Mastering bookkeeping is critical for fast-moving ecommerce stores to understand if they're profitable. From setting up the books to accurate inventory and COGS tracking, learn every detail about complex ecommerce accounting so you can make data-informed decisions.
For far too many ecommerce merchants, accounting is an afterthought, if it's a thought at all. After all, you want to sell products, not spend hours with an Excel spreadsheet figuring out why the $12,000 in sales you made on Shopify leads to a payout of just $8,400.
However, the reality is that getting ecommerce accounting right, including calculating key numbers like revenue, cost of goods sold (COGS), and gross profit margin, is essential to making sure your business is profitable and avoiding problems with government authorities.
So, what is ecommerce accounting exactly?
Ecommerce accounting is the process of recording, organizing, and analyzing all your store's financial data. It builds upon traditional accounting to incorporate the unique complexities of online commerce, including managing multi-channel sales and multi-state sales tax obligations.
This guide explains every major step of ecommerce accounting, from choosing your accounting method to setting up your chart of accounts to closing the books each month.
Ecommerce accounting is a subset of small business accounting focused on recording, organizing, and managing financial data specific to online sales. It goes beyond bookkeeping to include every financial detail needed to evaluate profitability and fulfill compliance obligations.
Here are some of the key components of ecommerce accounting:
Bookkeeping involves recording details about every transaction, including sales, expenses, refunds, and fees.
For ecommerce payments specifically, you must record key components of every payment from every platform you sell on. This includes things like:
There are also some nuances to know about how these details are recorded. For example, platform fees, payment processing fees, and chargebacks must be categorized as expenses, not revenue reductions, while refunds directly reduce revenue.
Ecommerce accounting treats inventory as a current asset on your balance sheet, but once it has been sold, it moves onto your income statement as COGS. Accurate inventory accounting is critical to correctly calculating gross margin and profitability.
There is nuance to this process, as you must decide on a consistent inventory valuation method and have effective processes in place to respond to changing supplier costs, track landed costs like freight and duties, and account for returns.
For ecommerce businesses, there's often a gap between when orders are placed, when payouts arrive, and when returns reverse transactions.
You'll need to decide when a sale is "earned," which varies based on your chosen accounting method. For accrual-based businesses, you must also decide when control of goods transfers to customers.
Establishing uniform policies is key to ecommerce accounting, as accurate revenue recognition allows you to accurately calculate your profit margin and ensure compliance with government authorities.
Accurately tracking sales is essential for sales tax obligations when you sell online.
Your ecommerce business establishes economic nexus once you have a certain sales volume or number of transactions. You also have physical nexus in a state if you have a physical presence (such as a store) or sometimes employees there.
Establishing nexus triggers registration requirements, as well as a requirement that you collect, file, and remit sales tax at the correct rates.
Failure to follow sales tax rules puts you at risk of audits and penalties, and sales tax compliance obligations grow with your business as you expand into more locations.
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Ecommerce businesses have annual federal and state tax filing requirements, plus must make estimated quarterly payments as required. Accurate books allow you to report and pay the required amount for state and federal income tax and franchise tax.
Financial reports provide insight into profitability, cash flow, and growth potential. Ecommerce accounting enables you to produce regular profit and loss statements, balance sheets, and cash flow statements. These must be accurate, and you must understand what to look for in each.
Every ecommerce business has routine monthly tasks to complete to ensure accurate books and robust financial reporting.
While we'll go into more detail below on each of these obligations, here are the basic monthly steps to keep your financial records in good order.
With the right systems in place, an organized ecommerce store can complete the items on this list in under two hours per month.
While accounting is a key part of running every business, ecommerce companies face unique challenges that make general accounting advice fall short. Some of the special challenges ecommerce merchants face include issues with:
Cash accounting and accrual accounting are two different methods of recording and recognizing your company's income and expenses.
The table below shows key differences:
Cash basis accounting is the simplest way to manage your company's finances. Unfortunately, it makes assessing profitability harder.
