What is Online Bookkeeping and How Does it Work

Online bookkeeping is a game-changer for small business owners and entrepreneurs. It allows you to manage your finances from anywhere, at any time, using cloud-based software.

You can access your financial records, track expenses, and make payments all in one place. This convenience is made possible by cloud-based software that stores your data securely online.

Online bookkeeping is a cost-effective alternative to traditional accounting methods. According to the article, it can save you up to 50% of your accounting costs.

Choosing the right tools for online bookkeeping is crucial for small businesses and entrepreneurs. A2X, for example, is an app that automatically posts Shopify store sales to Xero or QuickBooks and reconciles payouts.

FreshBooks is another popular option, helping you manage Shopify orders in FreshBooks based on three objects: items, invoices, and payments. It also uses your Shopify inventory for all inventory management, updating financial information automatically.

To make the most of these tools, consider the following options:

These tools can help you streamline your online bookkeeping process, saving you time and reducing errors. By choosing the right tools, you can focus on growing your business and achieving your goals.

Choosing the right ecommerce platform is a crucial step in setting up your online store. You've got options like Shopify, BigCommerce, WooCommerce, and Adobe Commerce to name a few.

Ecommerce platforms offer features to help with bookkeeping, such as tracking inventory and sales taxes. This makes tax time a lot easier to manage.

Many platforms charge merchant fees, which is a unique bookkeeping element online sellers need to track. The merchant fee will vary depending on the platform you use.

Here are some popular ecommerce platforms and their bookkeeping features:

Some platforms also integrate with accounting software, making it easier to manage your sales and expenses.

Choosing the right software and technology for your ecommerce business is crucial for efficient bookkeeping.

A2X, FreshBooks, and QuickBooks are popular tools for ecommerce bookkeeping, automatically posting sales and reconciling payouts.

You can also consider Bench, which offers affordable outsourced bookkeeping services for your Shopify store, syncing directly with your merchant and bank accounts.

Integrating your store with accounting software is a best practice for ecommerce bookkeeping. Most ecommerce platforms will integrate with dedicated accounting software or offer plug-ins to assist with tracking.

For a virtual bookkeeping business, you'll want to invest in core accounting software, such as QuickBooks Online, FreshBooks, Zoho, Sage Intacct, or Xero.

Document management software, like Google Drive or Hubdoc, will help you receive, share, and file documents and data effectively.

Tracking your inventory is a crucial part of ecommerce bookkeeping. You should aim to track it on a monthly or quarterly basis to keep it up to date, especially if you process returns or store inventory in multiple locations.

Your inventory will be logged in your ecommerce bookkeeping based on the cost of goods sold (COGS), which can be calculated by adding the cost of your inventory to the purchases made during a specific time period.

To calculate COGS, use the formula: (Beginning inventory + Purchases) – Ending inventory = COGS. This will give you the total cost of goods sold, which is different from your operating expenses.

You should record COGS separately from your operating expenses, as they are expenditures not directly related to the production of your products.

Virtual bookkeeping has several advantages that make it an attractive option for businesses. It allows businesses to access their financial records and work with their bookkeepers remotely, saving time and eliminating the need for physical meetings.

One of the most significant benefits of virtual bookkeeping is its cost-effectiveness. It can be a cost-effective solution for businesses that cannot afford to hire an in-house bookkeeper, reducing administrative costs associated with traditional bookkeeping methods.

Virtual bookkeeping software provides real-time data access, enabling businesses to make informed financial decisions quickly. This is particularly useful for businesses that need to respond quickly to changing market conditions.

Virtual bookkeeping is a scalable solution that can grow and adapt as businesses expand or change. It's an ideal choice for businesses that are growing rapidly or have fluctuating financial needs.

Integrating your store with accounting software is a must, as it will align your ecommerce platform with your financial records.

Most ecommerce platforms offer plug-ins or integration with dedicated accounting software, making it easier to track sales and remit sales tax.

Configure tax rules in your store to automate orders and ensure you're collecting taxes where required.

Tax locations should be set up in your store to avoid errors and make tax collection more efficient.

Reconciling your account regularly is crucial, as it helps you stay on top of your finances and identify any discrepancies.

Downloadable logs of sales should be reviewed and reconciled on a regular basis, ideally monthly or quarterly.

Here are some best practices to follow:

By following these best practices, you'll be able to maintain accurate bookkeeping records and avoid common mistakes.

