eCommerce Bookkeeping is More Complicated

Factors Complicating eCommerce Bookkeeping

ECommerce bookkeeping is more complicated for several reasons: payment processing fee, sales tax and high transaction volume. Each factor multiplies the complexity so it quickly reaches a level that requires a specialized breed of bookkeepers to take care of the problem.

eCommerce Bookkeeping is More Complicated Due to Payment Processing Fees

Most merchants rely on an online payment processer to receive payments, such as Shopify Payment, Paypal or Stripe. Accounting principles require businesses to separate sales and payment processing fees. This is challenging for inexperienced bookkeepers.

To make things worse, many merchants use several payment processors simultaneously to provide convenience to prospective customers. Different payment processors have different fee structures and deposit time frames so it quickly escalates the level of complexity.

eCommerce Bookkeeping is More Complicated Due to Sales Taxes

The beauty of eCommerce is that it can sell to a vast geographic area easily. While a brick-and-mortar store can only serve the its neighborhood, an eCommerce merchant can sell to the whole country, or even the whole world, from a single website. As a result, an eCommerce merchant is often required to collect sales taxes at different rates from different areas.

Properly recording sales taxes in the accounting books is itself not an easy task for an experienced bookkeeper. Adding the tasks of filing and remitting tax collected only increase the difficulties. Therefore, you should seek an eCommerce-specialized bookkeeper such as eComGuru Accounting Services.

eCommerce Bookkeeping is More Complicated Due to High Transaction Volume

With the complications we already have from each single transaction, the huge amount of transactions that a typical eCommerce merchant has multiplies the difficulties.

Furthermore the sales information is usually stored on an online platform, such as Shopify. That means a huge amount of sales information needs to be pulled out, aggregated, analyzed, converted and eventually recorded in the accounting system. If you have to do it manually, it will be very time-consuming.

When the volume is high, the efficiency becomes more important. That’s why using a bookkeeper with little or no experience is usually a bad idea.

A Simplified Example

To illustrate the bookkeeping issues involved when recording the sales information for an eCommerce merchant, let’s use a simplified example. In this example, there are only 3 orders for just one product. The merchant uses only Shopify Payment to process the credit card payments. However, the clients are in 3 different provinces. For simplicity, we assume the merchant doesn’t charge shipping fees.

Order	Shipping Date	Price	Units	Shipping Address	Payment Processor
A	2023-9-1	$100.00	1	British Columbia	Shopify Payment
B	2023-9-5	$100.00	2	Alberta	Shopify Payment
C	2023-9-10	$100.00	1	Ontario	Shopify Payment

Step 1: Adding Payment Processing Fee

Calculating Payment Processing Fee

The rate for payment processing differs by the Shopify plan you use. For merchants on a Basic plan, it is 2.9% + 30¢. For a $100 payment, the fee is $3.20; for a $200 payment, it’s $6.10. In other words, for Order A & C, the net amount deposited into the bank account is $96.80; for Order B, the seller gets $193.90. It is summarized in the following table.

Order	Net Proceeds	Sales Revenue – GAAP	Payment Processing Fees – GAAP	Actual Rate
A	$96.80	$100.00	$3.20	3.20%
B	$193.90	$200.00	$6.10	3.05%
C	$96.80	$100.00	$3.20	3.20%
Total	$387.50	$400.00	$12.50	3.125%

A Missing Figure: Payment Processing Fee

Many business owners refer the net proceed ($387.50, in this case) as their revenue; many bookkeepers encourage this inaccuracy because it is the easiest way to record the transactions. However, this is inconsistent with the Generally Accepted Accounting Principles (GAAP). The gross sales should be $400 because that’s how much you billed the customers and how much the customers paid. The $12.50 shortfall should be recorded as payment processing fees.

By reporting $387.50 as your sales revenue, not only are you reporting incorrect number on the top line of your profit & loss statement. You are also reporting incorrect figure on tax filing. Almost all tax forms require the sales revenue to be reported before deducting any expenses.

In addition, payment processing is expensive. The profit margin for a dropshipping business is usually only 15-20% and you can see from the example above, the payment processing fees are easily over 3%. In other words, it took away 1/7 to 1/5 of your gross profit! How could you ignore that expense? It is a big item on your profit & loss statement and should not be left out from the big picture.

A Missed Opportunity for Cost Saving

The biggest issue with not recording payment processing fee is that it could deprive you of the opportunity to save costs. After all, you cannot measure what you didn’t record. Without a solid number, you cannot make a decision out of it.

I have a client who didn’t pay attention to processing fees. As a result, he didn’t realize that if he had upgraded from the Shopify Basic plan to the next level, the reduction in credit card processing fees alone was more than than enough to offset the increase in subscription fees. Adding the extra savings from shipping rate, he had been losing money for a long time by not upgrading his plan.

Remember: Financial statements were invented not for tax filing; instead, they were invented to understand the financial activities of a business.

Step 2: Adding Sales Tax

Single Tax Rate

Let’s start with Order A to see what happens when we add sales taxes into the picture. (Hint: it gets really complicated!)

In BC, there are two types of sales taxes: 5% for GST (federal) and 7% for BC PST (provincial). For a product selling at $100, the consumer needs to pay $112; i.e. $5 for GST & $7 for BC PST. Since the payment is $112, the payment processing fee goes up to $3.55. The net payment is now $108.45. Please see the following Summary:

Order	Net Proceed	Sales Revenue – GAAP	Payment Processing Fees – GAAP	GST/HST Liability – GAAP	BC PST Liability – GAAP
A	$108.45	$100.00	$3.55	$5.00	$7.00

Apparently, you can no longer record your revenue as $108.45 because it’s actually larger than your true sales revenue. The two types of sales tax collected are not revenues of the store owner; they belong to two different tax departments and the store owner is supposed to remit them.

If all orders had been under the same tax rate, we could have formulated a mathematical equation to figure out all items. But since order A, B & C have different destinations and different tax rates, the mathematical equation will not work. We have prepared a complete breakdown to explain the situation:

Multiple Tax Rate

Order	Net Proceed	Sales Revenue – GAAP	Payment Processing Fees – GAAP	GST/HST Liability – GAAP	BC PST Liability – GAAP
A	$108.45	$100.00	$3.55	$5.00	$7.00
B	$203.61	$200.00	$6.39	$10.00	Nil
C	$109.42	$100.00	$3.58	$13.00	Nil
Total	$421.48	$400.00	$13.52	$28.00	$7.00

By now it should be quite clear that nobody can determine the sales tax liabilities and payment processing fees by merely looking at deposits on the bank statements. In order to determine the appropriate accounting entries, the bookkeeper needs to gather the extra information from the Shopify platform. That’s how the bookkeepers can determine payment processing fees and sales tax liabilities.

The example we use is highly simplified. Most eCommerce stores ship far more orders. As a result, a single deposit may be a combination of several orders. When it happens, a mathematic formula can no longer decipher the sales tax and payment processing fees in the transaction. In addition, the store owner has the option of keeping money in the Shopify account. If that’s the case, there won’t even be a deposit to be started with. But sales activities are still there and need to be recorded nonetheless.

Even though we can’t easily demonstrate the impact the sales volume, we believe you could easily imagine that the high volume is actually the biggest factor which makes eCommerce bookkeeping more complicated.

Conclusion

Due to the complexity arising from various sales tax rates and a multitude of payment processing rates, it’s really impossible to record the transaction by only looking at the deposits on the bank statements. An ideal bookkeeper should know where to look for the extra information; he/she should how to extract sales data, shipping addresses, sales tax rates and payment processing fees. Please contact eComGuru Accounting Services to find out how we can help you.