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16+ Common Mistakes in E-commerce Accounting

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What You Need to Know

  • Don't be lazy with accounting; use all the tools & methods available to you; understand the exact definitions and the implications of your financial metrics; make sure to account for all the expenses of your business.
  • To simplify your accounting procedures, use Shypyard to seamlessly synchronize your inventory, product information, payouts, and orders between your various sales channels and your accounting software.
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Accounting is an unavoidable part of running an e-commerce store. How much profit did you earn this month? How much inventory is left? However, e-commerce accounting usually involves a lot of data, sources, metrics, and channels, making it difficult to complete. First-time merchants are bound to make mistakes while tracking and analyzing the situation of their e-commerce businesses. These oversights can lead to a misunderstanding of your business' performance, with the negative impact magnifying as your store grows. Therefore, it is best to gain awareness of your accounting mistakes early on.

In this blog, we will present to you 17 common accounting mistakes that e-commerce merchants make. This will allow you to more accurately assess your store's performance, which is a big step towards running a successful, profitable business.

Doing your accounting manually and not using accounting software

Mixing business accounts with personal accounts:

Keep the accounts separate to avoid your personal account being dragged into any audits.

Not keeping up with accounting, not running regular financial reports, and not backing up data regularly:

Do not be lazy with bookkeeping and accounting, especially in e-commerce. E-commerce businesses generate a lot of data point, which will be hard to organize and even overburden your accounting system if left to pile up.

Doing bank reconciliations too infrequently:

Bank reconciliations serve as a way to detect fraud and accounting errors.

Not using and analyzing financial KPIs:

Some numbers and data mean nothing if you do not analyze them in context to others. Financial KPIs are a useful tool for tracking growth and understanding the "efficiency" of your customers, sales, expenses, etc.

Not creating standard operating procedures (SOP):

A SOP describes a repeatable business task or process in detail, including how to complete it, how often it should be done, and who is responsible for doing it.

Not using a chart of accounts:

A chart of accounts is a list of all the accounts that make up a company's summary of transactions, comprising of assets, liabilities, equity, revenue, and expenses. Taking time to set it up helps lay the foundation for a more efficient, clear, functional, and organized record-keeping. It also allows you to see how individual spendings fit into the bigger picture.

Not tracking or keeping records of reimbursable expenses

Inventory Mistakes:

For example, not including all the in-transit stock or forgetting to re-add returned products to the inventory. Maintaining an accurate, up-to-date inventory record is especially hard for merchants who have multiple sales channels. Since inventory carries over to the next month, small tracking mistakes can build up if left unrevised, resulting in large discrepancies, which may cause accounting errors and cashflow problems. Merchants need to actively prevent this situation from occurring.

This is where Shypyard comes in. Shypyard allows for real-time inventory synchronization between your multiple sales channels and your accounting software. This reduces manual effort and errors, so you can confidently spend more time focusing on the other aspects of your burgeoning business. In addition, Shypyard also offers seamless integrations for the other data of your e-commerce store, such as orders, payouts, and product information. See our Xero-Shopify integration solution as an exemplary demonstration.

Not tracking overhead expenses

This includes marketing, administration, staffing, and website maintenance costs.

Not quantifying discounts and customer returns into costs

Not accounting for merchant platform and service fees

This includes e-commerce platform fees, payment provider fees, storage & shipping services fees, etc.

Looking to your bank balance when determining income and sales:

The funds in your bank account are often net amounts, with the expenses already taken out, and therefore are not an accurate indication of your sales or revenue. Sales figures should be found in the back-end of your sales channels.

Looking at the profit, but not the cashflow:

The profit can be skewed by accounting adjustments and changes in working capital. This is especially true for e-commerce, since most of a merchant's cash is tied up in inventory, which may be overstocked. Therefore, merchants should not only look at their profit and loss statements, but also inspect their cashflow reports.

Incorrect Cost of Goods Sold (COGS) calculations:

The COGS in e-commerce includes both the manufacturing cost and the cost of selling & delivering the products. As a result, merchant platform fees and shipping costs must be included in the calculation. Generally, any expense that increases as the sales volume increases is a cost of sale. An accurate COGS is important for calculating an e-commerce business' gross profit, which informs a merchant of the profit they are earning from their sales.

Being overly optimistic about cash inflows:

Account for discounts, fulfillment schedules, debt payments, and customer returns when you record sales, don't simply mark it down as income.

Not understanding the difference between cash accounting and accrual accounting:

In cash accounting, a merchant adds a new record whenever cash is deposited in or leaves their bank account. On the other hand, in accrual accounting, a new record is added the moment a sale or expense takes place, even if the money has not been transferred yet.

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