Sales tax and fees can be a complex part of online bookkeeping, but understanding the basics can help you stay organized and compliant.

You'll need to identify where you have nexus, which means determining where your ecommerce business has a presence in a state. This can be where you sell, store inventory, or have employees, or if it's where you live, and some states have regional sales tax that applies to out-of-state sellers.

To calculate sales tax, you'll need to add the sales tax rates for your state, county, and city, and then multiply the total percentage by your sales amount. For example, if your city sales tax rate is 2% and your state tax rate is 5%, the total sales tax is 7%.

You'll also need to collect sales tax from customers and add it to their purchase at checkout, and then file a return before the deadline in the states you're required to collect sales tax.

Here's a simple formula to calculate sales tax: Sale price x Sales tax rate = Sales tax. Using this formula, if you sold an item for $100 with a city sales tax rate of 2% and a state tax rate of 5%, the total sales tax would be $7.

Payment processing fees can be categorized as COGS, which means you'll need to deduct them from your income to calculate your gross margin. The formula for this is Income - (COGS + Payment processing fees) = Gross profit.

Handling sales tax is a crucial part of ecommerce bookkeeping. You need to identify where you have nexus, which means your business has a presence in a state if you sell, store inventory, or have employees there. Some states even require out-of-state sellers to collect sales tax.

To determine which products are taxable, check the official sites of each state. Each state has its own rules, so you'll need to research and understand the tax laws in each place where you sell. This will help you avoid any potential issues down the line.

You'll need to register your business for a sales tax permit in any state where you have economic nexus. This is a requirement for compliance, and you may also need to purchase a business permit to sell to customers in that state.

To calculate sales tax, you'll need to add the sales tax rates for your state, county, and city, then multiply the total percentage by your sales amount. Here's a simple formula to follow:

For example, if you sold an item for $100 and your city sales tax rate is 2% and your state tax rate is 5%, the total sales tax would be 7%. You can calculate this by multiplying the total percentage by your sales amount: 0.07 x $100 = $7.

Finally, be sure to track sales tax correctly in your chart of accounts. This will help you understand how much of your cash in the bank should be set aside for taxes. One way to do this is to debit the amount you've collected from your cash account and credit it to your sales revenue and sales tax payable accounts.

Payment processing fees are a necessary expense for online sellers, and it's essential to track and account for them accurately. These fees can add up quickly, so it's crucial to keep a log of the fees incurred for each payment.

Most ecommerce businesses categorize payment processing fees as a cost of goods sold (COGS), which means they're directly associated with the costs of sales. This is because payment processing fees are a deductible business expense.

You'll need to deduct these fees from your income to calculate your gross margin, which is essential for understanding your business's profitability. The formula to calculate gross profit is: Income - (COGS + Payment processing fees) = Gross profit.

It's not uncommon for online sellers to use multiple payment providers for shoppers in different locations, which can make reconciliation a bit more complicated. However, it's still essential to reconcile all the fees together to create a total amount.

Financial statements are an essential part of ecommerce bookkeeping, providing a snapshot of your company's revenue, expenses, profitability, and debt. This information helps you understand the financial health of your business and make informed decisions.

Financial statements are also a valuable resource for potential investors, who can see the financials of your business over time. By using accounting software, you can automate many of the operations and get accurate debits and credits entered.

A small business can likely do all its own bookkeeping using accounting software, making it easy to stay on top of financial transactions. FreshBooks, Xero, and QuickBooks Online are popular options for small businesses, offering a range of features and pricing plans to suit different needs.

Inventory management is a key part of the bookkeeping process. Your inventory is considered an asset that holds value, so staying on top of it gives you a transparent view of how much stock you have, how much stock you need, and any emerging sales trends.

Tracking your inventory on a monthly or quarterly basis is a good idea, especially if you process returns or store inventory in multiple locations. This helps ensure your inventory is always up to date.

You can calculate the cost of goods sold (COGS) by adding the cost of your inventory to the purchases made during a specific time period. Subtract the cost of inventory left at the end of your timeframe to calculate your COGS.

The formula for calculating COGS is (Beginning inventory + Purchases) – Ending inventory = COGS. This helps you understand your business's expenses and make informed decisions about pricing and restocking.

Financial statements provide a snapshot of your company's revenue, expenses, profitability, and debt. They help you understand the financial health of your business.