With this approach, you record transactions only when money actually moves into or out of your bank accounts. Specifically:
This approach is simple because it's intuitive. You've made money when money goes into your account, and spent money when it leaves. Unfortunately, it often distorts your profitability outlook, especially in the ecommerce industry.
Say, you purchase and pay for $20,000 of inventory in January. This may make it appear you suffered a big loss that month. If you sell all the inventory in March, that month will look like you made a big profit.
It's also more challenging to tie expenses to the revenue they generate, and it can be difficult to accurately record revenue if a platform bundles payments and sends a lump sum.
If Shopify bundles many February orders and sends payment in early March, cash-basis accounting makes it look like you had a strong March and a weak February.
Cash-basis accounting works best for very small ecommerce stores with minimal inventory and low transaction volume.
Accrual accounting involves recording revenue when it's earned, instead of when it's deposited into your bank account.
Most ecommerce stores record the revenue when control of goods is transferred to the consumer. Depending on your store's shipping policy, contractual arrangements, and marketplace policies, this is usually at the time of shipment but could also occur upon delivery.
Expenses are also matched to the period in which they generate revenue, not to the period when the bills are paid.
If you buy $20,000 in inventory in May but sell the products in July, the inventory is recorded as an asset on the balance sheet, but the purchase isn't recorded as an expense.
As products are sold in July, inventory costs and revenue are moved into COGS. Shipping expenses and merchant fees are recognized along with other costs of generating revenue, including advertising spend, software subscriptions, payroll costs, and return allowances.
This is called the matching principle. It provides ecommerce stores with a more accurate financial picture, as expenses may be incurred well before sales occur, and returns and chargebacks may occur long after revenue is recorded.
Ecommerce stores with large inventories benefit from accrual accounting to avoid misleading fluctuations in profitability, while those managing multiple sales channels benefit because it's easier to track inventory, COGS, and gross margins across channels to identify profitable ones.
Banks and investors also prefer accrual accounting, and the IRS requires it for certain businesses, including C-corporations and those in which inventory or merchandise is a material income-producing factor (which is the case for ecommerce stores).
There is a small business exception for companies with under $32 million in average annual gross receipts over the prior three tax years (as of 2026); however, even small businesses must follow IRS requirements for accounting for inventory.
Many companies start with cash accounting because it's simpler, but must eventually make the transition. If you're currently using cash accounting, some signs you may need to make a switch include:
Businesses that delay transitioning from cash to accrual accounting could face problems during an acquisition or funding round, including delays during due diligence and reduced valuations due to unreliable reporting. Expensive accounting cleanup work may be required.
A chart of accounts (COA) creates the financial foundation for ecommerce accounting. It's the framework for recording and organizing all financial transactions, and it feeds into core financial statements, including your balance sheet, P&L statement, and cash flow statement.
Every transaction in which you spend or earn money is assigned to one of the accounts in your COA, and this chart determines how financial statements are structured and what reports you can generate.
Your chart of accounts will typically be built around the five primary account categories outlined below. However, there are some e-commerce-specific issues within each category that generic COAs often miss or don't handle correctly.
Assets are items or resources your company owns that provide future economic value.
For ecommerce businesses, common assets include cash in business bank accounts, payment processor balances, accounts receivable from wholesale customers, inventory on hand, prepaid inventory deposits, marketplace reserve balances, refunds receivable, and more.
Manufacturers may require deposits before starting production, but the deposits are neither inventory nor deductible expenses, so they're often missed when recording assets. They should be recorded as prepaid assets until the inventory is received.
Some larger ecommerce businesses may also need separate accounts for inventory in transit, returned inventory awaiting inspection, damaged inventory, samples, promotional inventory, and wholesale vs. direct-to-consumer inventory.
Liabilities are obligations your business owes, including short-term debts, taxes, unpaid bills, and future obligations linked to customer purchases. Since online stores often collect money on behalf of third parties, tracking liability can be complicated in ecommerce.
