A Complete Guide To E-commerce Accounting
The Australian e-commerce market is both vibrant and fast-growing, with an expected revenue of USD 37 billion in 2023. It is the 14th largest market in Australia comprising businesses such as:
- Clothing (43%)
- Shoes (31%)
- Books, movies, music, and games, excluding downloads (24%)
- Cosmetics and body care (22%)
- F & B excluding restaurant deliveries (22%)
If you are a solopreneur who is considering expanding your e-commerce business, this guide is for you!
Before we delve deeper, here is a quick walkthrough of e-commerce accounting.
Definition of, and Need for E-commerce Accounting
An e-commerce business is defined as the trading of goods and services over the Internet. Though it looks fairly simple on the outside, e-commerce accounting does require close tracking of financial transactions, purchase and sales orders, e-commerce sales tax, and cost of goods sold. Managing all of this while working on your store can be tedious. But, services like Sleek can help!
Australia has over 83,000 online shopping businesses as of 2023 , an increase of 14% from 2022. The current size of Australian e-commerce businesses and the expected growth over the next few years (market volume of US$53.3 billion by 2027 ) show the strong need for specialised services offering e-commerce accounting, and professional organisations such as Sleek that can offer tailored solutions to every kind of e-commerce business.
Differences Between E-commerce Accounting Services & Traditional Bookkeeping
E-commerce accounting and Traditional Bookkeeping have distinct differences due to the nature of the businesses they support.
An e-commerce business requires you to manage several financial considerations and challenges, such as payments, customer returns, shipping logistics, and inventory management.
- E-commerce Accounting: An e-commerce seller typically handles a higher volume of transactions compared to traditional brick-and-mortar stores. This requires efficient tracking and management.
- Traditional Bookkeeping: Traditional businesses generally have lower transaction volumes. This makes it easier to manually record and manage financial data.
Source of Transactions
- E-commerce Accounting: An e-commerce store operates from multiple digital sales channels, which involve digital payment methods and electronic invoices.
- Traditional Bookkeeping: Traditional businesses conduct transactions on one sales channel with basic bookkeeping tasks such as managing cash, checks, or other non-electronic payment methods.
Data Collection and Integration
- E-commerce Accounting: It involves integrating data from various digital platforms. Most e-commerce companies today use cloud accounting software such as Sleek.
- Traditional Bookkeeping: It relies more on manual financial data entry from physical documents, such as receipts, invoices, and ledgers.
- E-commerce Accounting: Business owners have to handle real-time inventory management which is closely tied to accounting systems to ensure accurate financial reporting on the company’s financial position.
- Traditional Bookkeeping: Traditional businesses with physical stores also manage inventory, but it is less dependent on real-time tracking to track sales.
- E-commerce Accounting: To ensure their business grows quickly, entrepreneurs may have to engage in cross-border sales and international transactions, involving multiple currencies. Handling profit margins, currency conversions and exchange rate fluctuations is therefore crucial.
- Traditional Bookkeeping: Traditional businesses usually deal with transactions in a single currency.
Customer Feedback & Interactions
- E-commerce Accounting: The success of an online business is influenced by customer reviews, feedback, and online interactions. Timely responses to customer feedback become more important as the business grows.
- Traditional Bookkeeping: Traditional bookkeeping focuses less on customer interactions and more on managing a positive cash flow.
- E-commerce Accounting: It heavily relies on cloud-based accounting software and online tools for managing accounting tasks such as accounts payable and cash flow statements.
- Traditional Bookkeeping: It relies mainly on an accounting method that uses physical records and manual systems.
To summarise the key differences:
|Element||E-commerce Accounting||Traditional Bookkeeping|
|Transaction Volume||Higher volume of transactions|
Lesser volume compare to e-commerce
|Source of Transactions||Multiple digital sales channels||One sales channel (offline)|
|Data Collection and Integration||Automatic Integration from various digital platforms|
Manual financial data entry from physical documents
|Inventory Management||Real time inventory tracking and management||Real time tracking not required|
|Multi-Currency Transactions||Borderless transactions involve multiple currencies||Single currency transactions only|
|Customer Feedback & Interactions||Heavily dependend on feedback for growth|
Relies less on customer feedback nad more on sales
|Technology Integration||Highly tech-oriented uses many online tools|
Little or no technology – mainly manual entries
Why is E-commerce Accounting Essential?
The key reasons include:
- Maintaining business finances properly
- E-commerce accounting streamlines tax compliance, inventory management, and cash flow analysis, promoting effective financial management in online businesses.
- Generating accurate financial reports
- E-commerce accounting ensures accurate tracking of revenue, expenses, and profits, providing a clear financial picture for informed decision-making.
- Tax planning for better financial forecasting
- E-commerce accounting is fully data-driven, which helps businesses project tax liabilities accurately and allocate resources effectively. It also gives businesses the means to track sales, expenses, and deductions, ensuring compliance with tax regulations.
