Processes of Accounting For Ecommerce Sellers
Estimated reading time: 9 minutes.
Never miss a beat in your ecommerce accounting with our free downloadable checklist. Everything you should be doing on a regular basis to ensure your ecommerce books and business thrive, ready to go.
“Inefficient processes (44%) are [one of] the biggest causes of wasted time within an organization.”
Are you one of the many people wasting almost a third of your work day battling with inefficient processes?
Managing your finances can be a tricky business. As your ecommerce company grows and you’re bringing in more sales and racking up more expenses, that means more money movement to keep track of.
So, how do you stay on top of it all?
Having an efficient accounting process will help you paint a clear picture of your company’s financial position.
Then you can spend less time staring at spreadsheets and more time planning for your future financial growth.
In this guide to accounting processes:
Table of Contents
What is the accounting cycle?
The accounting cycle is a series of steps that accountants take to ensure all financial records for a business are checked, correct, and recorded properly.
It helps to turn business transactions into organized, usable information.
It’s basic, but easy to get wrong.
If you’re not recording your business finances properly, your business will struggle to survive. You also risk non-compliance with sales tax, and that can lead to some nasty bills.
And if you want investors, a loan, or to sell up later, accurate books is a basic requirement.
Even if you have a bookkeeper or accountant, it’s good to understand what’s involved in the accounting cycle. That way, you can do your bit to make their jobs as easy as possible.
And of course that, in the end, will be a huge benefit to your business.
Steps in the accounting process
The flowchart below shows all of the steps in the traditional accounting cycle.
Depending on the tools you use, some of the steps might happen automatically.
We’ll run through each step and note which processes and procedures can be optimized thanks to purpose-built apps and automations.
If this becomes a little overwhelming, don’t forget that we created a checklist to help you keep track of all the processes you should be doing on a regular basis. Find it here.
1. Identify transactions
Your ecommerce sales channel will usually send you a lump sum deposit to your bank account.
Nice and neat, right?
But also, that’s not overly helpful.
That lump sum is a fortnight or month’s worth of transactions. And you need all that information.
How much did you pay in fees? How about shipping? What did you collect in sales tax, or refund for returns? How much did you spend on inventory, storage or fulfillment?
Without this information, you can’t answer the fundamental question for your business: is it making or losing money?
So, the accounting process begins with identifying these transactions.
You will probably need to download these from your sales channel. Or send them to your accounting software online.
Those lump sum deposits need to be broken down, line by line.
If that sounds time-consuming, it is. And it’s the key reason that A2X exists!
(To fix the problem for you).
2. Record transactions
Great, you’ve downloaded your transactions from your sales channel.
Now you’ll want to record and categorize them in your accounting software.
This way, you can keep running totals of different types of income and expenses, generate financial statements, and easily access the information later.
The easiest way is to have A2X automatically turn your payouts into tidy journal entries.
It will automatically categorize each line to match your chart of accounts, and save you hours calculating each credit and debit line manually.
A journal entry from A2X shows:
All the income and expense lines categorized as either a credit or debit.
Where they’ll be recorded in your chart of accounts (you can change this).
The date of the transaction.
The amount of the transaction.
Setting up a workflow can reduce the amount of hands-on work involved in managing and recording transactions.
It helps you replicate tasks and subtasks much quicker and more accurately.
3. Post to the general ledger
After categorizing and recording transactions as journal entries, they need to be posted to the general ledger.
This used to be a physical book that contained a complete record of all your business transactions.
These days, your general ledger is more likely to be stored in your accounting software.
The good news is that accounting software can identify, record, and organize your transactions in a dashboard.
What it can’t do is pull all those line-by-line details about fees and other income and expenses captured in a lump sum.
As mentioned, that’s A2X’s job.
Once A2X has generated a journal summary for your new bank deposit, your accounting software will recognize a match between that journal and the corresponding deposit.
All you have to do is check they’re a matching pair, and reconcile them.
4. Calculate an unadjusted trial balance
At the end of your accounting period, you need to calculate the total balance of all the accounts in the general ledger.
If you’re not using accounting software, this will mean manually going through each account and adding up the debits and credits to make sure they are equal.
