Shopify Accounting: Methods, Components, and Tools (Explained)

Disclaimer: This guide is not intended to be professional tax advice for Shopify store owners or other business owners in any manner. Please consult with appropriate tax professionals for clarity on matters related to taxation.

Imagine running a Shopify store where your finances are always in order, taxes sorted, and growth plans crystal clear—all with just a few clicks!

Sounds impossible, right?

Unlike a traditional brick-and-mortar shop, your financial transactions happen online across multiple platforms, and tracking these can be complex.

Well, it’s possible with the right Shopify accounting tools and methods. In this guide, we’ll show you how to simplify your accounting and gain financial clarity.

You’ll also learn how to eliminate manual data entry (for good) and save time using our bookkeeping automation software, Link My Books. Sign up for our free trial to get an early sneak peek.

‍What is Shopify Accounting?

Shopify accounting refers to recording, categorizing, and analyzing all the financial transactions involved in running an online store on the Shopify platform.

This includes tracking sales, fees, refunds, taxes, and expenses across Shopify, your payment gateways, shipping carriers, and other channels.

The main components of accounting for e-commerce businesses include:

• Bookkeeping: Recording day-to-day transactions
• Cash flow management: Tracking money in and out
• Inventory management: Keeping count of stock
• Sales tax compliance: Charging, collecting, and remitting sales tax
• Reporting: Producing financial statements

Robust Shopify accounting clarifies which products are profitable, your true margins, how much tax you need to set aside, when to reorder inventory, and more.

These insights help you make smarter business decisions for growth.

How is Shopify's Accounting Different?

Accounting refers to tracking and keeping a record of transactions in your store and classifying them as income or expenses. Accounting for a traditional brick-and-mortar business operating in a physical location is relatively simple. However, with a Shopify store, things get different. Here's how:

• Tracking Inventory and Cost: A Shopify store can be based on different inventory procurement models, such as manufacturing, wholesale/retail, drop shipping, or hybrid. Tracking inventory and the accurate COGS (cost of goods sold) can be tricky when using multiple models.
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• Evaluating Sales: Shopify stores can roll in sales from different channels, unlike a traditional store with a single-window sales channel. Shopify accounting must differentiate among sales channels and track the right ones.
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• Taxation: Calculating a Shopify store's sales tax is tricky, mainly because online store operations are enormous. As a Shopify store owner, you may sell goods/services in your local state, across different states, or in different countries. Plus, procuring goods from suppliers, evaluating tax on payrolls, and other business activities need a proper tax evaluation system in place.
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• Exchange Rates and Fees: Accounting becomes even more tricky when a Shopify store sells internationally, dealing with currency exchange rates, payment processor fees (like Paypal or Stripe), and tax-related laws. It is something a local store wouldn't have to deal with.

Scope of Shopify Accounting

Shopify accounting aims to ensure proper bookkeeping despite all the chaos in cost, inventory procurement, sales data, and taxation. Its scope majorly covers three aspects:

• Tracking and Reporting: Shopify accounting deals with tracking and reporting the core components of your business, such as inventory, assets, liabilities, revenue, expenses, and growth indicators (a.k.a KPIs). It helps keep your business organized and aware of everything happening around you.
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• Proper Tax Compliance: Adherence to appropriate taxation schedules can severely harm a Shopify business. Many new Shopify owners need to understand tax compliance and end up with taxation liabilities that can cause monetary losses or even a complete shutdown of a Shopify store.
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• Analytical Decision Making: Proper accounting helps track all business metrics, which helps make informed decisions about growth and strategy adjustment.

Key Components of Shopify Accounting

Let's explore the most important elements of accounting for Shopify sellers in more detail:

Tax Management

One of the trickiest parts of e-commerce accounting is complying with sales tax regulations across states and countries. Small mistakes can lead to expensive audits or penalties later on.

Sales tax management for Shopify stores should include:

• Understanding nexus rules and when you need to charge sales tax
• Accurately applying rates during checkout based on the customer's location
• Setting aside the sales tax you collect into a separate sales tax payable account
• Filing and remitting sales tax returns to each state

This is where our automated solution can save the day. Link My Books' payout reconciliation feature can accurately sync taxes from all your sales channels to your accounting software.

Even if you’re selling internationally, our platform can automatically separate the transactions and apply the correct tax rates.

Need to apply different tax rates to different products? Our product grouping feature makes that piece of cake!

Bookkeeping

Accurate bookkeeping forms the backbone of your Shopify accounting. This means accurately recording each financial transaction, from sales to refunds, and keeping your books balanced.

