Lately, we’ve been getting a lot of questions about accounting set up for e-commerce businesses. It’s a topic that’s gaining traction, since e-commerce is booming.
You’re the one dealing with shopping carts, payment processors, pay-per-click ads, email marketing, and many other apps. By now, you’re probably feeling overloaded and know you need to get a grip on your finances. But where do you start? You start with the choosing your accounting software.
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Choosing the Right Accounting Platform
Most people begin with spreadsheets because they’re simple and free. Spreadsheets accounting is also enough if you file your taxes as a sole proprietor (Schedule C). Spreadsheets are sufficient for a simple e-commerce start up when you are not sure how things are going to unfold and do not want to spend too much time/ money into a proper accounting system.
But as things get more and more complicated and you need to account for inventory or if you are on the track of becoming an S Corp, you would need to start looking for a system that has a double entry accounting (another term that comes hand in hand with double entry accounting is “bank reconciliations”), which is basically a way to ensure all your transactions are accurately recorded. Double entry accounting is also necessary when you become an S Corp that brings more than $250,000 in gross receipts, since the IRS asks for proper financials (to be exact balance sheet statements) and those financials can be produced only with bank reconciliations and double entry accounting.
Now let’s now talk about the different accounting platforms available.
NetSuite and Odoo
On the high end, there’s NetSuite. It’s a powerhouse, especially for companies with complex inventory needs and lots of moving parts. Think of businesses raking in $75 million a year—they need something robust like NetSuite. But here’s the catch: while NetSuite makes hard things easy, it makes easy things hard. For example, it doesn’t have automatic bank feeds like some of the more basic systems. Plus, it’s insanely expensive, so unless you really need it, you might want to look elsewhere.
Another option is Odoo, an open-source platform that’s getting a lot of buzz lately. It’s cheaper in terms of licensing, but the downside is you’ll spend more on development because you’re basically building a custom solution as you go. It’s worth keeping an eye on, though.
QuickBooks Online and Xero
Now, let’s get to the most popular players: QuickBooks Online and Xero. If you’re an e-commerce seller, you’re probably going to end up using one of these. Some older accountants swear by QuickBooks Desktop for its robust inventory features, but honestly, it’s a hassle to use compared to cloud-based options.
QuickBooks Online and Xero both have extensive ecosystems of apps that integrate seamlessly. This ensures more flexible and accessible bookkeeping for e-commerce websites. If your business is in the cloud, your accounting tools should be, too.
QuickBooks Online and Xero are pretty much neck and neck. We won’t go into too much detail here—you can check out a lot about their comparison. They’re both solid choices, and it’s more about personal preference. However, QuickBooks repeatedly raise their prices. That’s why our accounting firm works mostly with Xero. We want to save our clients money on accounting software.
Other platforms, like Zoho and Wave, are trying to break into the US market, but they don’t have the same ecosystem of third-party apps that make QuickBooks Online and Xero so powerful. For e-commerce businesses, having these integrations is essential, especially as you grow.
Chart of Accounts for E-Commerce Accounting
After you picked your accounting software, you would need to set up a chart of accounts in it. Essentially, the chart of accounts dictates how you will be categorizing all your future transactions. Every single transaction, whether it’s money coming in or going out, needs to be sorted into a category. A wrong category means a mistake in financial reports, which leads to improper presentation of your financial situation and incorrect calculations of tax liability. Yeah, a proper initial set up of chart of accounts is important.
Essential Accounts for E-Commerce Sellers:
Sales – This is to track all your sales from Shopify.
Discounts – Log any discounts you give out.
Shipping Income – This is for any shipping fees you charge your customers.
Refunds – Track any refunds you process.
Cost of Goods Sold (COGS) – Keep tabs on how much your products cost you.
Processing Fees – Record all the fees Shopify charges you, like transaction fees.
Inventory – Track the value of all the products you have in stock
E-commerce Integrations: Syncing Apps
After the chart of accounts is set up, you might want to look for apps that will make your accounting easier. Here are some widely used apps that can help you connect your sales data with your accounting and simplify your e-commerce life.
1. A2X
A2X is our go-to for syncing Shopify with QBO or Xero. Instead of dumping a ton of data into the accounting software, it imports nice, summarized transactions, which keeps things clean and organized. Just make sure the integration is set up correctly, and you’re all set!
2. Gusto
If you need to run payroll for yourself as an S Corp shareholder or for your team, Gusto is our favorite app. It makes payroll a breeze: Gusto handles all payroll taxes and forms, like W-2s and 1099s so you don’t have to worry about it. It has an easy-to-navigate website. Gusto also has an option to add an accountant, so your CPA can do most of the heavy work for you. At our firm, we calculate projected taxes for S Corp owners and then set up tax withholdings in Gusto so that federal and state tax liability is paid automatically through your payroll withholdings. This process frees up clients’ time (they do not have to deal with estimated tax vouchers), and it also ensures that clients do not get penalized with estimated tax penalties. We wrote about this tax planning technique here.