(Don’t do that. Spreadsheets might be free, but they’re hugely problematic for many reasons. In fact, companies have lost millions due to simple spreadsheet errors.)
If you have accounting software, a trial balance report can be created for you to export and analyze.
This is exactly how it sounds; a trial balance. It’s an opportunity to check your numbers and catch any mistakes.
It’s not unusual to find imbalances at this stage.
If the debits and credits aren’t equal, you might have missed, miscalculated or incorrectly categorized a transaction earlier in the process.
This can happen when customers haven’t paid an invoice or if a supplier hasn’t collected a payment.
5. Adjust journal entries
When you find the cause of an imbalance, the journal entry will need to be corrected.
If you’re using the right apps to generate journals for you, this should happen rarely.
Adjusting your journals should give you a balanced general ledger.
6. Prepare financial statements
With your freshly balanced books, you can now update your financial statements. The main three statements are the balance sheet, income statement and cash flow report.
Your balance sheet gives you a snapshot of what your business is worth.
It compares your assets (what you own) with your liabilities (what you owe) to calculate your equity (what you’re left with).
You can use your balance sheet to compare how your finances have changed over time and to anticipate where investments need to be made in the future.
Want to know how profitable your business is?
Your income statement or Profit and Loss Statement (P&L) will show you how much profit your company made over a certain period of time.
It takes your revenue and subtracts your expenses to give your net income.
So, if you’re making more money than you’re spending, then congratulations! You’re running a profitable business.
If you’re not, you can look at this statement to find where you might be overspending.
Cash flow statement
Your cash flow statement takes into account your operating costs, investments and financing to tell you exactly how much cash is flowing in and out of the business.
This is especially important for accrual-based accounting because the income reported on your income statement might not be money you have in the bank just yet.
Your cash flow statement will tell you the exact amount of funds you have at any given time, and how you’ve arrived at that figure.
You can use this information to predict any trends in cash surpluses or shortages. That way, you’ll know when you need to have more cash on hand.
7. Close the books
The last step in the cycle is for you or your accountant to close out the books at the end of the accounting period.
What this really means is to finalize the reports you’ve created.
These can now be used to compare to next month or next year’s performance.
Now, it’s time to prepare for the cycle to start all over again!
How to streamline accounting processes
The best thing about having an accounting process is that it keeps things running smoothly, and there are loads of tools and resources out there to help you optimize it.
Here are a few tips for optimization.
Separating personal and business accounts
When you’re first starting out, it might seem easier to keep your business and personal funds in the same account.
But, as your business grows, this will make it harder to track your company’s cash flow and correctly file your taxes.
Having separate accounts is a must.
It helps you run your business efficiently, reduces the amount of tax you owe, protects you against potential liabilities later on, and makes it easier to sell up down the road.
Documenting accounting processes with standard operating procedures (SOPs)
When you’re working in a business with lots of moving people and parts, having a standard way of doing things will take the guesswork out of operations (including but not limited to accounting).
Standard Operating Procedures are sets of instructions unique to a company, produced to ensure that everyone working there follows the same formula for everything.
While processes are higher level, SOPs are more detailed with specific assignments and ideal outcomes.
Using apps and automation
Human error can cost companies millions.
We’re not designed to handle high-volume, repetitive tasks accurately. Computers on the other hand? That’s their jam.
So let them do it. Mistakes will be rare and much easier to diagnose.
But remember, what you get out of automation is only as good as what you put into it. You still need a robust workflow and process.
Never miss a step with the ecommerce bookkeeping checklist
The accounting cycle may seem like a ton of work, but having a standardized process that works for your business can take a lot of the stress out of your accounting efforts.
You can also utilize the power of automation to save you precious time and money. Click to find out how A2X can take care of many of the manual tasks for you.
Want to feel completely confident in your ecommerce bookkeeping?
Businesses that document their processes grow faster and make more profit. Download our free checklist to get all of the essential ecommerce bookkeeping processes you need every week, month, quarter, and year.Download it here
Ecommerce accounting is challenging, A2X makes it easy.
Discover how A2X can automatically take all of your accounting pain away.