Key Accounting Areas of Ecommerce

Ecommerce accounting involves more than just recording transactions, it encompasses managing revenue streams, inventory, and ensuring compliance with tax regulations. The following sections outline the key components of effective ecommerce accounting and reporting practices.

Sales and Revenue Management

Sales and revenue management is central to ecommerce accounting. It includes accurately recording transactions, managing refunds and returns, and ensuring revenue is properly recognised across multiple sales channels. Ecommerce businesses often have multiple revenue streams, and understanding how each is generated is critical for:

1. Accurate financial reporting
2. Revenue recognition (under IFRS 15/ASC 606)
3. Tax compliance
4. Profitability analysis
5. Reconciling payouts across platforms

Table 1: Revenue stream and its accounting consideration

Thus, each model may involve different billing cycles, revenue deferrals, and payout timelines. To manage revenue effectively, ecommerce businesses must first define revenue streams and then apply appropriate treatment.

Sales Orders Reporting

What is a Sales Order (SO) in Shopify and Amazon?

A Sales Order (SO) is an internal document generated by an ecommerce seller to formally confirm that the business can fulfill a customer’s purchase request. While a sales order typically does not trigger a financial transaction, it plays a vital role in order processing, inventory management, and customer fulfillment.

Key Information Included in a Sales Order:

1. Product details (description, quantity, unit price)
2. Total amount payable (including shipping and taxes)
3. Order and shipping dates
4. Delivery method and address
5. Payment terms (e.g. credit, upfront)

Platforms like Shopify and Amazon automatically generate sales orders when customers complete the checkout process. These SOs are often used to initiate order fulfillment workflows, including:

1. Stock verification via the inventory system
2. Order processing (picking, packing, shipping)
3. Invoice creation and customer billing
4. Accounts Receivable (AR) entries for credit sales

Should an Ecommerce Company Record Each Order When It Is Placed?

Yes, recording each transaction as it occurs is essential for accurate financial reporting and business decision-making. However, how and when a transaction is recognised in the accounting records depends on the accounting method used:

Accrual Accounting (Recommended)

1. Revenue is recorded when earned, typically when goods are shipped or services are delivered but not when payment is received.
2. Offers a more accurate view of the business’s financial health, especially where inventory or credit sales are involved.
3. Under this method, it’s important to record the financial elements of the transaction at the time the order is placed and fulfilled.

Cash Basis Accounting

1. Revenue is recorded only when cash is received.
2. Simpler for small businesses, but does not reflect outstanding invoices or liabilities, which can understate the business’s financial position.

Regardless of method, all transactions including sales, returns, taxes, and fees should be clearly recorded with accurate dates and amounts to support compliance and performance tracking.

What is the Most Efficient Way to Record Orders?

In a high-volume ecommerce environment, manual data entry is neither scalable nor reliable. Businesses must implement automation and software integrations to streamline sales order recording and reconciliation.

Use Ecommerce-Focused Accounting Software. Tools like QuickBooks Online, Xero, and Zoho Books are tailored for online retailers. They offer features such as:

1. Automated sales entry
2. Real-time inventory tracking
3. VAT management and MTD compliance (UK)

Automate Reconciliation with Marketplace Payouts

Direct integration between ecommerce platforms and accounting systems ensures sales data flows automatically, reducing manual input and errors. VAT-specific tools for the UK and EU (like Avalara and Link My Books) are especially important for OSS/IOSS compliance, reverse charges, and zero-rated sales.

Tools like A2X and Link My Books are specifically designed to break down marketplace payouts into detailed journals and this is crucial for reconciling Amazon, Shopify, TikTok or Etsy lump sum payments.

Platforms such as Brightpearl and Cin7 are more advanced and better suited for larger or growing ecommerce businesses that need integrated ERP functionality.Nevertheless, all the above tools are essential to match each payout to the correct revenue and expense categories and to support accurate Financial Reporting:

Example Entry 1: Recording the Revenue and Cash/Accrual Accounting
This entry records the full sales price (including collected sales tax and fees) and recognizes the corresponding revenue and the liability for sales tax.

Key Context: Under accrual accounting, revenue is recorded when it is earned, typically when the goods are shipped or control is transferred to the customer regardless of when the cash is deposited.

Entry 2: Recording Cost of Goods Sold (COGS) and Decreasing Inventory

This entry reflects the direct costs associated with the items that were sold, which is essential for accurately determining profitability and gross profit.

Key Context: COGS is defined as the direct cost of producing the inventory sold, including the cost of materials, labor, and other costs associated with producing the goods.

Entry 3: Recording Payment Processing Fees and Platform Fees

This entry records the costs charged by payment gateways (like PayPal or Stripe) and the selling platform (like Amazon or Shopify) for facilitating the sale. These fees are considered a deductible business expense.

Key Context:Fees are often deducted directly from the gross sale amount by the platform before the lump sum payment is deposited into the business’s bank account. Ecommerce accounting software or integration tools are crucial for breaking down the lump sum payment into these distinct categories (sales, fees, refunds).

Entry 4: Recording a Refund/Return (The Reversal)

When a customer returns a product, a set of reverse entries is needed to decrease the liability for the expected refund (under GAAP/IFRS rules) and adjust the corresponding revenue and asset accounts.

Key Context: Returns and refunds must be properly accounted for to ensure balance sheets are accurate. The new revenue standard requires recognizing a liability for expected refunds and an asset for the right to recover the returned goods.