Crucial bookkeeping tasks include:

• Importing your Shopify sales, fees, and other transactions from payment gateways
• Attaching purchase receipts and matching them to bank/credit transactions
• Categorizing and tagging every expense (e.g., advertising, shipping)
• Recording one-off transactions like refunds and equipment purchases
• Reconciling accounts frequently

The good news is that Link My Books can handle all these tasks and more! You can save 6+ hours of juggling through the transactions every month! Schedule a 1-1 video meeting with our onboarding team for a personalized demo today.

Growth Planning

The ultimate goal for most Shopify businesses is sustainable growth and profitability. Your financial data is crucial for strategic planning and insights to help scale successfully.

For growth planning, Shopify accounting lets you analyze metrics like:

• Which products have the best profit margins
• Your revenue changes month-to-month or year-over-year
• Peak sales times/seasons to prepare inventory for
• Whether your marketing spend is providing ROI
• When to introduce new product lines

You can pursue calculated growth backed by numbers by consulting real-time reports and forecasting tools.

How to Access Shopify Accounting Reports

Shopify provides several accounting reports inside its dashboard's analytics section. These include acquisition, finance, behavior, marketing, profit, sales, custom reports, etc.

Go to Analytics in the sidebar of the Shopify admin dashboard and select reports. The dropdown menu allows you to access different reports by category.

Accounting Methods for Shopify Sellers

Accounting for a Shopify business is more complicated than typical small business accounting.

There's extra financial activity happening across your -

• Shopify sales channels
• Payment processors (Amazon Pay, Shopify Pay, Stripe, PayPal, Apple Pay, etc.)
• Bank accounts

All of these need tracking.

You have three main methods to choose from when setting up your accounting system:

1. Cash-Deposit Method

This beginner method involves simply recording your Shopify payout deposits in your bank account as sales revenue. As the name suggests, it focuses purely on the hard cash transactions hitting your business bank account.

It's best suited for new e-commerce businesses with annual sales of less than $250k who are busy growing their operations. As a new Shopify seller, your priority is probably marketing and expansion more than finely tuned accounting (Yeah, we said it!).

You likely don't need super detailed financials at lower volumes. The key here is to not spend countless hours on complex accounting (yet)! However, you should still categorize deposits appropriately and consider channel tracking.

How it works:

• Categorize all Shopify deposits into a Sales account
• Add tracking for multiple sales channels

Pros:

• Simple to manage
• Gives a decent idea of the performance
• Okay, for tax filing

Cons:

• Margins and sales numbers are inaccurate
• Other liabilities like sales tax can be missed

2. Shopify Details Method

A step up for sellers doing $250k - $1m in annual sales, this method requires a journal entry. It further breaks down the deposit totals and involves recording gross sales, sales tax liabilities, payment processor fees, and other transaction-specific details.

How it works:

• Record gross sales amount separately
• Deduct collected sales tax into a liability account
• Group other fees as Payment Processor Fees

Pros:

• More detailed financial records
• Better visibility into sales, fees, and taxes
• Improved accuracy for financial analysis and tax reporting

Cons:

• Still loses some transaction visibility
• More timing inconsistencies

3. Shopify Accounting Guru Method

This extensive method itemizes every transaction across your sales channels, processors, and bank to ensure the highest accuracy. 

Once you pass $1 million in annual Shopify sales, it's highly recommended. It ensures the highest level of accuracy and is essential for businesses with complex financial activities.

How it works:

• Spreadsheet imports/analysis of raw channel data
• Reconcile processor statements
• Line-by-line tracking

Pros:

• Full transaction transparency
• Informs growth decisions
• Compliance with tax regulations and financial audits

Cons:

• Very complex
• Significant learning curve

The further you level up as a seller, the more detailed accounting becomes crucial - though the right tools can save the headache!

Regardless of the method you choose, Link My Books can greatly simplify your process by automatically syncing and categorizing your settlements, fees, taxes, refunds, and more into clean accounting system overviews.

Sign up for our 14-day free trial to see the benefits yourself without any upfront payment.

How Does Dropshipping Accounting in Shopify Differ?

Dropshipping accounting for Shopify stores differs from regular stores because of how purchase orders and sales transactions are recorded. That’s because the Shopify store does not maintain any inventory; plus, there is a difference in the time of settlement of funds between the sale and paying the supplier. The three factors that get impacted in accounting under dropshipping are:

• Inventory
• Cost of Goods Sold
• Sales Tax

‍Best Accounting Software for Shopify

Dedicated e-commerce accounting software makes tracking all your Shopify transactions much easier. Integrating your Shopify store with cloud accounting platforms provides automation, saving hours of manual work.

