E-commerce Accounting: A Critical Review of Outsourced Accounting

E-commerce businesses have a lot of moving parts. It can be challenging to keep track of it all, from processing payments and refunds to tax compliance and handling shipping logistics, especially when you’re busy running your online business. That’s where outsourced accounting can help. 

By partnering with an experienced outsourced accounting provider, e-commerce businesses can cut out time-consuming and complex bookkeeping tasks. That affords more time and energy to focus on growing. 

This article will go over everything you need to know about e-commerce accounting and outsourced accounting.

What is E-commerce Accounting?

Accounting is the process of recording, classifying, and summarizing financial transactions to provide information vital for making business decisions. It is also the process of assessing financial performance and preparing financial statements.

That should not be confused with bookkeeping, which merely records a company’s financial transactions and its day-to-day operations. Although there’s an apparent disparity between the two concepts, they both go hand-in-hand for your e-commerce business.

E-commerce accounting employs both booking and accounting techniques to track and manage the financial records of an online business. It entails keeping track of a company’s financial transactions to understand its inflow and outflow. More so, it involves tracking inventory, recording sales and revenue, managing payments and refunds, and preparing financial statements.  

Types of E-commerce Accounting

There are several types of e-commerce accounting methods. Of all these, cash basis accounting and accrual accounting are more frequent among eCommerce businesses. In that light, this section explores these methods and their significance in modern enterprises.

  1. Cash Basis Accounting

Cash basis accounting is a process where you keep track of the money entering or exiting your hand or bank. In other words, you keep track of your expenses and revenue. Here is a typical example below: 

Expenses  Sales
Day 1 $5000 $12,000
Day 2 $7000 $10,000
Total $12,000 $22,000

Two-day Income = $10, 000

This method is effective for small businesses as it is simple and easy to manage. However, it may not be suitable for tracking more complex cash flows where invoices precede cash flow. It can be misleading in cases where businesses have received an invoice but have not received cash. Likewise, it doesn’t cover future expenses. Hence, larger companies adopt the accrual accounting method.

  1. Accrual Accounting

In accrual accounting, expenses are recognized when the cost is incurred, regardless of whether or not an invoice has been paid. The Matching Principle – which defines accrual accounting – states that revenues and expenses should be recognized as they occur rather than when cash is exchanged.

Under this method, you recognize revenues at the time of sale or transfer, and expenses are recognized when incurred at the time of purchase. That provides a more accurate reflection of the business’s financial performance.

Here’s an example of accrual accounting at work:

You have a subscription-based business, and you signed up five new customers on the first of January. You’ll receive monthly payments from each customer for 12 months. Though you won’t get the fee for your services until the following months, you will recognize the revenue in January when those five customers are added to your business’ subscriber list.

Accrual accounting is a valuable asset to any company. When managed correctly, it can help businesses stay on top of their finances by recognizing their revenues and costs before cash is received or paid out. However, tracking your finances can become more tasking as your revenue grows. Outsourcing your accounting needs may become necessary at such points

Outsourced Accounting

Outsourced accounting is the process of hiring a third-party company to handle all or a portion of your company’s accounting needs. That can include bookkeeping, preparing financial statements, and paying bills. 

Many businesses outsource their accounting to save costs on hiring an in-house accountant and improve efficiency. A common concern for business owners and managers is knowing when to employ third-party accountants.

Do You Need Outsourced Accounting?

A small business may be able to do the accounting work themselves with software like QuickBooks. Still, larger companies may find that they need outside help. Here are some signs that show it’s time to outsource:

  • You spend too much time preparing the books
  • The accounting process gets less efficient and records errors.
  • You struggle to draw out financial data for decision-making.
  • Your company is scaling, but you can’t afford to hire a team. 
  • In a situation where you are lagging technologically, you should consider outsourcing.
  • When you start getting concerns about data security, it may be a signal to outsource.

Why You Should Consider Outsourced Accounting

The benefits of outsourced accounting are numerous, provided you find the right partner to handle your needs. They help you get a clear picture of your tax and financial standing. With that, you can make informed decisions and have time to focus on other aspects of the business.

What’s more, they will help save you money. Dolloite’s Global Outsourcing 2020 report reveals that about 70 percent of businesses outsource to reduce cost.Following insights from the Bureau of Labor Statistics, in-house accountants’ earn up to $77,000 per year in salaries. However, outsourcing to accountanting firms cost fraction of the price.

Bottom Line

In-house e-commerce accounting and outsourcing accounting are excellent methods of tracking your finances. However, whether you choose to outsource will depend on several factors, some of which have been covered in this article. For smaller companies, a small in-house team may be enough to handle your accounts. That may not be the case for growing and larger enterprises, so outsourcing becomes an excellent alternative.