Owning an e-commerce business is both thrilling and stressful. Like all things, there are parts we love and parts we don’t love. There seems to be a common dislike among most business owners, e-commerce or not, and that’s bookkeeping and accounting. However, bookkeeping and accounting are necessities, regardless of how painful.
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Bookkeeping can be categorised as the “dull side” of business. Sadly, it is unavoidable, particularly if you want to see continued success and growth. On the other hand, most e-commerce entrepreneurs dread bookkeeping because they don’t understand it or know where to begin. So, we felt that we’d write a short blog on bookkeeping for e-commerce to help you stay focused and organised. Who knows, you might even start to like numbers.
Often, many business owners tend to throw their receipts and invoices into a box and hand them over to their accountant just before the tax deadline. Now, yes, this is an option. However, it isn’t recommended—and that’s coming from an accountant. Even if you have a great relationship with your accountant, you should still understand the basics of bookkeeping. Why? Well, here are three reasons:
1. You’re potentially risking the success
2. How can you seek investors, (when/if the time comes) if you don’t understand how can you pitch?
3. Mistakes and unbalanced books can be detrimental
Besides the reasons mentioned above, there are many benefits to understanding the basics of bookkeeping, which we’ll discuss later. Although bookkeeping can be somewhat complex, the day-to-day and monthly management of your finances isn’t as daunting as it may seem. Hopefully, by the end of this article, you’ll be able to focus, organise, and manage your books more effectively—helping you avoid costly mistakes.
Sadly, improper bookkeeping can have adverse consequences and can be expensive to rectify. For instance, if your books aren’t up to date or organised, it can result in submitting an incorrect tax report. Unfortunately, HMRC doesn’t take kindly to inaccurate tax filings, even if the mistake is genuine. That genuine error could mean having to repay a tax rebate or make an additional tax payment.
As we’ve said, even if you choose to have an accountant manage your books, understanding the basics can help your e-commerce business grow. So yes, we understand it’s tedious—but it’s also necessary. After all, you’ve already done the hard part by taking the leap and opening your e-commerce venture. Whether you’re running a Shopify store, an eBay trader or drop shipper, or an Amazon seller, it’s your business—so take ownership (or at least part) of your finances.
In this article, we’re going to look at some of the most misunderstood bookkeeping and accountancy terms. We’ll also share our top three bookkeeping tips for e-commerce.
Mini-Bookkeeping Guide/Hack
As accountants, we understand why few e-commerce owners genuinely enjoy bookkeeping. It’s undeniably stressful, and depending on your platform, there are fees, usage costs, and other factors to consider. A common misconception is that these platforms will handle everything for you. While they may provide a breakdown, you still need to keep track of your finances.
The number of business owners who truly love bookkeeping is limited. At first, it can feel overwhelming. However, as you begin to understand the terminology and processes involved in e-commerce bookkeeping, it becomes more rewarding. Why? Because you won’t just understand the numbers—you’ll also enjoy seeing the growth of your e-commerce venture reflected in them.
Top Five Commonly Misunderstood Accountancy and Bookkeeping on E-commerce Terms
1. Accounts Receivable
Depending on how long you’ve been operating your e-commerce business, you may have heard the term “accounts receivable.” But do you actually know what it means? You might assume it refers to “available” money—don’t worry, this often trips e-commerce owners up because the term can be misleading.
Accounts receivable is the money you are owed for products sold or services provided. The phrase “don’t count your chickens before they hatch” comes to mind.
That saying perfectly captures how you should think about accounts receivable. This concept is where many new e-commerce owners stumble. Understandably, it’s exciting to see sales increase—but what happens if a customer requests a return or a refund?
Sadly, those “chickens” waiting to hatch may not materialise, or at least not as quickly as you expect. That’s why the best way to view accounts receivable is to let it age. In accounting terms, this is known as the “ageing of accounts.” Quite simply, it means waiting for the money to be received before treating it as real income.
By viewing accounts receivable this way, you reduce the risk of overspending or overestimating your profits. Another approach is to estimate a realistic figure for what you’re actually likely to receive. If you’re just starting out, choose a conservative amount—or avoid spending until your second or third month of trading.
