To understand e-commerce accounting, it is important to have knowledge about e-commerce business and its various types. Ecommerce business refers to the companies that buy and sell products and services over the internet. It operates in different market segments and can be driven over laptops, mobiles, tablets, or other smart devices.
Now let’s understand Ecommerce accounting.
What is Ecommerce Accounting?
Ecommerce accounting is basically accounting done for e-commerce businesses. It refers to collecting, organizing, analyzing, and reporting financial data within an e-commerce business. It is important for three main reasons:
- determining the health of the business,
- making financial projections, and
- paying tax liabilities.
Types of Accounting for Ecommerce Businesses
There are two ways to do Ecommerce accounting that the IRS allows, i.e., Cash Basis of Accounting and Accrual Accounting Method.
This accounting method records the transactions when cash is received in your account or leaves as an expense. New businesses generally use it because it’s simple to use and manageable. You record the money movements based on your account and can see how much cash is available at any given point.
It is simple to use but does not represent the actual profitability of the business. Therefore, this method can not be used by large or growing businesses as it doesn’t recognize future account receivables or payables.
This method allows businesses to record the transactions when they occur, not when the money is received or paid. As a result, this accounting method provides you with a more realistic image of the business and allows you to make more accurate financial projections.
The disadvantage of this method is that it is more complicated as it requires more time and resources and also involves tracking cash flow, account receivables, and account payables.
Difference between Cash Basis and Accrual Basis of Accounting
The basic difference between cash accounting and accrual accounting is that cash accounting records transactions when a payment is received or made. Still, accrual accounting records the transactions when they occur. In other words, accrual accounting records the transactions when the revenue is earned or expenses are incurred.
Now that we have discussed the types of accounting for e-commerce businesses, we should also discuss the different accounts used in e-commerce businesses.
Business Account types in Ecommerce Accounting
There are four major account types used in the e-commerce business. These are as follows:
- Checking Account – A checking account is like a deposit account with a bank or other financial firms, allowing the holder to make deposits and withdrawals. This account is very liquid as it allows the holder numerous withdrawals compared to savings or investments, and there is no minimum limit for the account balance. The disadvantage of a checking account is that it limits the number of cash deposits made in a month.
- Savings Account – A savings account is used in e-commerce accounting because you can earn interest on the money deposited. This account can be used as a savings fund that is kept aside for business emergencies. With this account, there will be a limit on how much money can be withdrawn, and you must pay taxes on the interest earned as it is your income.
- Certificates of Deposits – A certificate of deposit is a kind of savings account in which money is deposited for a fixed period between 1 month to 5 years. With this account, you can earn high-interest rates, but the money is to be kept until maturity. A fee will be charged if you withdraw the money before maturity.
- Money Market Account – A money market account combines the features of both savings and checking accounts. If you want the benefits of both these accounts, a money market account is the best option. It provides you with higher interest rates than both accounts and is suitable if you deal with a large sum of money. However, this account has a major restriction: you can withdraw maximum up to six times a month.
Ecommerce accounting is divided into various categories and subcategories. It is difficult for business owners to know all the tax laws changes, understand the business models and structures, or identify different growth opportunities. For this, you require a flexible e-commerce accounting firm that can do it all for you.
Written by – Khushboo Batra
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