By maintaining your financial records, you will be able to act in accordance with federal and state tax laws and comply with all relevant sales tax regulations. Creating a chart of accounts not only shows a snapshot of your company’s financial health, it provides lenders and potential investors with all the information they need to know. This is crucial if you plan on applying for loans, investment, and funding when you expand.

Depending on your location, you’ll likely be paying federal, state, and other taxes. Plus, you’ll have to pay the sales tax you collect from the customers to the right governmental entities. Usually, ecommerce platforms include a sales tax portion and collect this tax from customers when they buy your products. Accounting and bookkeeping duties involve tracking purchases and inventory every step of the way. This way, you know your sales are accounted for and also know when it’s time to order more products.

  • For another report you may wish to show the individual accounts that make up the overall revenue number – by designing your CoA in this way you have the flexibility to do both.
  • A chart of accounts is essentially a list of categories that an organisation sets in order to distinguish financial transactions.
  • If we’re going to guess, you didn’t start your Shopify store because you loved accounting, bookkeeping, and spending all day in spreadsheets.
  • With the right e-commerce accounting software, you can confidently run your online business, while also easily integrating your sales channels and platforms with your accounting software.

To customize the account categories, click on the “Settings” icon at the top right corner of the screen. Here, you can customize the categories to fit the unique needs of your ecommerce business. Chart of Accounts is the financial tool which sorts all your business transactions.

Structuring your e-commerce chart of accounts

Your eCommerce business will live or die based on how you manage your cash flow. One of the main functions of a chart of accounts is to facilitate double-entry accounting, a record-keeping system that documents each business transaction twice. One entry shows the source of money, the other entry shows the money’s destination.

  • Generally, this is recommended if you’re a bookkeeper or accountant, or if you’re working with one.
  • It will save you a ton of time and can ensure that your finances are up-to-date and accurate.
  • Whether it is dealing with chargebacks or a rogue employee embezzling from your company – like this wild story from an 8-figure US ecommerce business, there are many things you can do to prevent fraud.
  • Now that you know all about the accounting options available to you, you can continue to turn your great eCommerce Business Ideas into profitable businesses.
  • Consider your sources of income, types of expenses, and the nature of your assets and liabilities.
  • A cash-based accounting system allows you to record sales and expenses when the money lands or leaves your business bank account.

Consistency and consolidation are critical when you want to be efficient using this financial organization method; accuracy equals financial coherency in financial management. A business owner, for example, may want to organize by labeling and naming the eCommerce categories and sub-groups so that it is easier to find. For instance, the deli equipment you purchased food and supplies for your convenience store may have cost $5,000. You would then credit $5,000 to your bank account and debit $5,000 to the equipment and supplies category. You would need to do this transaction because money is leaving your company in exchange for procuring new equipment and supplies.

The easiest way to manage your chart of accounts is to use an accounting software system that runs it on autopilot. A standard chart of accounts contains multiple accounts under each category. Your company might have an account for cash on hand, a separate one for accounts receivable, and a third for real estate holdings, all three of which are categorized as asset accounts.

What are the Best Accounting Practices to Use for an Online Business?

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns. Here is an example of how we breakdown the operating expenses for our customers. Below are examples of different equity sections for different type of entities. Equity can be quite confusing and is treated differently for different entity types.

Balance Sheet Accounts

Tax management for e-commerce stores can be difficult, but it’s much easier if you have accounting software to manage the process. However,  you must still track and pay state and local taxes, as well as make tax-related filings, such as sending Form 1099 to contractors. A big part of that is assessing financial statements, such as the balance sheet, profit and loss statement, and cash flow statement. A key advantage for eCommerce businesses is integrating the COA with online selling platforms. This integration automates transaction recording, ensures accuracy, and provides real-time financial data. It’s crucial for tracking profitability and managing inventory efficiently.

Current Assets

A chart of accounts is a financial organizational tool that provides a complete listing of every account in an accounting system, essentially a financial map for your e-commerce business. It categorizes all your what is net book value nbv guide and formula financial transactions, making sure that your financial reports are accurate and comprehensive. The income statement (or profit and loss statement) shows a company’s performance over a reporting period.

Chart Of Accounts For eCommerce Businesses

Consider the different categories and subcategories that are relevant to your e-commerce operations. For example, if you sell physical products, you may have separate income accounts for different product lines or sales channels. On the other hand, if you provide services, you might need to create specific expense accounts for software subscriptions or marketing campaigns. A one-size-fits-all approach simply won’t cut it when it comes to your chart of accounts.

Managing and Updating Your Chart of Accounts

If your business is based in a country like Pakistan, Saudi Arabia, or Nigeria, you may find that you need to use a payment gateway like 2Checkout. However, these payment gateways won’t work for all eCommerce businesses. “As far as selling your business goes, this will be the most important document you can bring to the table. It’s also the one Shopify store owners usually get wrong because bookkeeping isn’t their forte. If you’ve identified redundant or archaic accounts, it can be tempting to clean it up by deleting or by merging them. The way your accounts are numbered will help you stay on top of your finances and easily find transactions in each subcategory.

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