we recommend you get help on
There are some things you do not want to do without going through rigorous accounting training or committing to loads of accounting research. There are some things where internet resources do not really help tell you what you need to do and it becomes extremely hard to maintain compliance with HMRC. Regulatory compliance is crucial, and seeking professional help can ensure you meet all necessary standards. So let me take you through some areas where you need to ensure compliance and when it’s important to seek accounting services.
Payroll Management
Setting up payroll software and running it every month is not necessarily hard and you can do this via Quickbooks but it’s important that you understand what rate you are paying yourself and staff. You will also want to ensure you have registered for a pension scheme if you employ staff. At this point using online accounting services will be worth it.
Tax management
At year end, tax planning becomes crucial, regardless of if you have made a profit or not. You will have to do accounts for your limited company or self-assessment tax return. We would suggest speaking to an accountant to get these done as a one-off job if you have not made many sales. The reason you want to do it properly is that you can use tax losses against future profits. Therefore making you record the losses correctly will really help in the future.
Self assessment tax returns
If you have taken a dividend or operate as a sole trader, ensuring tax compliance by registering and submitting your self-assessment tax return is key. Again, you do not want to not do this or submit the wrong figures and sometimes it’s best to get an accountant who can make this easy for you.
VAT Returns
If you are registering for VAT, then you probably need an accountant. This is because VAT registration is crucial to ensure you are on the correct scheme for an internet-based business. This could be the flat rate or the normal VAT. You also want to know that you have registered for the correct VAT date. At this time, it’s best to get an accountant to register you and then submit VAT returns.
When to get a dedicated accountant
You should start thinking about getting an accountant when you realise your business is viable and will continue to grow. If you don’t get to that point at year end then you want to make sure you appoint an accountant to at least do the year end filings or tax returns.
So save money right at the start, get some sales, know the business is working and then start talking to an accountant who understands accounting. Seeking accounting consultancy can provide you with tailored advice and strategies to ensure your business’s financial health.
The key thing here is to know the difference between an accountant and a chartered accountant or qualified accountants. Anyone can call themselves an accountant, and many do, many are good but unlike chartered or qualified accountants they are not regulated by an accounting body and therefore you have no come back if they do anything wrong. With a qualified accountant they have to pass rigorous exams, be monitored and if you ever have any issue with an accountant you can complain to the accounting body.
