5 Common Accounting Challenges for the E-commerce Industry

Every industry has its accounting difficulties, and the e-commerce industry easily leads the charge when it comes to bookkeeping challenges, which oftentimes can be a lot more complicated than other industries. Learn more about the accounting challenges to be aware of when running an e-commerce business.

1. COGS and inventory management Cost of goods sold (COGS) is one of the most important aspects of accounting, it takes into account all of the direct costs involved in the process of selling products, to establish the actual cost of doing business as an e-commerce retailer. Understanding the COGS gives retailers a clearer understanding of their profits and how to manage their cash flow. It also directly affects accounting management and tax calculations. The following basic COGS formula can be used for e-commerce businesses: Direct costs involved in e-commerce inventory can include: raw materials and/or manufacturing costs as well as packaging costs and distribution or shipping costs NetSuite's inventory management software set up by a CPA that understands the intricacies of your specific e-commerce business might help mitigate some of the challenges around stock within your e-commerce business.

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2. Multi-state income tax nexus analysis E-commerce provides businesses with access to much larger markets, and the correct infrastructure makes it easy to sell to markets in other states. While this can rapidly boost sales, there is a lot to consider from a tax and accounting perspective, especially when dealing with multi-state sales. Keeping track of the tax laws that apply to sales per state, can be confusing, and getting the allocation and apportionment right when reporting to the IRS requires the expertise of a CPA that understands multi-state taxes. This is especially important to avoid double taxation-- in the state you are headquartered and in the multiple states within which your e-commerce business operates. .outsourced finance and accounting services

3. Reconciling 1099-Ks This means that each of the payment processes your e-commerce business makes use of to process sales will summarize your transactions. The challenge for many e-commerce businesses is that they would have to reconcile their personal accounting books against the 1099-K forms, in which payment processors would have reported their sales. It is advisable for e-commerce businesses to partner with a CPA that understands third-party reporting and tax filing for e-commerce businesses.

4. Reconciling Amazon sales data To 1099-K's, keeping financial statements accurate and up-to-date might be a challenge for Amazon sellers. This is largely due to Amazon's reserved balances, in which the platform holds a percentage of your sales revenue as insurance against damages or refunds; and the fact that the money paid into your business account by Amazon would be the amount due to you after Amazon deducted their reserved balance and commission fees, may create a disparity between the company bookkeeping and bank reconciliation statements. It is important for the CPA setting up your accounting software to make provision for these in the recordkeeping to make tax filing less laborsome for your e-commerce business. finance and accounting outsourcing

5. Cash vs Accrual based accounting The accounting method used by your e-commerce business may also clash with the payment structure by Amazon. This would be especially evident in the recon statements for businesses that make use of cash-based accounting, in which sales are reported immediately, despite when the funds reflect in the account. This would mean that your business reports the sale in its books when it took place (in January, for example), while Amazon only processes that payment to the business a few weeks later, creating a potential misalignment in the recon statement. A professional CPA would know how to set up your accounting processes in a way that minimizes these accounting inconsistencies. Cost of goods sold (COGS) is one of the most important aspects of accounting, it takes into account all of the direct costs involved in the process of selling products, to establish the actual cost of doing business as an e-commerce retailer.