Here are some top solutions:

Link My Books

Link My Books conveniently connects your Shopify data feed directly into cloud accounting tools like Xero and QuickBooks. It auto-imports and categorizes all your sales, fees, refunds, taxes, and deposits for effortless reconciliation.

This is more than just software. Our team is made up of former 7-figure sellers and accountants. We know firsthand that accounting is rarely anyone's favorite part of running an e-commerce business.

That’s why our support team is here to help anytime you have questions or doubt the numbers!

Key features include:

• Automatic bank matching with Xero, QBO, etc.
• Support for VAT, GST, and sales tax
• Detailed fee and margin tracking
• One-click setup wizard

Thousands of leading Shopify sellers like you already trust Link My Books to automate bookkeeping. 

Our software is:

• Used by businesses in over 40 countries
• Trusted by more than 12,700 users
• Has more than 700 reviews with an average score of 4.97/5

We streamline your Shopify bookkeeping so you can direct more energy towards profitably scaling your online store!

Xero

Xero is a popular online accounting platform used by over 3.9 million small businesses across 180 countries globally.

Besides core accounting features, key strengths for e-commerce sellers include:

• Seamless Shopify integration via app
• Automated syncing between sales and accounting
• Inventory management tools
• Bank feed and payment processing connections
• 1000+ third-party apps to customize functionality

It also offers unlimited users and editions tailored for early stages all the way to enterprise-level businesses.

QuickBooks Online

QuickBooks Online (QBO) is an intuitive accounting solution ideal for small businesses looking to scale.

Benefits for Shopify users include:

• Deep integration to import Shopify sales data
• Multi-channel sales tracking in one dashboard
• Inventory management across multiple locations
• Bank reconciliation and tracking
• Budgeting and cash flow reporting

With robust analytics reports, QuickBooks empowers smart decisions to drive profitability.

Zoho Books

Zoho Books simplifies e-commerce accounting by completely automating tasks such as tracking income and expenses, managing accounts payable/receivable, generating financial reports, and more.

Notable features include:

• Shopify app for easy syncing
• Multi-currency support
• Time tracking and invoices
• Document management with OCR
• 900+ app integrations

Zoho Books scales from early-stage businesses to those exceeding $1 billion in annual revenue.

What is the Best Accounting Software to Integrate with Shopify?

With the wide range of accounting platforms available, deciding which solution to rely on for your Shopify store isn't always straightforward.

However, when it comes to seamlessly syncing your Shopify data and resolving e-commerce accounting pain points, our platform - Link My Books - stands out as the top choice.

Here's why it is the best Shopify accounting integration:

• Specialized for e-commerce data flows - auto-imports settlements and sales data directly into Xero, QuickBooks, etc, with accurate categorization. See how we can help with -some text
  • Shopify QuickBooks Integration
  • Xero Shopify Integration
• Support seamless integration with multiple sales channels - Amazon, eBay, Etsy, Walmart, and TikTok Shop.
• Built-in support for tax compliance - easily tracks sales tax, VAT, and GST.
• Granular fee and margin tracking - giving profitability insights at an SKU level.
• Bank matching and reconciliation in one click - saving hours of manual work.
• Affordable pricing that scales as you grow.
• Intuitive interface even accounting newcomers can navigate.

We developed this tool to lift the accounting burden off your shoulders. While other solutions cater to general small businesses, none match Link My Books for understanding and elegantly solving the niche complexities involved with running an e-commerce store.

Ready to see how it can transform your accounting experience? Book a personalized demo with our onboarding team today!

Accounting for an E-commerce Business - Top 3 Best Practices

Follow these best practices and make the accounting journey for your e-commerce business easy.

1. Establish an Effective E-commerce Accounting System

The foremost action for error-free accounting is to pick the right Shopify accounting software. You should pick the software based on your company size (small, medium, large), scale of operation (one supplier/product or multiple), accounting method, and expectations.

Create and maintain an accounting system where every step is clear and KPIs are followed. Also, pick the most appropriate third-party applications that make accounting easier.

2. Keep Accurate Records and Track Financial Performance

Keep track of everything moving in your Shopify store. It includes cash flows (income, expenses, profit), inventory, supplier contracts, shipping times, taxation, chargebacks, and salaries. Make a habit of checking the accounting data regularly and ensuring changes in any factors are promptly reflected in your reports. Please pay special attention to inventory management, as it is more complex than it seems.

Track the financial performance of your Shopify store through KPIs and other metrics, and make changes in your business strategy based on the financial performance data.

3. Utilize Advanced Reporting Features in Accounting Software

Use custom reports to track KPIs and metrics that give you a broader picture of your business. Shopify's inbuilt reporting dashboard allows you to draft custom reports and analyze data from different angles.

