What does a chart of accounts for ecommerce business look like? Is it any different from a regular chart of accounts? What are those nuances?
Today we’re taking a look at its core components, how to set it up, best practices, and common mistakes. Along the way we will touch on needs specific to ecommerce businesses.
Let’s get a clearer understanding of this tool, and the purpose that it serves.
What is a Chart of Accounts?
You can think of a chart of accounts as a type of index. It helps you to organize and categorize your business accounts more efficiently. If you use the double entry accounting system for your online store, you need a chart of accounts for ecommerce business use.
As a sort of table of contents, your chart of accounts is more than just an organizational tool for your income and expenses. Like a directory, this chart helps everyone involved in your finances to find all the business accounts and categories easily. This way, you, your accountant, and any other authorized personnel can ensure more accurate transaction recording, reporting, and analysis.
Why Ecommerce Businesses Need a Specialized Chart of Accounts
The nature of business operations varies from one industry to another. For example, ecommerce businesses have different types of financial transactions. You need to track and categorize these in a different way than you would for a traditional brick-and-mortar store.
A chart of accounts for ecommerce business purposes needs to be tailored to accommodate these needs.
Inventory Management
A wide range of product variations calls for a specialized chart of accounts to track inventory levels for each variation separately. Shipping costs are a significant expense for ecommerce businesses. This makes a dedicated account helpful for tracking these costs and calculating accurate product margins.
Online Payments
Payment processing platforms charge transaction fees, so you need to track them accurately in your chart of accounts. When you face chargebacks from customers, you need another specific account to track them, adjust revenue, and track their impact on your profitability.
Customer Acquisition and Retention
Most ecommerce businesses rely heavily on digital marketing to reach customers. You need a chart of accounts for ecommerce business use to properly track expenses for advertising, website development and maintenance.
Tracking customer acquisition costs and customer lifetime value is also important to help determine each customer’s profitability and inform marketing strategies. A specialized account can track customer churn rates, too, and identify areas for improvement.
Tax Compliance
Ecommerce businesses need to comply with sales tax laws in different jurisdictions. A specialized chart of accounts can help you track sales tax collected and remitted. The same goes for all the applicable types of business tax you need to pay.
Financial Reporting
A chart of accounts for ecommerce business use ensures greater accuracy in your financial statements. It helps you see metrics that accurately reflect the unique aspects of your ecommerce business.
When you track specific expenses and revenue streams, you can also better analyze your financial performance to make more informed decisions.
Key Components of a Chart of Accounts for Ecommerce Business
Categories in a Chart of Accounts
Asset Accounts
These are what your business owns in terms of resources. It includes cash, equipment, inventory, accounts receivable, and more. It tracks COD or cash on delivery transactions and installment payments.
Liability Accounts
Liabilities are what your business owes in terms of resources. This account is where you record payments for loans or installment fees, accounts payable, accrued liabilities, and the like.
Equity Accounts
Equity is what remains after you calculate out all your assets and liabilities. This represents the financial health or “value” of your business. Equity accounts basically include owner’s equity, common stock, and retained earnings.
Revenue Accounts
These accounts record the income generated by your business’s operating activities, along with other transactions. This income includes revenue from product sales, revenue from service fees, investment income, and more.
Expense Accounts
This account records all the expenses your business incurred through its operations. These include utilities, rent, payroll, insurance, equipment, supplies, COGS, and the like.
Setting Up Your Chart of Accounts: Step-by-Step Guide
Analyzing Your Ecommerce Business Needs
How complex are your business needs? This can determine how simple or more robust your chart of accounts needs to be.
Take stock of the products and services you offer. Consider also your business model and what your non-operating income sources are. Are you financing your own business operations? What are your business needs, generally speaking?
Using Accounting Software to Create Your Chart of Accounts
Software solutions exist to make the accounting process easier with automations and templates. Here are some of the numerous benefits you can take advantage of in line with creating and managing your chart of accounts:
- Save time, reduce errors, and increase efficiency with pre-built templates and automatic data entry.
- Access greater customization options as you tailor your accounts and create hierarchical structures that suit your business needs.
- Ensure tax compliance and generate accurate, comprehensive reports to be able to analyze financial data for insights.
- Easily scale your chart of accounts as your business grows and adapt it to integrate with other systems.
Organizing and Numbering Your Accounts
A chart of accounts usually has four columns, indicating the account number, account name, account type, and financial statement. A chart of accounts for ecommerce business use can have this basic numbering system for its five main accounts:
- Assets: 1000 – 1999
- Liabilities: 2000 – 2999
- Equity: 3000 – 3999
- Revenue: 4000 – 4999
- Expenses: 5000 – 6999
These reference numbers help bookkeepers and accountants categorize and track transactions. You can number sub accounts within the main accounts (ex. 1020 Cash Asset, 2060 Taxes Payable, 5010 COGS, etc.)