Sales tax payable is one of the most important liabilities for ecommerce businesses, but is often overlooked or handled incorrectly.
A generic COA may group all sales tax into one liability account, but ecommerce sellers must collect sales tax across multiple states, with each jurisdiction setting its own rules. Tracking sales tax liabilities payable by the state can make reconciliation and filing easier.
Gift card liability, customer refunds payable, chargebacks in dispute, store credit liability, and loyalty and rewards program liability are also liabilities that ecommerce businesses may need to account for. Stores selling internationally have obligations for taxes like GST or VAT.
Equity is the owner's interest in the business after subtracting liabilities from assets. Owner equity should typically be recorded separately from revenue, while withdrawals should be tracked as distributions or draws rather than just as business expenses.
It's also important not to confuse profitability with cash flow. Your business may show positive retained earnings but struggle with cash shortages when large amounts of money become tied up in inventory or advertising spend.
Revenue is money earned from selling products or services. Tracking it is surprisingly complicated for ecommerce businesses, as you can't simply record deposits from marketplaces like Amazon as revenue without breaking down the items in the payout, including things like:
Tracking gross product sales and payouts separately is important for accurately measuring your true sales performance after fees and deductions are applied, while tracking shipping revenue helps you see whether fulfillment is profitable after accounting for carrier fees or is being subsidized.
Accounting for gift cards when tracking revenue is another commonly misunderstood area, as revenue is typically recognized when the card is redeemed rather than when it is sold.
Expenses are the costs incurred to operate the business, such as SaaS tools, fulfillment systems, marketplace fees, payment processing infrastructure, and advertising. Many ecommerce businesses also face additional industry-specific expenses, including:
While many businesses lump COGS into expenses, treating it as a dedicated reporting category, and ensuring you include all costs, makes sense for many ecommerce businesses because tracking COGS can be so important to making operational decisions.
Inventory shrinkage, damaged products, and unsellable inventory should also be separately tracked rather than included in COGS, so you can identify operational issues causing losses.
Pro tip: Most accounting software gives you a default COA. Customize it before you start by adding the ecommerce-specific categories above and removing generic ones you'll never use. Recategorizing two years of transactions is much harder than setting it up right the first time.
For ecommerce businesses that sell physical products, inventory management and accurately tracking COGS are essential to determining whether the company is just generating sales or is actually making money.
Incorrectly calculating COGS results in all downstream data being unreliable, including gross margins and unit economics. It also makes it impossible to make accurate reorder decisions.
The COGS formula is:
COGS = Beginning inventory + purchases (at landed cost) − ending inventory
COGS goes far beyond the amount you pay your supplier for the goods. The true landed cost of preparing a unit for sale must include things like:
Some ecommerce businesses include pick, pack, and ship fees or 3PL fulfillment charges in COGS because these costs are viewed as part of the cost of delivering a product to consumers and provide a more accurate view of unit economics and per-unit profitability.
Others classify fulfillment costs differently, treating them as operating expenses below profit. Gross profits can appear higher using this method.
Neither method is inherently better, but consistent classification is critical to allow for accurate historical comparisons of profit margins. However, businesses can run into problems if they exclude the costs of Amazon FBA fees or freight to Amazon from internal margin collections.
Even if those costs are classified below gross profit for accounting purposes, you still need to incorporate them into analyzing unit economics. Otherwise, you may believe you are operating at 60% gross margins when your fully loaded margins are actually closer to 45%.
Freight, tariff, and customs fees also usually apply to entire shipments. If you're importing multiple SKUs in the same shipment, it's important to allocate those fees across all products to determine the accurate landed cost per unit.
These fees are typically allocated based on weight, volume, quantity, or product value. If you're using inventory management software, it should automate the process.
Since inventory may be purchased at different costs over time due to fluctuations in supplier costs, freight rates, tariffs, and currency exchange rates, ecommerce businesses must have a consistent method to determine which inventory costs flow into COGS when products are sold.