After around six months, you’ll be able to calculate an average and make more accurate estimates for accounts receivable. This is where proper bookkeeping for your e-commerce business becomes essential. When you consistently record, monitor, and track your incoming sales and outgoing expenses—including your return rate—it becomes much easier to gain an accurate view of what revenue is truly receivable.
2. Accounts Payable
If you keep track of your assets, outgoing payments, and service costs in your balance sheet (your books), this process becomes much easier. Another term for accounts payable is liabilities—these are the payments your business is obligated to make.
It can be argued that accounting is all about balance. Without risking a cliché, in your accounts, every accounts payable entry should have a corresponding accounts receivable entry. Essentially, every transaction in your e-commerce business should always have an opposite entry.
In simple terms, £1 in accounts payable should correspond to £1 in accounts receivable.
This example brings us back to the idea of not counting your chickens before they hatch. If you overspend, miscalculate, or don’t fully understand these two transactions, you could end up losing money.
Although cash is king, when it comes to accounts receivable and payable, patience is king.
3. Bank Reconciliation
For this term, we’re going to assume you’re not entirely familiar with what bank reconciliation is or how it applies to your books. Who knows—if you enjoy this process and start implementing bank reconciliation in your bookkeeping, there may be an accountant in you yet!
Bank reconciliation is an essential part of accurate bookkeeping. But what exactly does it involve?
Bank reconciliation is the process of manually checking and cross-referencing your recorded transactions against your bank statements.
This process can be done using software such as QuickBooks or Xero. Alternatively, you can use a more hands-on approach with a highlighter and manually match each transaction. Either way, the benefits of bank reconciliation are undeniable, as it helps identify duplicate payments, missing entries, or other issues early on.
Although the idea of extra paperwork may not sound appealing, it ensures your books are accurate. If you’re a new startup, implementing this bookkeeping process early will be especially beneficial—particularly if you plan to seek investment in the future.
How often should you reconcile your bank?
This question doesn’t have a one-size-fits-all answer. The frequency depends on the size of your e-commerce business and transaction volume. However, as a general guideline, small e-commerce businesses should aim to reconcile their bank accounts monthly.
What do you need to check?
By now, you should have a better understanding of bank reconciliation. The next step is knowing what to review. Again, this depends on the size of your e-commerce business and how often transactions occur. A good rule of thumb is:
- Incoming payment against invoices or receipts
- Outgoing against invoices or receipts
- Bank fees – including interest rates, transaction fees, monthly payments
- Earned Interest
We’d like to note that the bottom two factors, may depend on your bank. Since every business bank account varies. Also, if you’re a new startup, have you looked into a business account? If not, here’s one of our articles that may help you choose the best business account for you.
4. Merchant Services
Now, this process depends on the type of e-commerce business that you have as there’s a variety of options, including:
- Solely trading on your website
- eBay sellers/drop shippers
- Amazon FBA sellers or Amazon Traders
- Shopify owners
So, depending on your chosen platform, you will likely be charged for every sale you make. This charge is known as merchant services. This can be one of the more complex aspects of e-commerce bookkeeping, as every merchant varies and may amend their payment terms.
If you’ve decided to take ownership of your bookkeeping and feel confident managing it—brilliant! However, we recommend checking the links above to double-check your merchant services.
Sadly, most platforms tend to hide some of their merchant fees. Therefore, it’s important to stay on top of accounts receivable, accounts payable, and bank reconciliation.
If you’re unsure about merchant payments for your e-commerce business, the best course of action is often to seek advice. There’s plenty of help available, including other sellers, online forums, business management services, or accountants.
5. Payroll
We cannot stress enough how important it is to get payroll right. One big misconception is that payroll only matters once you hire employees. However, if you take a salary yourself, payroll still applies.
Whether you have employees or it’s just you, it’s your responsibility to accurately record payroll. As your e-commerce venture grows and you begin hiring employees, you must ensure they are paid accurately and on time.
There are online payroll software options, and some accountants—like Pearl—offer real-time payroll solutions for all business types. Payroll is crucial because it is regulated by HMRC.
Besides ensuring your payroll system is HMRC-compliant, you should consider the following:
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Frequency of pay
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What happens if a payday falls on a bank holiday?
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What happens if the monthly/weekly pay falls on a weekend?
