How to Categorize Transactions in Ecommerce Accounting: The Definitive Guide

If you’re running an ecommerce store, then you know that bookkeeping can be a hassle. Keeping track of your sales, expenses, and inventory can be a daunting task. But it doesn’t have to be!

In this blog post, we will discuss how to categorize transactions in eCommerce accounting. By following our guide, you will streamline your bookkeeping process and make it easier to keep track of your business’ finances.

What is Ecommerce accounting and why is categorizing important?

Ecommerce accounting is the process of tracking financial activity related to online sales. This can include sales made through a company’s website, as well as an ecommerce platform, such as Shopify or Amazon.

Ecommerce accounting can be complex because it often involves tracking transactions that cross multiple platforms and countries. It’s important to have a system in place to track all of these transactions to ensure that your books are accurate and up-to-date.

One of the benefits of categorizing transactions correctly is that it can help track your cash flow. By understanding where your money is coming from and going, you can make better-informed decisions about how to allocate your resources.

Categorizing transactions can help you prepare accurate financial statements. This includes a profit and loss statement, balance sheet, and cash flow statement. This is essential if you’re seeking investment from venture capitalists or applying for a loan from a bank.

Financial statements that don’t accurately reflect your ecommerce business’ income and expenses can prevent you from getting the funding you need to grow your business.

Types of ecommerce accounting transactions and how to categorize them

There are several different types of ecommerce transactions:

• sales
• returns
• inventory
• payments
• receipts
• taxes

Sales

Sales are the transactions that occur when you sell products or services to customers. This could be done through your online store, offline store, or even through a third-party platform such as Amazon.

One way to categorize sales transactions is by the type of product sold.

For instance, you could have a category for “clothes” and another for “electronics.” Alternatively, you could categorize by the type of customer, such as “wholesale” versus “retail.”

The method you choose will depend on your business and what information you need to track.

Returns

Returns are transactions that occur when customers return products they’ve purchased from you.

This could be because the product is defective, they changed their mind, or they simply didn’t like it. Whatever the reason, it’s important to track returns so that you can keep tabs on your inventory and customer satisfaction.

There are a few different ways to categorize returns. The most common approach is to categorize them as either refundable or non-refundable. Refundable items are those that can be returned for a full refund, while non-refundable items can only be exchanged for store credit.

Another factor to consider is whether or not the customer paid shipping on the original order.

If the customer paid for shipping, then you can typically give them a full refund without taking a hit to your bottom line. However, if the customer did not pay shipping, then you’ll need to factor that into your decision on whether or not to offer a refund.

The last way to categorize returns is by the reason for the return. This can be helpful in understanding why customers are returning items and making changes to your product or sales process accordingly.

Inventory

Inventory is a record of the products or materials that you have on hand. This can include raw materials, finished goods, and even packaging supplies. Managing inventory is crucial so that you can keep tabs on your business’ expenses and ability to make sales.

There are a few ways to categorize inventory purchases. One way is to categorize by product type.  For example, you might have a category for “electronics” and another for “clothing.”

Another way to categorize inventory is by the supplier. So, you might have a category for “supplier A” and another for “supplier B.”

The method you choose will likely depend on the size and complexity of your business.

Small business owners with just a few products, categorizing by product type might be the simplest option. If you have a larger business with products from multiple suppliers, categorizing by supplier might be a better option.

Payments

Payments are transactions that occur when you receive money in your bank accounts from customers. This could be in the form of cash, check, bank transfer, or credit card.

There are a few different ways that you can categorize payments. The most common way is to break them down into payment channel like credit card payments, PayPal payments, and direct bank deposits. This can be helpful in understanding where your payments are coming from and tracking any trends over time.

Another approach is to categorize by sales channel like direct to consumer or wholesale so you can track the rate at which you collect cash by each channel.

Taxes

Tax payments are a necessary part of doing business, but they can also be confusing and complicated. When it comes to categorizing taxes for accounting purposes, there are a few different approaches you can take.

One approach is to categorize by type of business tax. For example, you might have categories for business income taxes, sales tax, and property tax. This can be helpful in understanding how much you owe in each type of tax and keeping track of any changes over time.

Another approach is to categorize by jurisdiction. So, you might have categories for federal taxes, state level sales taxes, and local taxes. This can be helpful if you have businesses in multiple states or countries and need to keep track of taxes for each jurisdiction.