The inventory valuation method directly impacts gross margins, taxable sales, and inventory value on your balance sheet. Two of the most common methods include the following:
In general, you should select a method and be consistent, as switching mid-year can distort profitability comparisons, complicate inventory reconciliation, and trigger IRS scrutiny.
While you may need to make changes as your business develops, they should be handled carefully.
Ecommerce businesses sometimes face challenges in ensuring their inventory tracking and financial accounting records match up.
Accounting systems track unit cost, when inventory becomes COGS, and how inventory affects your profit margins and taxable income.
Inventory systems track available units, inventory location, reorder timing, and SKU movement across fulfillment centers. Systems fall into two categories:
Perpetual systems provide greater accuracy, faster reconciliation, and more accurate COGS calculations.
Regardless of the inventory management system you select, it must synchronize with your accounting system to avoid issues. If your accounting records show 300 units in Amazon FBA but you have 500, financial statements will understate inventory assets and overstate COGS.
Manual reconciliation is unreliable and impossible for inventory-heavy businesses as they grow. Direct integration between your ecommerce platforms, inventory management systems, and accounting systems can help with reconciliation and reduce human error.
Recording ecommerce revenue is one of the areas where ecommerce bookkeeping diverges most heavily from standard accounting practices.
It's also an area where many mistakes are made, including confusion over payouts vs. revenue, and how to handle things like refunds, chargebacks, or sales tax.
When a marketplace like Shopify or Amazon deposits money into your bank account, this is a net figure. It's almost never the actual revenue you collected, as various costs are subtracted from it, including:
If you just record the deposit as revenue, you could understate gross sales, fail to categorize platform fees as expenses, and not account for refund activity at all. This distorts gross profit margin calculations and period-over-period comparisons.
Instead, when you get a deposit, you must break the deposit down and record each component of it separately. Specifically you should:
A sales channel connector tool can automate this breakdown so you don't have to do it manually during your reconciliation process.
Another common mistake ecommerce businesses make involves counting every cash inflow as revenue. In reality, revenue is only gross product sales + any shipping income collected from customers when you charge separately.
Ecommerce businesses frequently make a mistake by counting the purchase of a gift card as revenue. But that's not the case. Gift cards are deferred revenue, so they are listed as a liability until the card is redeemed. It can move to revenue at that time.
This is further complicated by "breakage," or the portion of gift cards that are never redeemed. Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, businesses can recognize estimated breakage revenue proportionally over time.
Because revenue recognition rules can become complex for larger gift card programs, businesses with these programs should consult a CPA for implementation guidance.
Returns and refunds are another area where ecommerce accounting becomes significantly more complex than standard bookkeeping.
When a customer returns a product, but the inventory is still sellable, revenue decreases, inventory increases, and the COGS of goods sold decreases. The business has recovered the inventory asset and must account for that in all relevant accounts.
Mistakes can still happen, though, including ecommerce companies treating refunds as an operating expense rather than a revenue reduction. This can distort both revenue and expenses on accounting records, even though the net income may end up similar.
Chargebacks are even more complex because multiple financial events occur at the same time:
You must track each one of these financial events separately, and should also track metrics like customer dispute rates, fraud exposure, and processor costs.
Manual tracking of refunds and chargebacks typically becomes too difficult if these events happen often. If you have even moderate volume in your ecommerce business, you typically should use integrated accounting tools to automate refund and chargeback reconciliation.
Sales tax compliance is, unfortunately, often a part of ecommerce accounting that many store owners overlook or underestimate the complexity of, and with good reason. The rules are complicated, and your obligations grow exponentially with your business.
Unfortunately, the consequences for noncompliance are high, and you must ensure you have appropriate systems in place to determine when you establish nexus and to collect, then file and remit sales tax to avoid audits and penalties.
States can require you to collect sales tax on their behalf, but only if you have sufficient nexus or connections to the state.