Some of these factors won’t apply until you hire employees, but understanding the process now will help in the long run.
Top Three Bookkeeping on E-commerce Tips
Hopefully, you feel a little less stressed about the seemingly complex bookkeeping and accountancy terms. So, in this part, we’re going to be giving you our top three bookkeeping tips for your e-commerce business.
1. Accountancy Software
Our first tip, unless you’re brilliant at maths, is to look into accountancy software for your eBay or Amazon service. If you’re a Shopify owner, we’ve listed the best online accountancy software, here.
However, that being said, if you want to make the bookkeeping process easier and ensure it’s accurate, online accountancy software is a worthwhile investment. While bookkeeping is a skill you can perfect over time, online software is far more effective.
In fact, there is tailor-made online accountancy software designed specifically for e-commerce owners like yourself. In this section, we’ll focus on the best accountancy software for Amazon sellers/FBA traders and eBay sellers/drop shippers.
Amazon Sellers (including Amazon FBA Traders)
The most effective online accountancy software, if you prefer to handle bookkeeping yourself, is Xero. Even if you only want to manage your daily or weekly bookkeeping needs, most e-commerce accountants can work directly from Xero.
The main benefits of Xero include:
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Simple reconciliation of Amazon transactions
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Integration of your cash flow with the Amazon Seller Centre
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Automatic syncing of your Amazon inventory to Xero
Besides the benefits above, Xero ensures that you have a complete picture of your Amazon e-commerce store.
eBay sellers/drop shippers
The ideal online accountancy software if you are an eBay seller or drop shipper is QuickBooks. So, let’s take a look at why:
The main benefits of QuickBooks:
- Easy to use: it’s a relatively simple set up process, and it’s easy to access once you get started. However, you’re unsure, you could always seek guidance from one of our e-commerce accountants at Pearl.
- Excellent Support: QuickBooks is well known for its excellent support and guidance; they make it very simple to provide an answer or solution to your question. For instance, they will pair you with a certified e-commerce accountant or bookkeeping, as well as sharing helpful videos.
- Integration: you can link your eBay seller or drop shipper account to the QuickBooks app or desktop. Although, there may be instances where it cannot integrate directly, which is why speaking to an accountant or asking their QuickBooks pros to help.
If QuickBooks isn’t really for you, or you don’t want to commit to a paid plan straight away, they often offer a free trial.
When it comes to online accountancy software, it really depends on what suits you and the needs of your business. However, rather than relying on your trusty calculator and Excel spreadsheet, we recommend trying out online software, especially if this is your first attempt at e-commerce bookkeeping.
2. Track Your Cash Flow
In any business, including e-commerce, money is king. If you don’t take care of your cash, it can lead to problems. Using online accountancy software, as suggested in our first tip, is an excellent way to track your daily, monthly, and quarterly cash flow.
Even in the initial days, a balanced or healthy cash flow will help your business grow. The last thing you want is to have a negative cash flow from the offset. You can avoid this by taking care of and monitoring your profits.
Here are two simple ways to track and maintain your cash flow:
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Don’t make early payments unless you have enough to cover them. While paying early is usually good practice, it can harm your business cash flow. Always pay on time—if an invoice is due in 30 days, make the payment on the agreed date.
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Keep a “rainy day fund.” If you’ve ever played Monopoly, you know how unexpected payments can drain your cash. The same applies to real-life e-commerce. Preparing for the unexpected, like a manufacturer failing to deliver on time, can prevent a deficit cash flow.
The best way to view your cash flow is like a plant: it only grows when fed and watered. Don’t let it wilt by failing to track its progress.
3. Identify Your Break-Even Point
Following from tip number two, if you want to track your cash flow, you need to know your break-even point. How can you manage your books if you don’t know how much profit your e-commerce store makes?
Your break-even point is:
Cost of Sale – Cost of Product = Profit
The cost of product includes manufacturing, employees, packaging—basically every cost of making your product/service.
The Bottom Line
We’ve covered a lot in this article on bookkeeping for an e-commerce business. It’s natural to feel unsure about some parts. If you need help, our dedicated e-commerce team at Pearl Accountants is here for you.
At Pearl, we will help you water and nourish your e-commerce finances, so they consistently grow and flourish.