Whether you’ve been running your Shopify store for a while or you’re just dipping your toes into the world of e-commerce as an online seller, staying on top of your finances is key to making it big. This guide will walk you through the essentials of accounting on Shopify, helping you keep your books in order and your business thriving.
Understanding the Basics of E-commerce Accounting
The e-commerce basics crucial for running a successful online business are:
- Staying on top of accounts receivable and accounts payable – important to maintain positive cash flow.
- Proper bookkeeping practices – helps you track expenses meticulously, ensuring you’re prepared for tax season and can make informed decisions regarding your business strategy.
- Recognising revenue – the key is to only count it when you’ve actually earned it and can collect it, meaning record revenue when you deliver a product or service, rather than when you receive payment. Understanding this rule helps you predict your business’s earnings and financial health accurately.
- Cost of Goods Sold (COGS) includes all the direct costs linked to making the goods your business sells – precise COGS records help you figure out your gross profit and can assist you in setting the right prices for your products.
- Managing your inventory means keeping an eye on the products you have in stock – Efficient inventory management ensures you have enough products to meet customer demand without ending up with excess stock that ties up your funds. Techniques like just-in-time inventory, FIFO (First In, First Out), and LIFO (Last In, First Out) can help you in this process.
Setting Up Your Shopify Accounting System
Before you start, it’s essential to have a solid system in place.
- Select the appropriate accounting software: look for software that offers seamless integration with Shopify, has robust features tailored for e-commerce, and provides excellent customer support. Popular choices include Xero, and FreeAgent, which, at CloudAccountant.co.uk, we are proud platinum partners of. Each of these platforms offers unique benefits, so consider your specific business needs and budget.
- Once you’ve chosen your software, the next step is to integrate it with your Shopify store. Most accounting software platforms provide detailed guides or support to help you connect your Shopify account. This integration allows for automatic syncing of sales, expenses, and inventory, which can save you time and reduce the risk of errors.
- Organising your financial records is another critical aspect of accounting success. Begin by setting up a chart of accounts that categorises all your income, expenses, assets, and liabilities. This will help you track your financial performance and make informed business decisions. Regularly reconcile your accounts to ensure that your records match your bank statements and Shopify reports.
- Consider implementing internal controls to safeguard your financial information. This includes setting up user permissions within your accounting software, regularly reviewing financial reports, and conducting periodic audits.
- Lastly, stay informed about tax regulations and deadlines relevant to your business.
Tracking Sales and Expenses
Tracking sales and expenses will keep your business in a healthy financial situation. By keeping a close eye on your revenue streams and properly categorising expenses, you can gain broader insights into your financial health. Utilising tools like Shopify’s reporting features and third-party apps can make this process more efficient and help you stay organised.
Managing Taxes and Compliance
Understanding UK tax laws is essential for Shopify sellers to ensure compliance. In the UK, e-commerce businesses are required to collect and remit Value Added Tax (VAT) on applicable sales. It’s important to stay informed about VAT registration thresholds, as exceeding these thresholds will require you to register for VAT.
In addition to VAT, Shopify sellers in the UK should also be aware of other taxes and laws that may impact their business operations. For example, businesses in the UK are subject to paying business rates, which are taxes on non-domestic properties, including warehouses or offices used for e-commerce activities.
Sellers may also be liable to pay income tax on profits generated from their Shopify sales. An accountant can help you stay updated on the latest tax regulations and give you professional advice if needed to ensure your Shopify business remains in good standing with the law.
Analysing Financial Performance
Once your accounting system is set up and running smoothly, it’s time to analyse your financial performance.
The profit and loss statement, also known as the income statement, gives you a snapshot of your company’s revenues and expenses over a specific period. This statement determines your net profit or loss and understands the sources of your income and the nature of your expenses.
The balance sheet provides a comprehensive view of your company’s assets, liabilities, and equity at a particular point in time. It helps you evaluate your company’s financial position and assess its ability to meet short-term and long-term obligations. Understanding the balance sheet can also help you identify areas where you might need to improve liquidity or manage debt more effectively.
The cash flow statement tracks the flow of cash in and out of your business. It highlights how well your company generates cash to pay its debt obligations and fund its operating expenses. By analysing your cash flow, you can ensure that your business has sufficient liquidity to sustain operations and invest in growth opportunities.
Regularly reviewing these financial statements will enable you to make data-driven decisions, such as identifying cost-saving opportunities, optimising pricing strategies, and planning for future investments.
Finding the Right Accountant
Even with the best tools and knowledge, sometimes you need professional help. Check our blogs on ‘How to find the right accountant’ for a comprehensive guide.
How CloudAccountant.co.uk Can Help You as a Shopify Seller
Expert e-commerce accountants like us can help you avoid a lot of headaches. At CloudAccountant.co.uk, we can ensure you have everything up-to-date and capitalise on all the tax relief you are legally entitled to.
After an initial free, no-obligation chat to learn more about your circumstances and requirements, we’ll send over a personalised quote based only on the services you need. This means that you’re not paying for services that you don’t need. If you’re happy with the quote, we will then get the ball rolling. All we require is your passport ID and proof of address.
To learn more about how we can help, check out our online sellers package, and our Guide to Accounting for E-commerce.
Here at CloudAccountants.co.uk, we also provide online accounting services for eBay sellers and Amazon sellers.