eCommerce bookkeeping becomes difficult when the money arriving in the bank no longer matches the sales shown on the platform. Marketplace fees, payment charges, refunds, stock movements, advertising costs, currency conversion and VAT can all sit between the customer’s order and the final payout.

A reliable process therefore starts with the platform records, not the bank receipt. The aim is to reconstruct the full transaction: what the customer paid, what was refunded, which fees were deducted, how VAT was treated and what eventually reached the bank.

Why the bank payout is not the sales figure

An online marketplace or payment provider will often pay a net amount after deducting several items. These may include selling commission, payment-processing charges, subscriptions, fulfilment fees, advertising spend, refunds, chargebacks and currency conversion costs.

If the net payout is posted entirely as sales, turnover is understated and expenses disappear from the accounts. This can distort gross margin, make marketing costs difficult to assess and leave VAT records disconnected from the platform reports.

The bookkeeping should normally record gross sales and the relevant deductions separately. The settlement report then acts as a control account: gross activity less fees, refunds and other adjustments should agree with the amount paid into the bank.

Our guide to reconciling bank transactions in Xero explains the wider principle of matching accounting records to independent bank evidence.

Build the records around each sales channel

A business selling through its own website and several marketplaces should avoid treating every receipt as though it came from one source. Each channel may use different fees, payout dates, VAT reports and refund processes.

A practical chart of accounts might separate marketplace commission, card-processing fees, fulfilment charges, advertising, returns and foreign-exchange differences. It may also separate sales channels where that information is useful for management reporting.

The level of detail should remain proportionate. The objective is not to create dozens of accounts that nobody uses. It is to provide enough information to answer sensible questions about revenue, margin and the cost of acquiring sales.

Refunds, returns and chargebacks need their own trail

Returns can affect several parts of the bookkeeping at once. The customer may receive a refund, the marketplace may return part of its fee, stock may come back into inventory and the VAT treatment may need adjusting.

Chargebacks are different from ordinary refunds because the payment provider may remove the sale and add a separate dispute fee. Recording only the reduced payout makes it difficult to see whether the business lost revenue, incurred an extra cost or later recovered the amount.

For VAT-registered businesses, HMRC requires relevant returns, exchanges, credit notes and debit notes to be recorded and retained. The settlement report, customer refund record and accounting entry should therefore tell the same story.

Digital advertising and reverse charge VAT

Digital advertising is often one of the largest costs in an eCommerce business, yet it is also one of the easiest areas to record incorrectly. The first question is not simply whether the supplier has a familiar brand name. It is which legal entity issued the invoice and where that supplier belongs for VAT purposes.

Under the general business-to-business place-of-supply rule, services are normally treated as supplied where the customer belongs. If a UK business receives taxable services from a supplier that belongs outside the UK, the reverse charge may apply.

HMRC describes the reverse charge as the customer acting as both supplier and recipient for VAT accounting purposes. A VAT-registered business records output VAT on the service and may also reclaim the corresponding input VAT, subject to the normal recovery rules.

For example, if a UK VAT-registered online retailer receives a £1,000 advertising invoice from a non-UK supplier and the reverse charge applies, it would normally calculate £200 of output VAT at the current standard rate. If the cost is fully attributable to taxable business sales, the same £200 may normally be reclaimed as input VAT. The net VAT cost may therefore be nil, but the entries still need to appear correctly on the VAT return.

HMRC states that reverse charge services are included in boxes 1, 4, 6 and 7 of the VAT return, with box 4 recovery subject to the normal rules. Its place-of-supply and reverse charge guidance explains the conditions in detail.

Why non-VAT-registered sellers must still check

The issue does not disappear merely because the eCommerce business is not registered for VAT. HMRC says that the value of B2B general-rule services received from overseas suppliers must be added to the business’s own taxable supplies when deciding whether the VAT registration threshold has been exceeded.

The current UK VAT registration threshold is £90,000 of taxable turnover. An online seller approaching that level should therefore identify overseas advertising, software and other service invoices rather than assuming that only customer sales matter for the threshold calculation.

