The E-commerce industry is booming, and there is nothing that can’t be made available to the customer with the help of an e-commerce model. Not only the new business that has no physical presence but also the business with brick-and-mortar store has availed the benefit of e-commerce in the past few years. Interestingly, this phenomenon is also applicable in reverse order. There are e-commerce businesses that did exceptionally well online and now have their brick-and-mortar stores as well.
E-commerce is a lucrative industry, but the problem in this industry is the challenges it faces. One big challenge most business owners face is accounting for e-commerce businesses. No one will disagree with us here that, business owners While you can always rely on expert outsourced e-commerce accounting services provider, it is always beneficial to have the basic knowledge of e-commerce accounting.
Here Some Accounting Basics You Must know –
There are some accounting basics that are applicable to all businesses irrespective of which industry you belong to. As a business owner, you must have knowledge of simple accounting processes and terminologies. While it is not necessary for you to know how to calculate or perform the process independently, you will have to analyse different financial information. Here is a list of basic e-commerce accounting knowledge that you must have.
- Chart of Accounts:
As a part of the accounting process, the first thing you have to do is make a chart of accounts which is majorly categorised in five account categories, namely – Assets, Liabilities, Equity, Revenue, and Expenses. You must be able to categories all the transactions that have monetary implications into these five accounts. Try to make a chart of accounts as specific as possible to avoid future confusion. When it comes to the e-commerce business, a lot of products and services are returned back by the customer. It results in the formation of accounts dedicated for return and chargeback by banks.
- Inventory management:
Inventory is the soul of any e-commerce business selling products, failing to provide the right order at the time and right place could negatively impact your business. Inventory management is an important process for E-commerce business. Also, having efficient inventory management helps you in understanding your gross profit for a particular time period.
The formula of gross profit is as stated below –
Gross profit = Sales – Cost of goods sold
While Cost of Goods Sold = Beginning Inventory + Purchases During the Period – Ending Inventory.
- Cost Of Good Sold (COGS):
COGS is another crucial element in e-commerce accounting. E-commerce overall is a quite competitive industry, and it is important to have an idea of what is the cost of goods that you are selling as this is the base for your selling price. The selling price is dependent on various factors such as product niche, business’s brand equity, number of competitions, and other such factors. However, it is always best to control your COGS to set a selling price that provides you with the right profit margin.
- Profit Margin:
This accounting terminology is known to all, and business owners take an active interest in the profit figures. However, it is essential to know that there are two types of profit margins: Gross Profit and Net Profit. You must learn to distinguish between the two. As discussed, gross profit is your business’s profit that you earn after the deducting cost of goods sold (i.e., costs of producing the products). Whereas, net profit is the revenue after subtracting all operating, interest, and tax expenses, in addition to deducting your COGS.
The formula of net profit is as stated below –
Net Profit = Gross Profit – All other Expenses
Net Profit = (Sales – Cost of goods sold) – All other Expenses
These pointers will serve as a foundation for your accounting, apart from these, you must be able to analyse the few vital statements and reports. Cash Flow Statement is one of them, to be able to understand your business cash flow is very important, if more cash is flowing out from the business and relatively lesser cash is flowing in, you are in trouble. While negative and positive cash flow is part of the business operation, but it is important to analyse these changes and understand the underlying reasons. Another important financial statement is your Balance Sheet, and it will help you to keep track of your business’s long-term financial health. Besides, if analysing the balance sheet is too complex for you, you can always take financial ratios help which is much simpler and easier to understand.
How to E-commerce accounting easier for yourself?
First and foremost, fully utilise the benefit that technology has to offer. Make use of inventory management software and accounting software that can integrate. Doing so will enable you to have a clear picture of your business’s financial health all in one place. As we said earlier in the article, you can hire an outsourced accounting services provider, as it will help streamline your overall accounting process and provide you with regular analysis and reports that would take you longer due to its complexity. As an e-commerce business owner, you can fully focus on the nitty-gritty of running your business while your outsource partner takes care of your accounting and bookkeeping process.