It is best to ensure compelling features in Shopify accounting software, such as automation, pattern analysis, and data visualization, for maximum efficiency and better decision-making. Automation features significantly reduce manual data-entry errors.

5 Major Roadblocks in Shopify Bookkeeping

Now, let's look at some prominent hindrances in bookkeeping for Shopify.

1. Tracking Multi-Channel Sales

A Shopify store runs 24/7, and most store owners utilize multiple channels to promote their products. The different sales channels for an online store include organic traffic (from SERPs), direct traffic, paid advertising (Facebook ads, google ads, etc.), social media (Instagram, TikTok, YouTube), affiliate sales, and others.

Keeping a sales record from different channels can be tricky, and that's where you need the help of an excellent Shopify accounting software or a bookkeeping expert.

2. Inventory Management Complexity

Many Shopify stores use the dropshipping model (which made Shopify famous), where a store processes the order, places it with the supplier, and the supplier ships the product directly to the customer. Now, this is just one of the five types of Shopify store models, and managing inventory based on suppliers, products, sourcing channels, sales, and returns can become highly complex.

It is humanly impossible to keep track of different inventory items if you are a medium-sized Shopify store with multiple suppliers and a good number of daily orders. That's where an excellent Shopify bookkeeping software comes to the rescue.

3. International Sales and Currency Conversion

While Shopify gives you the freedom to sell anywhere in the world, regardless of borders, tracking international sales can be tricky. Although there are plugins that automatically calculate shipping fees and currency conversions for the end user, it is the store owner who has to keep track of all of this.

For example, several products may have been restricted for sale in some countries, shipping times can vary based on the mode of transport and season, and currency prices fluctuate daily. While a few good plugins can handle it in the store, it is tricky to account for and adjust for this when bookkeeping.

4. Sales Tax Compliance

As we discussed in the opening sections, sales tax laws and rates differ from state to state in the U.S. Even if you are from another country, your respective tax laws will apply to the transactions in your store. Shopify taxation can be a big headache, especially for newbie Shopify store owners who lack the knowledge and resources to handle it.

5. Shopify Integration with Accounting Software

Shopify integrates with some of the most popular accounting software. However, this integration may not be very intuitive for the end user. Some features of such accounting software may not comply with your requirements and may need more reports than you need.

Frequently Asked Questions (FAQs)

Here are some common questions you may have about Shopify accounting processes:

How Can I Make the Most of Shopify Accounting Reports? 

To maximize business insights from your Shopify accounting data:

• Set aside regular weekly/monthly reporting sessions
• Consult reports highlighting margins, expenses, sales volumes, and peaks
• Compare current data versus past periods
• Share reports with staff/consultants to troubleshoot problems
• Make strategic decisions based on emerging trends

Well-utilized reports unlock a treasure trove of intel on what's driving (or hindering) your e-commerce growth.

How Do I Handle Refunds and Chargebacks in Shopify Accounting?

Refunds and chargebacks are inevitable in running an e-commerce business, and you must account for them accurately. 

With Link My Books, refunds, and chargebacks are automatically categorized and recorded, ensuring that your financial statements reflect the true state of your business.

Does Shopify have Accounting Software?

No. Shopify does not have inbuilt accounting software, but it offers integration with third-party software like Xero and Quickbooks. Additionally, you can access a wide variety of reports in the reporting tab of the Shopify dashboard.

Do I Need an Accountant for My E-commerce Business? 

It depends upon the scale and scope of your e-commerce business. If you have a large store with a wide range of products and good revenue numbers, you can hire an accountant to ensure proper reporting and compliance with tax laws. On the contrary, if you own a small Shopify store with low revenue numbers, there's little to worry about hiring an accountant.

What Is The Difference Between Shopify Accounting For B2C And B2B Sales?

The breadth of the audience is different between B2B and B2C sales. While B2B businesses will have fewer clients but with large revenue numbers, B2C businesses will have more customers, payment options, products, etc. Hence, B2C Shopify accounting can be slightly more complex than B2B.

Conclusion

Getting your Shopify accounting right is really important. It helps you understand your profits, keep track of your cash flow, and make smart decisions for your business.

Whether you're a small seller or a large operation, managing tasks like bookkeeping and tax calculation can be challenging. However, with Link My Books, you can put everything on autopilot. 

This all-in-one solution we created integrates your bookkeeping platform (Xero and QuickBooks) with Shopify, Amazon, Etsy, eBay, and other sales channels. It means you can handle all your e-commerce bookkeeping in one place.

Try Link My Books with a 14-day free trial today!