Because supplier structures and invoice entities can change, the bookkeeping file should retain each invoice and avoid relying solely on the name shown on the bank payment. Where the treatment is uncertain, the business should ask its accountant or VAT adviser to confirm it.

Platform VAT rules depend on the transaction

Online marketplace VAT is not governed by one rule that applies to every seller. The treatment can depend on where the seller is established, where the goods are located at the time of sale, whether the customer is a business or consumer and the value of an imported consignment.

For certain sales by overseas sellers and certain consignments imported through an online marketplace, the marketplace is responsible for collecting and accounting for VAT. In other situations, the seller remains responsible.

The bookkeeping should therefore preserve the marketplace VAT report and distinguish between sales on which the seller accounts for VAT, sales treated under marketplace deemed-supplier rules and any import VAT or customs entries. HMRC’s guidance on overseas goods sold through online marketplaces shows why stock location, seller status and consignment value matter.

A generic entry labelled “marketplace VAT” is rarely enough. The report should make clear what the amount relates to and whether it belongs in sales VAT, import VAT, a marketplace control account or another category agreed with the accountant.

Inventory and cost of goods sold

Product businesses need records that distinguish stock purchased from stock sold. Buying inventory reduces cash, but it does not necessarily mean that the full purchase should be treated as a cost in the same period.

Under traditional accounting, closing stock remains an asset until it is sold or otherwise written down. The cost transferred to the profit and loss account should relate to the goods sold during the period, rather than simply every stock purchase paid from the bank.

Good eCommerce bookkeeping therefore needs a reliable stock value at the reporting date, a consistent method for calculating product cost and a process for dealing with damaged, obsolete, returned or missing stock.

Where the sales platform, fulfilment provider and accounting software hold different quantities, the differences should be investigated rather than adjusted automatically. A stock figure that agrees with software but not with physical goods can still misstate profit.

Multi-currency sales and conversion differences

International sales may be processed in one currency, settled in another and converted again when transferred to the UK bank. The platform report may show gross customer sales, conversion fees and a settlement exchange rate, while the accounting software applies its own rate.

These differences should be separated from sales and platform commission. Otherwise, exchange gains and losses become hidden inside revenue or fees, making channel performance harder to understand.

The same principle applies to overseas advertising and software subscriptions. The sterling amount recorded should be supported by the invoice, payment record and the exchange rate used by the bookkeeping system.

Keep invoices and digital VAT records together

VAT-registered businesses must retain records of purchases, sales, invoices, adjustments and reverse charge transactions. HMRC’s VAT record-keeping guidance also requires specified VAT information to be kept digitally unless an exemption applies.

For an online seller, that means the platform data, payment-provider reports, advertising invoices and bookkeeping entries should remain connected. A monthly total copied manually from one system to another without a supporting trail makes future checking much harder.

Our guide to capturing expenses and receipts in Xero covers the practical side of collecting purchase evidence, while our first VAT return guide explains the wider preparation process.

A dependable monthly eCommerce bookkeeping process

A monthly close should bring the separate systems together before management reports or VAT figures are relied upon. A useful checklist is:

This process produces more than a tax record. It helps the owner see the real cost of each channel, the relationship between advertising spend and sales, the effect of refunds and the amount of cash tied up in stock.

When outsourced bookkeeping becomes useful

eCommerce bookkeeping becomes difficult to maintain alongside customer service, purchasing, fulfilment and marketing. The warning sign is not simply a large number of transactions. It is when the owner can no longer reconcile platform activity to the bank or explain the difference between sales, cash receipts and reported profit.

Bookkeeping Packages Ltd provides outsourced bookkeeping support for businesses that need their platform reports, expenses, stock records and VAT information brought into one dependable monthly process.

The objective is clear reporting rather than extra administration: gross sales that agree with platform activity, costs that are visible, VAT entries supported by invoices and a balance sheet that can be explained.

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 reliable financial records and useful management information.

This article is provided for general information only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax, legal or financial advice. Advice specific to your circumstances should be obtained from an appropriately qualified professional.