Shopify Financial Statement: The Difference Between Ecommerce Accounting and Other Accounting Types

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Your Shopify financial statement may be showing you false numbers. Pull up your income statement and look at the bottom line. That number has a high chance of being inaccurate. This is especially true if someone without eCommerce accounting expertise has prepared it.

This is called an omission error. While the numbers you see look correct—the trial balance says so—it may be lacking a few amounts. In reality, your financial statement is distorted. The mistake is hard to figure out, and you can only prevent it by knowing the difference between eCommerce and traditional accounting.

In this post, we’ve laid down these differences so you can pinpoint where the possible omission lies. In addition, we’ve provided a quick and practical solution to ensure you get real financial statement numbers moving forward.

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What Makes Shopify’s Accounting Methods Different From Others?

Shopify is an eCommerce business, and it has a different accounting model than the traditional brick-and-mortar business you may know about. Some areas have more cost elements to consider, which affects how accounting and bookkeeping are done. 

The following are several areas where a different method is adopted. These areas can affect your Shopify financial statements and cause distorted net profits.

Accounting Data Collection

Traditional businesses have a simple way of collecting accounting data. A business’s bank account is used as a primary source for practical reasons because accounting records are always reconciled to them. Following sources may include purchase or job orders, invoices, and official receipts.

With Shopify, you can sync the amount from your business account to the accounting software you use. This virtually eliminates bank and book reconciliation. As a result, eCommerce data collection shifts objectives toward making sense of gross income called “deposits.”

But collecting eCommerce accounting data can be challenging. First, you’ll have to source the information from a vendor entity. Then, you’ll have to consider the payment process the entity uses (Shopify Pay, Paypal, Affirm, to name a few). This sounds simple on print but imagine doing this if you have multiple vendors under your belt.

Cost of Goods Sold (COGS) Calculation and Inventory Accounting

Calculating COGS for traditional and eCommerce businesses follows the same accounting principles and methods. But the manner of collecting may differ depending on how your business produces and sells its products. With eCommerce, there are at least five recognized models:

  • Manufacturing
  • Outsourced Production
  • Ecommerce Wholesaler or Retailer
  • Hybrid (Manufacturing with end-consumer retailing)
  • Brokering / Dropshipping

It’s vital to know what category your business belongs to, as this will affect recordkeeping significantly. COGS directly affects your profit margin. So if you’re seeing unusually high net profits (or losses) on your bottom line, it can mean your cost of goods sold is inaccurate.

Ecommerce Sales Tax Compliance

If there’s any difference between traditional businesses and online businesses like Shopify, it’s the method of determining how much the eCommerce sales tax is and where you should pay it. 

For traditional businesses, paying sales tax is relatively simple. This is because these enterprises have a physical presence. Therefore, there’s a relatively clear-cut way to determine the nexus. For example, a restaurant is registered in New York and conducts business within that state. That’s where they collect and remit the tax.

Ecommerce businesses are trickier because they have a wider reach. For example, you can set up an online shop and have sales coming in from multiple states. So determining the nature of each transaction and what sales tax amount you should pay to which state can be mind-boggling.

Foreign Exchange Rates and Transaction Fees

Transaction fees are common to Shopify businesses and differ depending on the foreign country you do business with. If your eCommerce business sources products from multiple overseas vendors, you’ll pay different rates depending on where these suppliers are located.

The foreign exchange rate is also considered if you’re paying or receiving money. Unfortunately, these things can be hard to record and keep track of by anyone without specialized knowledge of foreign exchange behavior.

Why You Should Straighten Up Your Shopify Financial Statements

Now that you know the areas where gathering and recording data are different for eCommerce businesses, the next step is to straighten those Shopify numbers. You may like what you see when you stick to the old ways, but cleaning up your financial statements will give you the following benefits.

You Get an Accurate View of Your Ecommerce Business

An unusually high net profit can get you excited. But if you know how your business moves, you’ll want to know if these numbers are accurate.

We know straightening those numbers up is taxing work, but the result will be worthwhile because you’ll know your business’s true performance. Besides, it doesn’t always mean that accurate figures will result in a lower net profit in your statement. Sometimes, it can even be higher. Whatever the case, it’s important to know your business’s financials are on point.

You’re Safe From Tax Auditors

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Another reason to get accurate financial statements is for tax compliance. Solid financial statements are crucial when your Shopify business grows and you remit high amounts of taxes. 

Auditors will make spot checks, and if they find an error costing the government more than pocket change, your business may get heavily penalized.

You Can Make Better Business Decisions

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Accurate financial data is necessary to make informed decisions. Take, for example, your COGS. If the cost is low and the margin is high, you can keep doing business with your suppliers. But if it’s understated, then you’ve just lost your business a hefty inventory investment. 

Having your COGS on-point will help you make a better decision on whether to switch to a cost-competitive partner or retain your current suppliers.

Accurate numbers help ensure you make the right decisions at the right time.  However, that can only happen if you look into the areas discussed above and find what’s missing.

What Ecommerce Accounting Experts Can Do for You

We know how it feels to rack your brain and strain your eyes to find a missing penny. It’s time-consuming, and it takes you away from what matters to you—growing your Shopify business.

Luckily, you can always outsource the penny-finding to the experts. They’ll do more than find what’s missing in your financial statements.

Here’s what experts can do for you and your business:

Save your time and money: A team of financial experts can do more than just bookkeeping. They can work with your COGS and inventory, generate reports, and offer sales tax assistance so you can allot more time to make your Shopify site stand out. One eCommerce financial agency you can partner with is Unloop.

Give you access to specialized knowledge: These experts know how eCommerce businesses work. Plus, they also understand accounting principles. So they know where to look and what to record in which account.

Lend accounting software skills: Experts like the ones in Unloop are masters in accounting software such as Quickbooks Online (QBO) and Xero. All you need to do is share your data with them, and. you’ll get a vivid financial picture of your eCommerce business in return.

Prepare you for growth: Hiring a team of experts is essentially outsourcing your whole accounting department. It’s efficient and reliable. As a result, you’ll have more time to grow your Shopify business and build an eCommerce marketplace.

Real Numbers Are Better Obtained with Experts

Pull up your Shopify financial statement again. Look at your income statement’s net profits. Do you still feel good about it? Chances are, if you’ve read through this article, you’ll feel a sense of unease. Entrepreneurs like you will always have an itch to scratch when it comes to finding solutions. That’s how you got started in eCommerce in the first place. 

As an online business owner, you know these numbers need fixing. Hiring experts is a practical choice given the hassles of running your business. Experts work fast, and their costs are fair. But, most importantly, you’ll never have to worry about false numbers in your financial statements because they understand that real numbers will always be better.

So what are you waiting for? Reach out to the professionals, and get an accurate view of your business today.

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