All About Shopify Accounting [Best Practices Included]

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.
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Shopify is undoubtedly one of the most popular e-commerce platforms in the world and powers more than four million online stores globally. If you are a Shopify store owner, you already know how important it is to have good Shopify accounting software to track and keep everything in order.

Sidenote - if you’re searching for such a software, Link My Books may be your best bet! You can set up a quick demo here.

Read this comprehensive guide to learn about the different aspects of Shopify accounting and the best practices and tools for making accounting and bookkeeping easy.

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

Here are the key components that stand as pillars of a Shopify accounting procedure:

• Cash Flow: Accounting for your Shopify store helps analyze your business's cash flow. It refers to tracking the business's income, expenses, and profit.
• Inventory Tracking involves accounting for inventory and tracking different procurement routes (wholesale, manufacturing, or drop shipping).
• Preparing Financial Statements: Accurate financial data is essential for running a successful business and adjusting growth strategy. It also helps when applying for loans or merger and acquisition deals.
• Reporting: Shopify accounting is responsible for creating detailed, actionable reports for the business.

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.

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

Different Methods of Shopify Accounting

Let's examine the different methods used for Shopify accounting, their processes, and their pros/cons.

Cash Basis Accounting for Shopify Stores

The cash-based accounting method acknowledges payments (incoming or outgoing) when the money is received or debited.

For example, the amount for the sale made through the Shopify store will only be recorded in accounting data if the money is received in the store's clearing account.

Cash basis accounting is less popular among businesses because clearing payments through payment processors and banks can take time (up to several days in some cases), which disrupts the business cycle and prevents the business from selling/buying at peak output.

Accrual Basis Accounting for Shopify Stores

Accrual-basis accounting is a prevalent accounting method in which a transaction is recorded into accounting records instantly as it occurs.

For example, a sale from the Shopify store would be recorded as soon as the customer makes the payment, regardless of when it is cleared.

Accrual accounting helps businesses move products on credit and gives a better picture of a business's financial health and projections. It also allows the business to operate at peak output without relying on payment settlement.

‍Best Accounting Software for Shopify

The Shopify marketplace is crowded with free and paid accounting software, but we have shortlisted the best ones. For in-depth information, you can also read our detailed review of the best Shopify accounting software.

QuickBooks Online

Quickbooks is a masterpiece of the SaaS from Intuit, one of the most popular accounting software programs today. It is popular among small businesses because it is intuitive and straightforward, offers easy integration to third-party apps, and is moderately priced.

Xero

A cloud-based accounting software that is quite popular among small and medium-sized businesses. It has a vast library of add-ons ranging from invoice generation to reporting. The plans are quite inexpensive for small Shopify stores, and one can also opt for a 30-day free trial with no credit card required.

What’s more? You can seamlessly integrate Xero and Shopify with Link My Books.

Zoho Books

It is exceptionally accurate accounting software that automates many error-prone accounting tasks. The interface has a smooth learning curve and offers a free subscription option for those who want to test the waters.

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)

Check out this comprehensive FAQ section for answers on Shopify bookkeeping.

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.

How Should I Manage Returns and Refunds in Shopify Accounting?

Use good Shopify accounting software to track returns and manage the data in your books. You can also use a third-party returns management program to handle this issue.

Conclusion

Bookkeeping for a Shopify store is slightly more complex than a regular store, especially when considering selling techniques like dropshipping.

Link My Books can help you with your Shopify accounting with our seamless integration and comprehensive set of features. Joining us is easy, as you only have to punch in the details of your store and start your free trial.