Why is bookkeeping and accounting important for ecommerce businesses?
In recent years, there’s been a significant rise in the number of people starting up their own ecommerce businesses. This has coincided with the popularity of online shopping, which saw a massive boom during the Coronavirus pandemic. With this growth comes the need for proper management of financial records. Accounting for ecommerce businesses is important for several reasons.
Financial management and budgeting
Proper bookkeeping and accounting help ecommerce businesses manage their finances effectively. Through bookkeeping, businesses can keep on top of their transactions, sales, and expenses.
This information can then be used to make informed budgeting and financial planning decisions.
Read: Our simple guide to bookkeeping.
Tax compliance
Bookkeeping and accounting help ecommerce businesses stay compliant with tax laws and regulations. Propper bookkeeping means that a business has accurate records of sales and purchases, making it easier when it comes to filing tax returns. Using an accountant like us to take care of your tax returns removes the risk of failing to comply with tax laws and missing deadlines, which can result in hefty fines and legal consequences.
Investor readiness
If you’re looking to raise capital for your ecommerce business, investors will want to see accurate financial records. Good bookkeeping and accounting practices can help you prepare for this process and increase your chance of securing funding.
What is ecommerce accounting?
In essence, accounting for ecommerce businesses is handled very similar to any other small business, with a few unique needs specific to ecommerce.
Accounting for ecommerce businesses, at its most basic, is the act of tracking and recording transactions and categorising them either as income or expenses. Although it sounds simple, it can be easy to get caught up in some of the terminology. Below is a quick explanation of the key components of ecommerce accounting:
Purchase Order
A purchase order is a commercial document issued by a buyer to a seller. It indicates the types, quantities, and agreed prices for products or services that the buyer wants to purchase.
While a purchase order is not payment itself, it should include payment details. You may use a purchase order to request raw materials from a vendor, or a client might send one to you to request a certain volume or goods or services.
Sales Order
A sales order is issued by a business to a customer which includes the details of a sale. It usually includes the item or service being sold, the quantity, the price, the payment terms, and the delivery date. A sales order serves as a confirmation of the transaction between the buyer and the seller, and it helps to ensure that both parties are on the same page regarding the terms of the sale.
Accounts Payable and Accounts Receivable
Accounts payable and accounts receivable are two important terms used in accounting. Accounts payable refers to the money that a business owes its suppliers, vendors, or creditors for goods and services purchased on credit. This is a liability for the company until the payment is made.
On the other hand, accounts receivable refers to the money that a company is owed by its customers for goods or services sold on credit. It’s an asset for the company until the payment is received. Both accounts payable and accounts receivable are important for managing a company’s cash flow and financial health.
Cost of Goods Sold
Cost of goods sold is the direct cost of producing and selling a product or service. This includes expenses such as raw material, direct labour, shipping, warehousing and any other costs associated with the production process. This does not include overhead costs such as rent, utilities and marketing.
How to choose the right cloud accounting solution for my ecommerce business
It can be difficult to know where to start when choosing the right cloud accounting solution for your ecommerce business. We recently wrote a handy guide on how to find the right accountant, which highlights the signs of a good accountant, how to find and research accountants, and questions to ask your accountants before signing.
Why choose CloudAccountant.co.uk for your ecommerce business
From selling flowers to selling fashion, we understand that managing your finances as an online seller can be a daunting prospect. We specifically help ecommerce businesses with our Online Sellers package, which ensures you’re using the right ecommerce accounting software to support VAT and volume transactions.
Our services are fully customisable, meaning that you only pay for what you need. Visit our Online Sellers package to find out more or talk through your requirements with one of our advisors.
Get in touch
At CloudAccountant.co.uk, we have over ten years of understanding and proactively supporting businesses with their tax and accountancy needs up and down the UK. If you have any questions, please get in touch with one of our friendly team members who can help you.