3. Melio
For paying vendors via ACH or check, Melio is our favorite app. It automates your accounts payable, and you can pay vendors easily, even by sending paper checks (yep, Melio does that, too!). Plus, there’s an approval process, so your bookkeeper can handle the bills, and you just give the final okay.
4. Rewind
Shopify sellers, this one’s for you. Rewind backs up your Shopify store, which is super important in case anything goes wrong. You don’t want to lose all your data! It also backs up your QuickBooks Online file, and we recommend doing that too.
E-Commerce Business: Inventory Management
We’ve talked about accounting apps, now lets dive into inventory management. So, what does an inventory management tool actually do? It helps you manage inventory across multiple locations, making sure everything is in the right place, at the right time, and in the right quantities. As products sell, the tool tracks costs to give you an accurate cost of goods sold (COGS) figure. It also keeps an eye on the value of your inventory—both what’s on hand and what’s on order. Plus, it can help you monitor key metrics like inventory turnover and reorder points, and some even offer forecasting.
If manufacturing is part of your business, some tools can support that, too, which is a big deal. And one of the best features? Many of these tools integrate directly with your sales channels—like Amazon or Shopify—so you can make decisions based on real-time data.
Our Inventory Management Tools Suggestions:
1. Trunk: For Multi-Platform Sellers
Trunk is a Shopify app, but it takes things up a notch by syncing your inventory across multiple platforms like Etsy, Amazon, eBay, and more. One of its coolest features is the ability to manage bundling and kitting, which is a game-changer if you sell products in sets or bundles.
For example, if you sell a bundle of different soaps, Trunk will automatically adjust the inventory for each type of soap in the bundle, so your stock levels are always spot-on. Trunk does not cost much and offers a 14-day free trial. It’s a solid choice if you’re selling on multiple platforms and need a bit more from your inventory management tool.
2. Craftybase: Tailored for Handmade Sellers
Craftybase is a bit different—it’s both an inventory management and bookkeeping system specifically designed for handmade sellers. It integrates with Etsy, Shopify, and other platforms, and it’s great for keeping track of not just your finished products but also your raw materials. This is super useful if your products are made up of multiple components.
For example, if you sell charm necklaces, Craftybase can track your inventory of both charms and chains and deduct the appropriate quantities when a sale is made.
Craftybase starts at a low cost, but the price increases as you need more features. It’s a more advanced tool, ideal if you need to closely track both inventory and material costs.
3. Sellbrite: Inventory Management with Built-In Shipping
Last but not least, there’s Sellbrite. What makes Sellbrite different is that it not only handles inventory across multiple platforms but also includes shipping features. You can ship orders and buy postage directly within the software, which makes it a convenient, all-in-one solution. While it doesn’t have the bundling and kitting features that some of the other tools offer, it’s a solid option if you’re looking for a tool that combines inventory management with shipping.
Sellbrite has a free plan that supports up to 30 orders a month with paid plans. It’s a great choice if you want to streamline both inventory and shipping in one place.
Other Inventory Management Apps:
We don’t have a one-size-fits-all recommendation here because every business is different, but we’ve put together a list of some other great inventory management apps.
Check these out and see which one works best for you:
● SOS Inventory
● Zoho Inventory
● Ecom Dash
● Locate
● Finale
● Cin7
● Dear Systems
Sales Tax as an E-Commerce Seller
A question we get all the time from e-commerce sellers is, “When should I start worrying about sales tax?” Well, the answer is when you learn about Nexus rules or hire someone who knows about them.
What Is Nexus?
Nexus means you have some sort of connection or link to a state. If you have Nexus in a state, it means you’ve got enough of a connection that you’re required to collect and pay sales tax there. No Nexus? No need to worry about sales tax in that state yet.
TaxJar – Recommended Sales Tax App
We see that a lot of our client use TaxJar. This app streamlines the process, handling reporting and filing automatically, so you don’t have to do it your self. It is always a good idea to let your CPA check the settings however, since in our experience they very often set up incorrectly.
Conclusion: Optimizing Accounting For E-commerce Business
E-commerce is a niche and your business needs a good accounting software, especially when you are pass the initial start-up stage. Do your research and pick the one that works best for you. And don’t forget about those extra tools. Apps like A2X to sync your sales data and Gusto for payroll can make your life a whole lot easier. Also, keep an eye on your inventory and make sure you’re handling sales tax correctly.