- Inventory purchases and management
- E-commerce accounting streamlines inventory purchase and management by automating the tracking of online transactions and stock levels
- Cash flow management
- You can use e-commerce accounting methods to streamline financial tracking and real-time monitoring of revenue and expenses.
- Managing multi-currency transactions
- By automating currency conversion and real-time exchange rate updates, e-commerce accounting helps you manage your international transactions seamlessly
Different Accounting Approaches for E-commerce
In Australia, accounting firms can use various accounting approaches to manage the finances of e-commerce businesses:
- Accrual Accounting: Revenues and expenses are recognised when they are earned or incurred
- Cash Basis Accounting: Revenues and expenses are recorded only when cash is received or paid
- Hybrid Accounting: A combination of accrual and cash basis accounting
- Inventory Accounting Methods: First-in-First-Out (FIFO) and Last-in-First-Out (LIFO), which can impact the cost of goods sold (COGS) and tax planning
- Goods and Services Tax (GST) Accounting: In Australia, businesses (including e-commerce businesses) with a GST turnover of $75,000 or more must register for GST
Regular Tasks for Best Practice
Like all accounting methods and practices, e-commerce accounting also requires you as an e-commerce entrepreneur to carry out certain tasks regularly for accurate and lawful financial records. You also need to be compliant with rules and regulations governing e-commerce transactions and taxation.
Routine tasks are those that need to be performed as per a set schedule (daily, weekly, monthly or other frequency). They include recording of all sales transactions and expenses, bank reconciliation, tracking foreign currency exchange rates, inventory management, tax return filing and inventory tracking.
Your e-commerce business must develop and adopt best practices followed by other industry players. These include the adoption of up-to-date online accounting software for real-time monitoring, software for automated data entry and reconciliation, integration of payment gateways for ease of transactions and compliance with all mandatory financial and tax obligations.
These practices collectively uphold efficient financial management, compliance, and trustworthy reporting in the dynamic realm of e-commerce.
E-commerce Payment Methods
E-commerce business owners in Australia accept various payment methods. Offering multiple modes of payment to buyers also increases revenue for small businesses. Some of the popular payment modes are:
- Credit and Debit Cards
- Bank Transfers
- Apple Pay and Google Pay
These are linked to the accounting system and the bank accounts of the e-commerce companies. It is vital that an e-commerce accounting service track all sales and refunds from these sources.
As a small e-commerce business owner, your choice of e-commerce accounting would depend on various factors. A qualified e-commerce accountant or professional services can help simplify it for you.
Sleek’s expertise in e-commerce accounting lies in providing specialised accounting services and tax management tailored to the unique needs of online businesses. We understand the complexities of managing financial transactions and data of e-commerce stores.
By combining expertise in accounting practices with a deep understanding of the e-commerce business, Sleek provides tailored accounting solutions to e-commerce business owners. This helps you ensure business success, leaving you with time to focus on growth strategies for your business.
Key components of e-commerce accounting are a higher volume of online sales, multiple payment gateways, and global customers. It requires specialised tools to integrate data from various platforms and handle multi-currency transactions, making it more complex than traditional brick-and-mortar businesses.
The best accounting software for an e-commerce business depends on various factors. Popular options for e-commerce sellers include Sleek, a cloud-based e-commerce accounting software that offers several unique features.
Many accounting firms use an inventory accounting system Like FIFO or LIFO to track stock levels and valuations of their sales channel. E-commerce businesses can use specialised inventory management software that integrates with their accounting system to ensure accurate records and avoid overstocking or stockouts.
E-commerce sellers handling multi-currency transactions have to monitor exchange rates and foreign currency gains or losses. These can impact the company's finances and gross profit. Many accounting software solutions offer multi-currency support, allowing businesses to record transactions in their respective currencies and automatically convert them to the base currency for reporting.
An e-commerce store in Australia must comply with relevant tax regulations in its business budget.
In Australia, e-commerce businesses must have a business tax ID number. It must also consider Goods and Services Tax (GST) and income tax requirements.
Businesses must register for GST if their annual turnover exceeds the threshold, charge GST on sales, and claim GST credits on eligible purchases. Income tax obligations involve reporting business profits and expenses in annual tax returns.
It is advisable to consult with a qualified accounting service like Sleek to ensure proper tax compliance and maximise available tax benefits for your e-commerce business.
- E-commerce Accounting Software: A computer programme designed to perform various accounting tasks.Cloud Accounting: Storing accounting data and software on remote servers accessible through the internet.
- E-commerce bookkeeping: Details of all debit and credit entries
- Online invoicing: The process of generating and sending invoices to customers electronically.
- Electronic payments: Transactions made using digital payment methods.
- E-commerce integration: Connecting an e-commerce business platform with accounting software.
- Online sales: The trading of goods and services on the internet.
- Data Security: Protection of sensitive financial information from unauthorised access, data breaches, and cyber threats.
- Data Backup and Recovery: To prevent data loss and ensure business continuity in case of hardware failures or disasters.