We’ve been in the ecommerce accounting world for quite a few years now, and there are a few things that have never changed… accounting problems in their books. Here is our list of the top six mistakes Shopify sellers make in their accounting.
1 - No Accounting.
Oh my, yes. This is by far the biggest mistake.
People think they can glean what they need to know from Shopify’s online dashboard, their checking account balance, and maybe a spreadsheet here or there. Unfortunately, running a business is far more complicated than that.
When there is no true double-entry accounting system in place, there is no way to validate that all income and expenses have been captured, and it’s entirely possible that some transactions could be missing, resulting in an overstatement or understatement of your book and/or taxable income.
Every serious business should have a solid accounting system to track all assets, liabilities, income, expense, and equity. If you’re still small, do yourself a favor, and set this up properly from the get-go.
2 - Sales Tax, Sales Tax, Sales Tax.
Sales tax errors really deserve a list of their own… there are so many mistakes made around sales tax, it’s hard to keep up. Here are the most common ones we see every day:
- Sellers assume that they don’t need to worry about sales tax (this is the biggest mistake you can make!)
- Sellers don’t understand where they should register
- Sellers don’t understand what’s taxable
- Sellers don’t configure Shopify properly to collect sales tax
- Sellers don’t keep track of their sales tax liability in their accounting
- Sellers record sales tax as an expense (but it’s not!)
- Sellers assume that Shopify (or other shopping carts like Amazon) are remitting sales tax on their behalf (they aren’t!)
As a side note, Shopify can sometimes add to these problems by automatically setting you up to collect sales tax in the jurisdiction where your company exists… regardless of whether you are registered to collect there or not. Umm… collecting sales tax without a registration is criminal, so don’t let that happen to you! (We’ve brought this to Shopify’s attention, so hopefully they’ll fix it soon.)
And even though this is slightly off-topic, I would be remiss if I didn’t point out that there is basically a one-in-a-lifetime sales tax amnesty going on that you should check out. If you’ve been doing things wrong in the past, I highly encourage you to take advantage of this offer to set things right. Time runs out October 17, 2017.
3 - Inventory and/or Cost of Goods Sold Aren't Accounted for Properly.
Just because you spent the money on product doesn’t mean it’s an expense (otherwise, they’d call it Cost of Goods Purchased), and just because you bought inventory doesn’t mean you don’t get to deduct any of it.
In a perfect, accrual accounting world, the cost of your products should be expensed as they are sold which has nothing to do with when the cash for said products goes out the door.
4 - Shopify Sales Are Being Recorded One-By-One.
Although there is nothing inherently wrong with this method from an accounting perspective, the method is not scalable. Any cloud accounting system (Xero, QuickBooks Online, etc.) can easily become overwhelmed with too many transactions as it was not built to house an excessively high volume of transactions.
The other problem is that if (or when) you have hundreds or thousands of transactions running through your accounting each day, it becomes extraordinarily time-consuming to try to reconcile all that activity in your books.
Unless your company is pretty tiny with less than 100 orders per month, and you plan to keep it that way, the sales data should be posted in summary form in Xero. And if your sales data lives in a cloud inventory system, that’s even better.
5 - Shopify Sales Are Being Recorded from Lump Deposits.
We usually see a couple of different mistakes when someone is recording batch sales data:
- Recording deposits entirely to Sales. This is most common with sellers who aren’t as familiar with accounting principles. The batch deposits that are coming through usually include a variety of different elements: sales, discounts, shipping income, returns, merchant account fees, and sales tax. All of these numbers are important to a business for tracking purposes. By coding everything purely to Sales, you are understating every single one of these items.
- Recording Sales in the wrong period. This applies to cash and accrual basis companies alike. Shopify Payments (and most payment processors) typically take two business days between the sale date and the date the funds arrive in your bank. When you’re recording batch sales on the 2nd of the month, some or all of those sales probably belong in the previous month… even if you’re a cash basis company.
The biggest problem with this (besides being technically incorrect, which honestly, usually only accountants typically care about) is that it skews the monthly sales results from month to month which makes monthly comparisons difficult for management purposes. Also, if you have heavy sales in December (which most ecommerce sellers do), you may accidentally be recording your sales in the wrong year which can screw up your income taxes.
6 - Commingling Business and Personal Activity.
Although accidentally grabbing the wrong credit card from time to time is a common accident among all business owners, it should be avoided if at all possible.
Most business owners set up a separate entity to help create legal liability protection for their business and/or themselves personally. However, when you commingle funds between the two, an argument can be made that the two entities (you and your business) are not, in fact, separate and should not be treated separately on matters of liability. This is a serious issue that should be discussed with an attorney.
We always recommend that your keep your business and personal finances completely separate wherever possible.
To learn more, please register to join Catching Clouds for a free webinar on Friday, September 22nd, Shopify - Accounting Best Practices. We’ll talk about steps ecommerce sellers can take to navigate these tricky accounting waters.