Importance of Automation for Reporting

Given the high volume of transactions in ecommerce, manually creating these entries for every sale is prone to error and time-consuming.

The most efficient practice is to automate this process using specialized accounting software that integrates directly with sales channels and hire an ecommerce accountant that understands the complexity of multichannel bookkeeping and compliance.

Regular reconciliation (monthly is ideal, or weekly/daily for high-volume sellers) of bank accounts, matching the summary transactions provided by the platform against the bank deposits is a must to quickly catch discrepancies, often caused by refunds or chargebacks.

Refunds reporting 

For businesses selling across platforms, the lump sum payments received from the sales channels (like Amazon or Shopify) are not just sales but are actually a combination of sales, fees, refunds, shipping income, and other transactions. Hence, mismatches often happen due to refunds or chargebacks, which must be caught early to prevent financial misstatements.

Revenue recognition standard FRS 102, section 23, provides specific guidance on accounting for the Right of Return:

Revenue Restriction: Revenue is only recognised for goods that are not expected to be returned, with the transaction price reflecting only the portion to which the entity is highly probable to be entitled after considering expected returns.

Refund Liability: A liability must be recognised on the balance sheet for the amount of expected refunds due to customers. This liability needs to be updated during each reporting period to reflect changes in the expectation of refunds.

Asset Recognition for Returned Goods:This asset is initially recognised at the original inventory cost less expected costs to recover and any decreases in value. A corresponding credit is recognised against cost of sales. The asset and liability should be re-measured at each reporting period to reflect revised estimates.

Financial Statement Presentation: The revenue standard requires that the balance sheet presentation for expected returns reflect both the refund obligation (liability) and the asset for the right to the returned goods on a gross basis. This eliminates diversity previously seen in reporting practice. Example of Accounting for Expected Returns: If a retailer sells 100 mobile phones and estimates 10 will be returned:

• Revenue is recognised for 90 phones.
• Cost of sales is recognised for 90 phones.
• A liability for the refund obligation (cost of 10 phones * selling price) is recognised.
• An asset for the anticipated recovery of the inventory (cost of 10 phones * cost price) is recognised.

Related Mechanisms (Price Protection): Customer incentives that involve potential future payments, such as price protection (agreeing to reimburse the customer if the price drops later), are treated similarly to refunds in that the amount expected to be repaid to the customer is excluded from revenue and recorded as a liability at the time of sale.

Inventory and Cost of Goods Sold (COGS):

Inventory is an asset that holds value and its management involves overseeing the flow of goods from purchase to sale. Effective management ensures adequate stock to meet demand while avoiding unnecessary expenses from overstocking. Businesses must track and value inventory using established methods such as FIFO, LIFO, and Weighted Average.

COGS represents the direct cost of producing the inventory a business has sold, including the cost of materials, labor, and overhead associated with producing the goods. It is distinct from operating expenses, which are expenditures not directly related to product production. Calculating COGS is essential for determining profitability, as it represents the direct cost of the inventory sold (materials, labor, overhead).

The cost of inventory sold will depend on which valuation method the business uses:

• FIFO (First In, First Out):This method assumes the items purchased or produced first are sold or used first. The cost of the oldest inventory is used to determine profitability.
• LIFO (Last In, First Out):This method assumes the inventory acquired most recently was sold first. The cost of the newest inventory is used to determine profitability. It is assumed the most recently acquired items cost more, which may make them appear less profitable if costs are rising.
• Weighted Average Method:This method takes the average cost of all inventory items sold, regardless of when they were acquired, and applies this average cost to all inventory.

Tax and Regulatory Compliance:

Ecommerce businesses must comply with federal, state, and local tax laws, which typically include sales. The first step is to recognise that tax obligations vary depending on the business’s location and the products or services offered.

Sales tax is levied on the sale of digital or physical products sold online, and the collection requirement hinges on having a “sales tax nexus”. These laws require sellers to collect and remit sales tax if they meet a certain sales threshold or number of transactions within a state, regardless of physical presence. After identifying nexus, you must determine which products are taxable and by how much, as tax rates vary. Some products may not be taxable at all, or only during certain periods. Sellers must accurately calculate and collect the appropriate sales tax for each product and order.

According to HMRC, all UK-based limited companies must register for Corporation Tax after incorporation. Once registered, HMRC issues the company a Unique Taxpayer Reference (UTR) used to identify it for tax purposes and to file Corporation Tax returns. This applies to UK-incorporated and UK-resident companies.

A UK company also requires an Economic Operator Registration and Identification (EORI) number if it imports or exports goods to or from the UK or EU. An EORI that starts with GB is issued by HMRC for trade within Great Britain, while one starting with XI (for Northern Ireland) allows transactions within the EU customs system. EORI numbers help customs authorities track and process movements of goods across borders and are necessary for customs declarations.

HMRC emphasises that businesses engaged in international trade must maintain the required digital records and systems to ensure customs and tax compliance, integrating proper processes for multi-jurisdictional reporting and correct duty/tax calculation.

Given the complexity, especially regarding international sales and multi-state sales tax rules, professional help is highly recommended.

• Hire an Accountant/Tax Professional:Ecommerce businesses should consider hiring an accountant or tax professional to handle tax compliance tasks. A tax professional can automate the process and ensure compliance.
• Specialist Expertise: If you are dealing with complex sales tax laws, international transactions, or high-volume sales, hiring a specialist e-commerce accountant is a smart investment to save time, reduce errors, and prevent costly penalties.