Before 2018, you could establish nexus only by having a physical presence in the state. Physical nexus includes meant operating a storefront, warehousing goods locally, or having local employees. Still, the physical presence requirement generally meant your sales tax obligations were limited.
In 2018, a case called South Dakota v. Wayfair changed the rules. States had been increasingly trying to impose sales tax requirements on Internet sales, and Wayfair opened the door to this when the court ruled that states could require sales tax collection based on economic nexus.
Economic nexus means that you have sufficient economic connections. Each state was allowed to set its own definition, but all states base nexus on either volume or number of transactions or both. Many states set their thresholds at $100,000 in sales or 200 transactions annually.
Those who sell across state lines now must track nexus in every state where they have customers. Once you hit the thresholds to establish economic nexus in a state, you must register to collect sales tax in that state. You then must begin collecting sales tax from residents.
You don't want to delay in registering once you trigger nexus, and you must always tax buyers in states where you have nexus at the correct rate. Since rates and the rules for which products are taxable can vary by jurisdiction, this is more complicated than it seems.
Services like Numeral offer free nexus monitoring, so you'll be alerted when you're getting close to having to register and when you have established nexus. You must ensure you are monitoring this carefully and fulfilling obligations in every state where you have nexus.
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Monitoring nexus is the first step to remaining compliant with ecommerce sales tax obligations. To do this, you must track aggregate sales across all of your channels, including Amazon, Etsy, Walmart Marketplace, and your own websites.
Once you have established nexus, you must register to collect sales tax in that state. For many ecommerce stores with a large volume of transactions, this could easily mean registering in all states that require it, while international sellers also have registration requirements in other countries.
After registering to collect sales tax, you must configure your store to collect the correct amount of tax on taxable products, while also ensuring you do not collect tax on exempt products or exempt customers (and keep exemption certificates on file for those exempt customers).
Rates and the types of products that are taxable vary by state and, in some cases, by locations within each state, as there are local taxes to pay as well.
Finally, you must file required tax forms on a set schedule and make payments on schedule, which could be monthly, quarterly, or annually, depending on the state's rules and your sales volume.
Most states have passed marketplace facilitator laws that require platforms to collect sales tax if they play a meaningful role in facilitating or arranging sales. For example, Amazon, Etsy, Walmart, and many large platforms are marketplace facilitators.
Note that Shopify is not a marketplace facilitator, except for sales made through the Shop channel.
When a platform is a marketplace facilitator, it collects and remits sales tax for you for sales on that platform. But this doesn't mean you have no sales tax. You still must register in states where you have nexus and pay tax on sales not made through marketplace facilitators.
You also need to account for marketplace-collect tax in your financial records.
Unfortunately, many store owners don't realize they may have these added sales tax obligations until they receive a notice from the state.
Managing all of the compliance requirements in sales tax can be incredibly burdensome, especially if you're tracking nexus across multiple states, tracking exposure across multiple channels, and dealing with shifting filing calendars.
Or it can be effortless if you let Numeral take care of it for you. Numeral manages every aspect of sales tax compliance for ecommerce sellers, and we were built for ecommerce, so our AI-native platform does it right. We can help with every step, including:
Book a demo today to learn more about how Numeral can handle the sales tax part of the ecommerce accounting equation for you.
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Finally, you'll need to understand the three main financial statements that you'll encounter in ecommerce accounting, along with some key things to watch for as you build your financial records.
Also called the income statement, the profit and loss statement is a snapshot of business performance over a set time, such as a month, quarter, or year. It's the statement most people look at first because it answers the core question of whether the company made money.
Typically, a P&L statement shows:
However, interpreting a P&L statement correctly when you're in the ecommerce industry can be tricky if you focus on top-of-the-line revenue growth and don't pay enough attention to gross margin.
You can grow your sales, but end up less profitable due to issues like supplier cost increases, higher freight rates or tariffs, higher ad costs, or more aggressive discounting.
Gross margin, which measures remaining money after costs are removed, provides a more accurate picture.
