E-commerce businesses have some special accounting considerations. Unfortunately, many business owners are unaware of these nuanced differences, resulting in avoidable accounting errors. These errors can have serious financial and legal implications for e-commerce businesses and their owners, which can snowball over time if they are left unaddressed. Eliminating these types of errors should be a top priority for any organization to improve efficiency, maximize revenue, prevent fraud, and avoid tax-related penalties.
Cost of Goods Sold (or COGS as it is more commonly referred to) is the total cost of selling products, which means it is the cost of doing business for e-commerce and traditional retailers alike. COGS is one of the most important metrics for an e-commerce business because it will be your most significant expense. It informs inventory decisions, pricing strategy, tax calculations, and cash flow management, among other critical business functions. Understanding COGS provides a full picture of revenue generation, arming you with crucial information for better strategic planning.
While e-commerce bookkeeping is a lot like traditional retail bookkeeping overall, there are unique accounting considerations when doing business online as well. Being aware of these special considerations when starting an e-commerce business helps avoid surprises along the way. However, even well-established e-commerce companies can still struggle with the intricacies as operations evolve, regulations change, buying trends shift, and new technology is developed.
Business owners that are new to the world of e-commerce often mistakenly believe that e-commerce bookkeeping is vastly different than traditional retail bookkeeping and accounting.
While e-commerce certainly has some extra steps to get started and nuanced differences along the way, business finances are similar whether they are online or offline. Essentially, e-commerce accounting best practices are basically just accounting best practices.