Shopify has made it easier for e-commerce entrepreneurs to sell their products and services online. Shopify’s platform allows flexibility and a wide range of apps to enhance the user experience. When Shopify sellers are first starting out, their focus is increasing their sales and retaining more customers. As they start making sales and start to reconcile their books, they realize that e-commerce accounting has its own unique nuances. Here is a list of the Top 5 Accounting Mistakes Shopify Sellers can Avoid:
Mistake 1. No Accounting or Bookkeeping System in Place
A lot of times it is easier to kick off the Shopify store online and worry about the accounting side later. However, this could be a huge oversight in the long term.
Firstly, not having an appropriate bookkeeping system in place could create cash flow problems. Lack of control of cash can generate debts for the business. This could mean paying higher interest rates as well as paying penalties for late payments. Secondly, it is hard to assess how well your business is performing if the financials are cluttered. Having an organized recordkeeping structure in place will allow the business owner to understand how the key indicators are performing. Lastly, having your books in check will also allow for a smooth transition come tax time.
Mistake 2. Using Excel or Google Sheets as your ‘Accountant’
While both are great platforms to use while organizing your expenses or looking at your sales revenue, at the end of the day, they can’t be your only accounting systems. Microsoft Excel or Google Sheets can be used as supplemental tools as long as there is a proper accounting solution in place, like QuickBooks Online.
QuickBooks Online for Shopify is a seamless integration. QBO also allows you to give your accountant access to your books in a matter of seconds. It permits you to set up a proper chart of accounts in order to maximize tax deductions. It can also serve as a good platform for allowing your accountant to monitor sales tax. Furthermore, it can help keep a track of profits for your E-commerce business.
Mistake 3. Distinguishing between Cost of Goods Sold and Expenses
One of the common accounting mistakes Shopify Entrepreneurs make is assuming Cost of Goods Sales (COGS)=Expenses. This isn’t true. COGS are costs related to the production of the product or service being sold. While expenses apply to operating upkeep of the business (e.g. Rent, Utilities).
It is also important to point out that both the cost of goods sold, and expenses take a different approach if your business is solely a drop shipping business.
Mistake 4. Collection and Remittance of Sales Tax
There are some important things to note as a Shopify seller when it comes to sales tax:
- If Sellers are selling in different states in the US, they might be responsible to collect and remit taxes in all those states.
- Sellers should not define Sales tax as an expense but as a liability in their books that needs to be remitted to the different State(s).
- Sellers should understand which of their products and services are taxable and which aren’t.
- Shopify can be configured to calculate the sales tax correctly, however, Shopify itself does not file or remit taxes to the different State(s).
Failure to properly collect and submit taxes could result in interests and penalties so make sure your accountant is up to date with the tax laws of the country/state/city in which your business is selling in.
Mistake 5. Shopify deposits does not equal Sales Revenue
It is important to accurately recognize the portion of deposits. Let’s say, a taxable sale took place in your online store for $20. $15 of which you saw in your bank account. In this scenario, $5 would be classified as merchant fees. Estimated sales tax $2 = liability and sales = $13.
Proper record keeping will ensure accurate financial statements. It allows you to make better business decisions.
These are the top 5 accounting mistakes Shopify Sellers could avoid to garner more control over their business. It also makes a key difference if you have an accountant who specializes in e-commerce accounting. Finally, having your books in order will also allow efficiency and save money if audits occur.
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