Other common issues include:
A balance sheet provides a snapshot of a company's assets and liabilities, as well as owner equity, at any given point in time. Unfortunately, many ecommerce operations underutilize the balance sheet despite the fact that it can provide early indications of operational issues.
Inventory is typically the largest asset on a balance sheet outside of cash for many ecommerce businesses. However, when the growth in inventory levels significantly outpaces growth in sales, this could be a sign of problems such as over-ordering or issues with demand forecasts.
Other potential points of concern for ecommerce businesses include significant and growing gift card liability, suggesting that cards aren't actually being redeemed, and failure to write down stale or obsolete inventory, which overstates assets and makes you appear more profitable.
Accounting for sales tax payable is also critical, as it reflects money you collected for state governments. This money can't be treated as operating cash, and balances should be reviewed and reconciled regularly to ensure you can pay the required sales tax on schedule.
Ecommerce stores often neglect their cash flow statement, to their detriment. This statement is critical to ensuring you have enough cash to continue operations.
Business profit and cash flow are not the same thing, and your business could struggle to remain operational if it doesn't have enough cash coming in or has too much going out.
The inventory trap is one of the biggest ways that ecommerce companies get into trouble when it comes to cash flow. Say, for example, you spend $80,000 on holiday inventory in October, leaving little cash in your bank account.
The products likely won't sell until November or December, when people begin thinking about the holiday season.
The inventory remains as an asset on your balance sheet until it's sold if you use accrual accounting, so the expense won't show up on your P&L, potentially for months. Your P&L may look strong, and your gross margins may appear healthy, even if your bank account is empty.
You face the biggest risk of falling into this trap when building your inventory pre-season or during high-growth phases. To prepare, run a rolling 13-week cash forecast during these times.
Software tools can make ecommerce accounting much simpler. There is a wide variety of tools to help with every task on this list, from building your financial accounts to importing the correct data to managing your inventory and making sure you're complying with sales tax obligations.
Here are some examples of software tools to consider as you build your stack:
Still need to know more? Here are the answers to some frequently asked questions related to ecommerce accounting.
A DIY approach to ecommerce accounting is typically preferred for early-stage and low-volume ecommerce stores, while those approaching $500,000 in revenue, who have significant inventory, or who have multiple sales channels, may need a bookkeeper for help.
Those doing tax planning or preparing to raise money or sell the company should have a CPA.
Bookkeeping involves recording financial transactions made by your ecommerce business.
Accounting is the process of doing something with those numbers, including preparing reports and analyzing data. Both terms are often used interchangeably, although they technically have different meanings.
Cash-basis accounting may seem intuitive because you record revenue when money is received and report expenses when the bills are paid.
However, it's best only for stores with low volumes and minimal inventory, as reconciliation can be challenging, it can produce wild swings in profitability, and it's not always accurate.
Accrual-based accounting, on the other hand, records revenue when it is earned and expenses when they are incurred. It can be best as inventory grows, or in situations where external stakeholders, such as the IRS, investors, or lenders, need to review the financials.
To handle sales tax among multiple states, you must understand your obligations, including monitoring nexus thresholds, registering when required, collecting the correct tax, and remitting tax on each state's schedule.
Be aware which platforms are marketplace facilitators, so you don't collect tax if the marketplace does, and make sure you know your filing schedule.
Numeral offers free nexus monitoring and can handle all of your sales tax compliance tasks across the U.S.'s 13,000+ tax jurisdictions and global VAT support in 80+ countries.
COGS is the total landed cost of inventory units your ecommerce store sold during a given period of time. The formula is:
Beginning inventory + inventory purchases (including freight, duties, tariffs, and packaging) − ending inventory.
Ecommerce businesses must avoid using the vendor purchase price and forgetting about other costs, including inbound shipping, customs fees, and product packaging, among others.
You should reconcile your ecommerce books at least monthly, and sometimes weekly if you have a high volume of sales. The longer you wait to reconcile and ensure your numbers match up, the harder it is to identify discrepancies and identify the source.
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