Regularly Reviewing and Updating Your Chart of Accounts
Preparing a flexible chart of accounts that can meet future business needs doesn’t mean you won’t ever have to make adjustments. You still need to periodically review and reflect on your current chart of accounts to see if it still accurately represents your business activities.
Businesses can change. Sometimes, opportunities arise that you wouldn’t have been able to, well, “account” for. When making big business decisions, always make sure to double check the financial back-end. Adjust where necessary and set yourself up for that next step.
Common Mistakes to Avoid When Setting Up a Chart of Accounts
Overcomplicating the Chart of Accounts Structure
It’s important that you have a comprehensive range of sub-accounts for proper categorization. However, it’s also crucial to strike a balance so that you do not overcomplicate it unnecessarily.
We recommend consulting a financial advisor or accountant when creating your chart of accounts for the best results.
Neglecting Industry-Specific Needs
You need to understand the standard accounting methods and terminology for your industry. Consult industry experts if you need help with reporting requirements.
Identify the specific transactions that are common in your industry, like inventory valuation methods, revenue recognition policies, and research and development expenses.
Create dedicated accounts to accurately reflect the unique financial aspects of your industry. Make sure your chart of accounts aligns with any industry-specific regulations.
Inconsistent Account Usage
Form clear definitions around the purpose and scope of each account so you consistently categorize all transactions. Use a standardized coding system, too, to avoid errors. Make sure everyone involved knows how to use the chart of accounts.
Set a schedule to review your chart of accounts so you can find and address any inconsistencies. We highly recommend using accounting software to help you enforce account usage rules and automate consistency checks to avoid human error.
Best Practices for Maintaining an Effective Chart of Accounts
Regular Reconciliation and Review
You need to review and reconcile your chart of accounts regularly to ensure compliance with accounting standards. Here are a few suggestions:
Monthly
- Reconcile bank and credit card accounts against your general ledger.
- Compare physical inventory with the inventory account.
- Verify the accuracy of prepaid expenses and accrued liabilities.
Quarterly
- Check that your chart of accounts is still relevant and efficient for your business needs.
- Assess the accuracy of account balances and classifications.
- Identify and address any inconsistencies or errors.
Annually
- Conduct a comprehensive review to ensure your chart of accounts aligns with current accounting standards.
- Evaluate the effectiveness of your account definitions and coding system and adjust as needed.
Aligning Your Chart of Accounts with Financial Reporting
The way you list your main accounts and sub accounts should correspond with how they appear on your financial statements.
This usually begins with your balance sheet and then your income statement.
A balance sheet will list assets first, liabilities second, and equity last. There is also usually a structure to how it lists the sub categories of these main accounts which your chart of accounts should reflect.
For instance, a simple balance sheet might list current and fixed assets first.
- Cash and cash equivalents
- Accounts payable
- Inventory
- Property, plant, and equipment (machinery, buildings, vehicles)
A profit and loss (income) statement is a little different. It does start with revenue and moves onto operating expenses. For expenses, you would normally list COGS first and then other operating expenses. It lists operating income (generated through core business activities) after operating expenses and then non-operating last.
For the purposes of a chart of accounts for ecommerce businesses, you should structure it in order of appearance. So that would be assets, liabilities, equity, revenue, expenses, and sub accounts as they show up.
This makes it so much easier for reference purposes when corroborating for reporting or checking for discrepancies.
Scaling Your Chart of Accounts as Your Business Grows
It’s also important to create a chart of accounts with future growth and scalability in mind.
Planning ahead is more than just creating scalable business ideas, or ways to expand markets. It’s also about creating a flexible financial management backbone that can carry you as you hit your business growth spurts.
FAQs
How often should I review and update my chart of accounts?
Updating your chart of accounts is typically done on an “as needed” basis. If you’ve set it up right the first time, you won’t have to worry as much about adjustments. However, you should take a look if you make any major changes to your business. You’ll want to double check if you need to add new accounts or remove obsolete ones.
Can I use a generic chart of accounts template for my ecommerce business?
We do believe that templates are very beneficial. You can certainly start with one. However, you’ll want to consult a professional or someone in the ecommerce space as early as possible. They would know the specialized accounts you’ll need like sales return, shipping income, etc.
How do I handle returns and refunds in my chart of accounts?
Sales Returns and Allowances is a contra revenue account which is where you record refunds. You would credit your sales account and debit this account when fulfilling returns and refunds.
What’s the best way to track sales tax in my chart of accounts?
You would record sales tax as a liability account like Sales Tax Payable. When making sales tax payments, you would credit your cash account and debit this account, reducing its balance.
How can I simplify my chart of accounts as my ecommerce business grows?
We recommend consulting a financial advisor and an accountant familiar with the ecommerce space. They can help you to group similar items together for a more streamlined management of your accounts.
What Is EcomBalance?
EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
Conclusion
Your chart of accounts for ecommerce business use should reflect your specific needs. That’s always the best one. You can use a template, but make sure you customize it to have all the categories you need.