The approach you take will likely depend on the size and complexity of your business. If you have a small business with just a few types of taxes, categorizing by type of tax might be the simplest option.  For ecommerce entrepreneurs with sales channels in multiple states or countries, categorizing by jurisdiction might be a better option.

Why should ecommerce businesses keep accurate books?

Staying organized and efficient

Proper bookkeeping helps you keep track of your business performance, operating expenses, and cash flow – all of which are critical for running a successful eCommerce operation.

It’s essential to have a clear picture of your business financials and identify areas where you may need to reign in expenses. Bookkeeping keeps tabs on your overall financial health in order to make sound strategic decisions.

Making tax time easier

As an ecommerce business owner, it’s important to stay compliant with tax laws.

When it comes time for your tax bill, you’ll be glad you have all of your tax documents neatly organized and easily accessible. This will save you time and hassle – not to mention potential penalties from the CRA or IRS if you’re not fully prepared.

External funding

Accurate bookkeeping can make it easier for you to get funding or investment for your business.

When you’re looking for external funding, investors will want to see proof that your business is financially stable and has a solid track record. This is where well-kept financial records come in handy – they show that you’re serious about running a successful ecommerce business.

Avoiding penalties & interest charges

If you don’t keep accurate books, you could be subject to penalties and interest charges from lenders.  This is because lenders use your financial information to assess your creditworthiness.

If your records are a mess, it will be difficult for them to determine whether or not you’re a good candidate for a loan. This could also lead to higher interest rates and less favourable terms.

Managing cash flow

One of the most important aspects of bookkeeping for eCommerce businesses is cash flow management. This simply refers to the money coming in and out of your business account on a daily basis.

To get a better understanding of your cash flow, you’ll need to track all of your income and expenses and compile cash flow statements. This will give you a clear picture of how much money is coming into your business bank account, what expenses need to be paid, and how much profit you are making.

Tips for keeping an ecommerce business organized

Use accounting software

Use accounting software to manage your books. Cloud accounting software makes it easy to keep track of income and expenses, and it can automate many of the tasks involved in ecommerce bookkeeping.

There are a number of accounting software programs available such as Quickbooks and Xero. Be sure to research the options and choose an accounting solution that best meets your needs. Check out our post on the best Accounting Softwares for Amazon Sellers.

Keep track of your sales tax

Don’t forget to keep track of your sales tax.  This is a critical part of your bookkeeping and failure to pay sales tax can result in penalties from the government.

As an ecommerce entrepreneur, you may be required to collect local sales taxes from customers in multiple states or provinces. This can get complicated, so it’s important to keep good records and consult with a tax advisor if necessary.

Set up a system for tracking inventory levels

If you sell physical products, you’ll need to track your inventory levels.

This is critical since it allows you to reorder as needed and keep track of your cost of goods sold (COGS). It will also prevent costly stock-outs, which can frustrate customers and damage your business’s reputation.

There are a few different ways to do this, but the most important thing is to find an inventory management system that works for you and stick with it.

Make a budget

Knowing where you spend money is key to keeping your finances in order.  

Create a budget for your business and track your income and expenses against it. This will help make informed decisions about where to allocate your resources.

It’s also important to be realistic when creating your budget. If you’re too stingy, you could end up starving your business of the resources it needs to grow.

Hire a bookkeeper or accountant

If you’re not comfortable doing your own bookkeeping, you can always hire a bookkeeper or ecommerce accountant to do bookkeeping tasks for you. They can provide expert tax planning advice and help you avoid costly mistakes – which will save you time and energy in the long run.

This is an especially good idea when your business grows and your accounting tasks are becoming more complex.

Analyze your financial data regularly

Don’t forget to analyze financial reports on a monthly or quarterly basis. This will help you spot trends and make adjustments to your business as needed.

For example, if you notice that your advertising expenses are increasing but your sales are not, you may need to re-evaluate your marketing strategy.

You can use an accounting system that includes financial statements and data analysis tools, but an accountant or bookkeeper can provide more detailed financial projections.

Wrapping Up

Categorizing ecommerce accounting transactions doesn’t have to be complicated. By following our tips, ecommerce business owners can streamline their bookkeeping processes and avoid costly mistakes. If you need help with your ecommerce accounting feel free to reach out!

‍