It’s the end of the financial year and spirits are in the sky! But before you crack open the champagne and drink to your well-earned profits, there’s one last thing for ecommerce businesses to do. So they can ensure their financial records are accurate and ready for tax season - complete the year-end accounting checklist.

Yes, it doesn’t sound like a barrel of laughs, but conducting a proper financial review is super important. It helps businesses understand their financial health, ensure tax compliance, and make informed decisions for the upcoming year.

Also, ecommerce businesses face unique challenges compared to traditional businesses, such as inventory management, sales taxes, and multiple payment gateways. This can make their accounting a bit more tricky.

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What's involved in year-end accounting for ecommerce businesses?

If you’re confused about what’s involved, don’t worry, we’ll explain everything in this clear, info-packed guide. So let's get into it, the quicker you get your year-end tax sorted, the sooner the drinks can start flowing. 

1. Review and reconcile financial records

An essential part of any year-end accounting checklist for ecommerce businesses is reconciling financial records from different platforms and payment gateways. 

This includes checking sales records from all platforms, reconciling bank statements with business accounts, and ensuring all expenses and transactions are accurately logged:

• Gather all financial documents like bank statements, credit card statements, payment gateway reports, and sales records from all platforms.

• Compare your bank statements to your accounting records, ensuring that all deposits, withdrawals, and transfers are accurately reflected. 

• Verify that all payments received through your ecommerce platform or payment gateways are recorded correctly in your accounting system. 

• Carefully review your financial records for any errors or omissions. This might include missing transactions, incorrect amounts, or inaccurate categorisations.

• If you find any discrepancies, investigate their causes and take steps to resolve them. This may involve contacting banks, payment gateways, or customers to obtain additional information.

2. Review outstanding invoices and receivables

To avoid cash flow issues and ensure accurate financial reporting, you need to review outstanding invoices and receivables regularly. Send timely reminders for overdue payments, consider offering discounts for early payments, and write off bad debts if necessary. 

Additionally, use an ageing receivables report to track the status of outstanding invoices and identify potential cash flow problems. This report categorises invoices by age, making it easier to prioritise collection efforts and take proactive measures to collect overdue payments. 

3. Inventory valuation and stock management

Accurate inventory valuation is crucial for financial reporting. Conduct a physical inventory count and write off damaged, obsolete, or unsellable items. Adjust inventory for discrepancies. Consider using a perpetual inventory system to track stock levels in real-time.

Additional Tips:

• Choose a valuation method: Determine the appropriate valuation method (e.g., FIFO, LIFO, average cost) for your business and industry.
• Review inventory turnover: Analyse your inventory turnover rate to identify slow-moving or obsolete items.
• Consider shrinkage: Account for inventory shrinkage due to theft, damage, or errors.
• Implement a cycle counting system: Conduct regular cycle counts to verify inventory accuracy without a complete physical count.

If you're looking for more tips on ecommerce inventory management, then be sure to check out our ecommerce inventory guide to find the best tools, practices and even future trends to look out for.

4. Review VAT compliance

Ecommerce businesses must pay careful attention to VAT, especially when operating in multiple jurisdictions. To ensure compliance, regularly review sales tax laws and regulations in all states where you have a physical presence or nexus. 

Accurately calculate VAT rates and collect taxes from customers in taxable jurisdictions. File sales tax returns on time and remit taxes to the appropriate authorities. Consider using tax compliance software or consulting with a tax professional to help manage VAT obligations.

5. Review profit and loss statements

A detailed review of the profit and loss statements is required to understand your ecommerce business's financial performance. Analyse revenue streams and major expenses to identify trends, strengths, and weaknesses.

Assessing the performance of different product categories, sales channels, or customer segments will help you determine which areas are driving growth. You can then focus on selling products or services that are generating the highest profit margins.

You should also examine your cost structure to identify areas where you can reduce expenses or improve efficiency - compare your actual expenses to your budgeted amounts. 

Lastly, after you complete a P&L review, you’ll be able to view your financial performance against industry benchmarks to assess your business's competitiveness.

6. Plan for tax preparation

Preparing for tax season is a major annual task for all businesses. Gather and organise all necessary financial documents, including bank statements, credit card statements, payment gateway reports, sales records, and expense receipts.

Identify potential tax deductions and credits specific to ecommerce businesses, such as the Section 179 deduction for equipment purchases, the Qualified Small Business Tax Credit, and the Research Credit. 

Consult with a tax professional to ensure accurate tax filing and to take advantage of any available tax benefits. Consider using tax preparation software or online tools to streamline the process.

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7. Assess payment processor fees

Assessing payment processor fees should be on every ecommerce business' year-end accounting checklist to ensure no unexpected costs are eating into the business’s profits. 

Average payment processor fees vary depending on the processor, transaction volume, and industry. But they typically range from 2.0% to 3.5% of the transaction amount, plus a fixed fee per transaction. Negotiate for better rates, especially if your business processes a high volume of transactions.

Key Factors to Consider:

• Transaction fees: Calculate the percentage of each transaction that goes to the payment processor.
• Monthly fees: Determine if there are fixed monthly fees or minimum transaction volume requirements.
• Additional fees: Be aware of any additional charges, such as chargeback fees, refund fees, or international transaction fees.
• Customer experience: Consider the impact of payment processor fees on your customers' experience. High fees can discourage purchases.

8. Review payroll and contractor payments

A thorough review of payroll and contractor payments is a vital task in the year-end accounting checklist to avoid errors in tax reporting. 

It’s been reported that 88% of UK businesses experienced payroll errors, resulting in employees/contractors not being paid properly. And apparently 80% of companies spent over 12 hours per month on correcting payroll errors.

So verify accurate payroll records, confirm contractor payments for 1099 reporting, and review bonuses and other compensations. Using dedicated payroll software will make this much easier. 

Ecommerce year-end accounting made easy

With this comprehensive year-end accounting checklist, ecommerce businesses can ensure their financial records are accurate, their tax obligations are met, and they have a clear understanding of their financial health. 

To recap, you will need to review and reconcile financial records, assess outstanding invoices, accurately value inventory, ensure sales tax compliance, analyse profit and loss statements, plan for tax preparation, assess payment processor fees, review payroll and contractor payments. 

One last bonus tip:

Always organise and back up financial data once you have completed the listed actions. Taking these steps will allow ecommerce business owners to set themselves up for success in the coming year, make informed decisions about their operations and start downing the year-end bubbles stress-free!

And if you're not quite sure you want to face accounting alone, then make sure you work with a reputable ecommerce accountant (like Crunch!). Working with an accounting partner that knows what they're doing will massively save you time, tax and money.

Interested in seeing how we can support your business? Book a call today with our advisors. It's free and no-obligation consultation, so you can rest assured knowing you're not about to face a robotic, rehearsed sales script.

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