Whether you’re just starting out, or have been around since the “e” made its first appearance, chances are you’ve heard some advice on handling e-commerce bookkeeping. But as the industry expands, I think it’s worth revisiting some basic choices we might be taking for granted. After all, e-commerce as a sales method isn’t just for “e-commerce” businesses or products anymore!
For me, I begin my list of best practices for e-commerce bookkeeping right where e-commerce actually begins - Sales! In particular, that old, familiar question: Will that be Cash or Accrual?
Definitions of cash basis and accrual basis: a quick refresher
- Cash Basis - Income and expenses are recognized when payment actually changes hands.
- Accrual Basis - Income and expenses are recognized when the sale or purchase is made.
Here is an example of cash and accrual.
I have a side business that creates and sells custom swag for accounting types. Imagine someone contacts us to create a busy-season thank you for their tireless employees. They place a $1,500 order on 12/1/21. They arrange to make payment when the swag boxes are due to arrive on 1/31/22, In other words, they are paying on 60-day terms. How would this situation be treated in each accounting basis?
- Cash Basis - The $1,500 sale is reported in 2022 because that’s when the payment happened.
- Accrual Basis - The sale is reported in 2021 because that’s when the sale and billing happened.
You can see that choosing either cash or accrual can be a big difference, one that might give business owners thoughts about how things are reported and if it’s fair to them. Rightfully so! Business owners should understand bookkeeping choices, and the effect they can have. But, these very basic definitions have also led to more than a few misunderstandings and mischaracterizations of cash basis and accrual basis.
Five myths about cash basis and accrual basis in e-commerce
Here are the five “myth-understandings” that I've encountered during my work with e-commerce businesses.
Myth #1: If accrual basis sales are recorded instead of cash basis sales deposits, it will look like I made more than I did!
Truth: Cash basis may mean that deposits are booked with fees and chargebacks already taken out. That doesn’t mean sales aren’t booked “in full.”
Yes, accrual basis means your sales will be booked without the fees and stuff subtracted. But they will be booked as expenses. So the resulting amount of money reported will be the same.
Why does this matter? When you book sales by deposit you are not always recording fees, chargebacks, etc. to show the purpose of those deductions! And you don’t know what you sold before those expenses were deducted. So you’re missing important details that might suggest how to become more profitable.
Myth #2: I don’t want to get taxed on money I haven’t received!
No one does! The myth is that the best way to avoid this for e-commerce is by keeping cash-basis books.
Truth: When you book sales on accrual basis, any unreceived amounts at the end of the tax period can be excluded. Most accounting software allows books kept on an accrual basis to easily run reports on a cash basis. After one or two period-end adjustments, reports will be correct for cash basis tax filings.
Why does this matter? The reverse isn’t true. If you keep cash-basis books, you can technically choose to view a report on “accrual basis,” but chances are that report won’t actually reflect an accrual basis view of your business. It takes a lot of work to make cash correctly report as accrual. More on why this is important later…
Myth #3: I need to know how much money I can spend! And cash basis = cash flow.
With this myth, the assumption is that the way to track cash and cash flow is through cash basis bookkeeping.
Truth: Booking sales on an accrual basis doesn't mean your books can’t track your available cash! Sales from each platform can be booked against a clearing account for that platform. This keeps expected sales money out of the running “bank” balance in the books until the money is actually deposited into the bank.
Why does this matter? Booking sales using clearing accounts allows you to see the amount of cash available and also lets you see how much each e-commerce platform has outstanding for later deposits. Knowing what’s coming is invaluable for cash flow planning.
Myth #4: If you file taxes on a cash basis, the books should be cash basis.
Yes, Cash basis filers need cash basis tax reporting. But, that doesn’t mean they can only have cash basis reporting.
Truth: The best bookkeeping allows for BOTH cash and accrual basis reporting. By using accrual basis sales entries you build a more flexible data set that supports both kinds of reports.
Why does this matter? Accrual basis reports give a truer picture of how the business is actually operating, and they matter to lenders, investors, banks, or anyone else who needs to see the true value of a business. Clarity increases when transactions are connected to when they took place, not just when money changed hands. Imagine having a huge sale not included in the financials you send to a potential investor, just because the bill hasn’t come due yet? Yikes!
Myth #5: Cash basis sales bookings are “easier.”
Absolutely true. At least, it used to be.
Most people using e-commerce use more than one platform. So accrual basis must look at each sales platform to determine what makes up those totals.
Worse, there is no standard system across platforms. Things like sales, fees, interest, chargebacks, etc. are reported in different combinations, formats and even under different definitions. Every new platform requires new processes for sales bookkeeping on an accrual basis.
The myth is that cash basis needs anything less.
Truth: Cash basis needs to reflect all the same facets of the sale that accrual basis needs to reflect. To keep cohesive books, you still end up digging into what made up the number you’re booking – sales, fees, chargebacks, etc. When you keep cash-basis books, you still need to find this information from each platform, so it’s not really “easier” unless you skip this research. Also, you don’t get the other benefits of accrual basis like knowing how much money is coming your way later and making sure you’re getting all you’re owed.
When it comes to good books, cash basis sales bookings aren’t really worth the little time they might save. Especially not these days.
New Truth: Automation is finally closing the effort gap between cash- and accrual-based bookkeeping. In fact, selecting an accounting automation platform that integrates with both your GL program as well as with all of your sales channels means that booking e-commerce sales on a cash basis simply doesn't have any real workflow advantages.
Skipping the detail is no longer the 'easiest' way to keep e-commerce bookkeeping costs and effort scalable. I've chosen to use Bookkeep because it is built on best practices for e-commerce bookkeeping, and it bridges the gap between accrual basis books and cost-effective workflows through automated sales entries.
Why does it matter?
As more e-commerce platforms emerge, we’ll need automation to keep up with all the different workflows. Along with more diverse platform options come more businesses choosing to use some type of e-commerce solution.
The result: e-commerce is increasingly likely to be a part of your business as an owner and increasingly likely to be a part of each client’s business you handle as a bookkeeper. This will become more and more true whether you choose to “specialize in e-commerce” or not.
For myself, I consider accrual basis sales entries as first on my list of best practices for e-commerce bookkeeping. Hopefully, this small exploration has helped you add it to your list of best practices. A little detail can go a long way toward building easily utilized and inherently valuable e-commerce books.