Why eCommerce Bookkeeping Is More Complex Than It Looks
Selling online appears straightforward from the outside: goods are listed, sold, and payment is received through a platform. The bookkeeping reality is considerably more complex. Payment processing fees, platform selling fees, currency conversion charges, returns and refunds, inventory costs, and marketplace VAT rules all create a volume of transactions and adjustments that, if not managed carefully, produce accounts that bear little resemblance to the actual financial position of the business.
A seller using a single platform such as Shopify or Etsy has a simpler bookkeeping task than one operating across Amazon, eBay, and their own website simultaneously, potentially selling in multiple currencies to customers in multiple tax jurisdictions. Regardless of scale, the principle is the same: every sale, every fee, every refund, and every inventory movement must be recorded accurately and completely.
Marketplaces and VAT
The VAT rules for online selling changed significantly in 2021. For sales to UK consumers, online marketplaces are now responsible for collecting and remitting VAT on sales made by overseas sellers through their platforms. For UK-based sellers, the standard VAT registration threshold applies, and businesses that exceed 90,000 pounds in taxable turnover must register. Digital services sold to UK consumers by overseas businesses are subject to UK VAT from the first sale, with no threshold. HMRC provides current guidance on the online selling VAT rules on the Making Tax Digital for VAT guidance page.
Platform-collected VAT does not reduce the seller’s own VAT obligation where one exists. A UK-registered seller on Amazon must account for VAT on their own sales regardless of any VAT that Amazon collects and remits separately. The monthly reconciliation of sales platform reports against accounting records, including a clear trail of how VAT has been treated, is essential for any VAT-registered online seller.
Recording Platform Fees and Costs
Most eCommerce platforms charge a combination of subscription fees, selling commissions, and payment processing fees. These are business expenses and must be recorded as such, but they are often netted off against sales receipts in the platform’s payout rather than being separately invoiced. This means the amount received in the bank account is not the same as the gross sales figure, and accounting for only the net receipt understates both income and expenses in the accounts.
For accurate bookkeeping, the gross sales figure from each platform should be recorded as income, and the platform fees should be recorded separately as expenses. This requires using the platform’s detailed transaction reports rather than simply recording the bank receipt. Most platforms provide monthly settlement reports that show the gross sales, individual fee categories, refunds, and net payout in a format that can be reconciled to the bank.
Inventory and Cost of Goods Sold
Product-based eCommerce businesses must track inventory as a balance sheet asset and recognise the cost of goods sold as they are sold rather than when they are purchased. A business that buys 10,000 pounds of stock and sells half of it in the period should report 5,000 pounds as cost of goods sold and 5,000 pounds as closing stock on the balance sheet. Simply expensing all purchases creates an inaccurate profit figure that understates performance in buying periods and overstates it when drawing down existing stock.
Setting up the accounts correctly from the start, with separate tracking of inventory, cost of goods sold, platform fees, and returns, is significantly easier than retrospectively restructuring a set of accounts that has been maintained as a simple cash record. Our bookkeeping services include eCommerce-specific account structures for product-based sellers.
If your eCommerce business is growing and the bookkeeping is no longer manageable alongside running the business, our outsourced bookkeeping service covers the full monthly bookkeeping function for online businesses.
About the Author
Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses maintain accurate records and management accounts. Stuart is a bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax or financial advice. Call 0161 531 0087 or visit bookkeepingpackages.co.uk.
The information in this article is provided for general guidance only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. This content does not constitute tax or financial advice. For advice specific to your circumstances, please consult a qualified accountant or tax adviser.
By Stuart Kerr, Managing Director, Bookkeeping Packages Ltd