Financial statements are an integral part of ecommerce bookkeeping, allowing you to see how much money you have available to put back into the business.

Potential investors can also use financial statements to see the financials of your business over time. This can be a major selling point when looking for funding.

Financial statements include profit and loss statements, which highlight revenues, costs, and expenses incurred during a set period.

Opening a business bank account is a crucial step in maintaining separate finances for your bookkeeping business. This helps keep your personal and business transactions distinct.

Mingling personal and business transactions can lead to piercing the corporate veil, which can result in losing personal liability protection. This protection is essential for bookkeeping business owners who have formed an LLC or corporation.

Having a dedicated business bank account and credit card will help you avoid using business funds for personal expenses. This will also make it easier to keep accurate records of your business transactions.

As a bookkeeper, you know how important it is to keep your personal and business finances separate. This is why opening a business bank account is a must for any bookkeeping business owner.

Online bookkeeping can be a challenge, especially for small ecommerce businesses. Trying to do it all manually can lead to duplicates and inevitable human error.

Manually inputting data is a time-consuming and tedious task that can be easily avoided. Failing to meet international tax standards is another common issue, as tax laws vary around the world and many ecommerce businesses fail to check their compliance.

Keeping accurate inventory levels is crucial, as one mistake can lead to other problems down the line. Inaccurate inventory levels can affect your balance sheets, profit and loss statements, and cash flow forecasting.

Here are some common issues and solutions to consider:

To become a bookkeeper, you'll need a strong understanding of finances and organization, as well as a love of numbers. Many bookkeepers are self-taught, but formal education and training can also be beneficial.

While there are no required certifications to work as a bookkeeper, having a certification can be advantageous. You can acquire the necessary skills through working in the finance industry or by balancing your personal budgets.

To become a bookkeeper, you need a strong understanding of finances and organization, as well as a love of numbers.

Bookkeepers work with a variety of clients and handle daily financial activities, including overseeing and recording transactions, creating budgets, and balancing ledgers.

You can acquire the skills needed to become a successful bookkeeper through working in the finance industry or by balancing your personal budgets.

Many bookkeepers develop their expertise over time, while others opt to complete seminars, read books, or take online classes.

There are no required certifications needed to work as a bookkeeper, but taking a certification class can help demonstrate your capabilities if you're new to the field.

You might want to consider taking a certification class if you don't have experience to back up your skills.

As you consider becoming a bookkeeper, it's essential to understand the difference between bookkeeping and accounting. Bookkeeping focuses on recording and organizing financial data, including tasks such as invoicing, billing, payroll, and reconciling transactions.

Accounting, on the other hand, is a more complex profession that involves interpreting and presenting financial data. It includes tasks such as tax returns, auditing, and analyzing performance. While bookkeeping is a crucial part of accounting, not all bookkeepers are accountants.

In fact, bookkeepers are often not certified with a degree or diploma, whereas accountants are typically licensed professionals. This is because accounting requires core knowledge of finance, accounting, and taxation, which goes beyond just calculating numbers and managing books.

Some of the key differences between bookkeeping and accounting are outlined below:

As you can see, while bookkeeping is an essential part of accounting, it's a distinct profession that requires its own set of skills and knowledge. By understanding the differences between bookkeeping and accounting, you can better prepare yourself for a career in bookkeeping and set yourself up for success in this field.

To become a bookkeeper, you'll need to obtain a certification, such as the Certified Bookkeeper (CB) or QuickBooks Certified User (QBCU) certification.

The median annual salary for bookkeepers is around $40,000, according to the Bureau of Labor Statistics.

You'll need to have strong organizational skills to manage financial records and maintain accurate ledgers.

Bookkeepers typically work 40 hours a week, with some overtime during tax season.

To succeed as a bookkeeper, you'll need to be detail-oriented and have a strong understanding of accounting principles.

Many bookkeepers start their careers by working as accounting clerks or data entry specialists.

With experience, you can move into senior bookkeeping roles or start your own bookkeeping business.

Bookkeepers use software like QuickBooks and Xero to manage financial records and prepare tax returns.

You can learn bookkeeping skills by taking online courses or attending workshops and conferences.

A high school diploma or equivalent is typically required to become a bookkeeper.

Bookkeepers work in a variety of industries, including small businesses, non-profits, and government agencies.

Bookkeeping is a stable and in-demand career, with job growth expected to be 10% by 2026.