A Detailed Guide to Shopify Accounting and Bookkeeping Best Practices for eCommerce Businesses

If we’re going to guess, you didn’t start your Shopify store because you loved accounting, bookkeeping, and spending all day in spreadsheets.

You probably started your business because you had an idea for a game-changing product(s), or maybe you wanted to create a better life for yourself and your family. However, accurate accounting and bookkeeping are the foundation of a profitable eCommerce business.

Running an eCommerce business is hard enough as is. You are only making it harder on yourself if your books are filled with inaccurate or missing financial transactions and business expenses.

In this post, we’re sharing everything Shopify merchants need to know for getting your books in order, including:

Why is accounting and bookkeeping important for eCommerce business owners using Shopify?

Your business’s finances are the foundation of a healthy eCommerce business. If you don’t have accurate inventory numbers, don’t know how many sales you made in a given time period, or can’t trust your financial statements because of messy bookkeeping, you are doing yourself and your business a massive disservice.

Not to mention, you need to pay attention to your balance sheet and your incoming and outgoing cash flow running through your cash flow statement.

The basics that all eCommerce entrepreneurs should have in place is a way to keep track of the following: 

• Assets – this is everything that your business owns 
• Liabilities – any outstanding debts or loans that your business has 
• Revenue – all incoming cash into the business from sales, affiliate deals, etc. 
• Expenses – all of your outgoing cash, including inventory, team costs, packaging, etc. 
• Equity – what percentage of the business do you own? For example, if you are a solo business owner with no outside investors, then you own 100% of the business. 
• Key Growth KPIs – the most important growth metrics that you move the bottom line 

What cloud accounting software works best for Shopify businesses? 

If you are running a brand new business with less than six figures in total sales, you might be able to get by with the default reports in Shopify as well as a spreadsheet or two.  

However, once you are doing six-figures in sales, it is in your best interest to use cloud accounting software. It will save you a ton of time and can ensure that your finances are up-to-date and accurate. 

The two most popular options for US, UK, and Australian eCommerce businesses are Xero and Quickbooks.

Whether you are evaluating Xero, Quickbooks, or alternatives like Freshbooks and MYOB, here are some key things to consider when choosing your eCommerce cloud accounting software: 

• Is there a direct integration with Shopify? 
• How easy is it for you to use? 
• Does it sync automatically with your business bank account, credit cards, and any other financial software you are using? 
• What third-party integrations do they have? 

Here at Bean Ninjas, it is no surprise that we’re big fans – and power users – of Xero.

If you are just getting started, here are eight things that many people forget to do when they are setting up their Xero account for the first time. 

Pro Tip: Want to dive deeper into the ins and outs of Xero? Here are some lesser-known features.

What are the top benefits of using cloud accounting software? 

As we alluded to earlier in this post, the biggest benefit of using Xero is that it is easier to have accurate financials. You can sync Shopify with Xero so that you can make informed business decisions based on the most up-to-date sales, profit, inventory, and cash flow numbers.

Here are some additional benefits of using Xero, including but not to limited to: 

• Build a more profitable eCommerce business 
• Spot potential problems early on before it turns into a full-blown cash crisis
• Know your top and bottom performing products and sales channels 
• Understand your revenue and profit numbers for all of your products and SKUs 
• Get accurate customer acquisition and lifetime value numbers 
• Run detailed cash flow forecasts – along with inventory forecasting. 
• Make informed decisions before you apply or take out a loan or seek out investors  
• Gain clarity around your inventory numbers, PO terms, and repayment schedules 
• Avoid scary tax letters and fines 

Top cloud accounting software options for Shopify merchants

Xero

Xero’s comprehensive cloud-based accounting software provides tools to help with various accounting tasks, including invoicing, bank reconciliation, expense tracking, and more. It works best for small to medium-sized businesses. 

Xero’s app store allows businesses to integrate with key software in their tech stack, like inventory management, payroll, expense management, sales tax, You can even create custom apps and integrations with Xero’s open API.

Xero offers three pricing plans:

• Early plan is $15 per month and includes the ability to reconcile bank transactions, capture bills and recipes with Hubdoc, W-9 and 1099 management, and sales tax.
• Growing plan includes Early plan features plus allows unlimited invoices, quotes, and bills and reconciling transactions in bulk.
• Established plan includes Growing plan features plus multiple currencies, track projects, claim expenses, and Analytics Plus.

Pro Tip: When working with a Xero preferred partner like Bean Ninjas, you could even save 30% on your subscription pricing, reach out and ask how.

Quickbooks Online 

Along with Xero, QuickBooks Online is one of the top two cloud accounting platforms for all small businesses. Its cloud accounting features help you streamline operations and simplify your accounting with automation so you can focus on growth. This platform offers features to support a range of businesses from small e-commerce companies to fast-growing businesses. 

QuickBooks offers a 30-day free trial and then the following four plans: 

• Simple Start is $30 per month and provides 1 sales channel connection, 1 user, and basic reports
• Essentials is $60 per month and provides 3 sales channels, multi-currency transactions, 3 users, and more
• Plus is $90 per month and provides all sales channel connections, 5 users, more reports, order and inventory tracking, and more
• Advanced is $100 per month and provides 25 users with custom access, custom reports, automated accounting workflows, and more. 

Wave

Wave is a cloud-based money management tool that makes it easy to accept online payments, create invoices, and streamline your accounting.

This software is user-friendly and easy to set up, making it a good fit for new and smaller businesses. The financial management tools include basic functions like income and expense tracking, basic reporting, and invoicing.

Wave offers both free and paid plans, including:

• Starter Plan is free and provides unlimited estimates, invoices, bills, bookkeeping records, online payments, cash flow management, and invoicing through the Wave mobile app.
• Pro Plan is $16 per month and includes everything in the free plan plus the ability to accept online payments at a discounted rate, auto-import bank transactions, auto-merge and categorize bank transactions, automate late payments, and more. 

Zoho Books

Zoho Books provides cloud-based accounting software that helps you automate workflows and manage your finances with end-to-end accounting.For instance, it assists with tax compliance by providing tools to help with sales tax, tax compliance, and preparing your audit reports. You receive a clear record of tax payments, can reconcile within the software, and get consolidated reports that you can export and file at tax time.  

Zoho Books offers a free plan for companies earning under $50k and five paid plans:

• Standard plan is $15 per month and provides features like recurring expenses, sales tax tracking, custom fields, and more.
• Professional plan is $40 per month and provides additional features like tracking project expenses and invoice, project tasks, timesheet billing, recurring bills, purchase orders, and more.
• Premium plan is $60 per month and provides features like vendor portal, budgeting, validation rules, custom reports, up to 200 workflow rules, and more.
• Elite plan is $120 per month and includes additional features like unlimited custom reports, multi-currency transactions for each contact, integrate up to 2 Shopify stores, and more.
• Ultimate plan is $240 per month and includes additional features like advanced analytics with real-time reports and dashboards, custom reports and dashboards, and more.

FreshBooks

FreshBooks ecommerce accounting software makes billing and accounting easier with custom invoices, client management, and payment tracking. Their tools save you time by allowing you to create custom invoices with ease, track and organize expenses, manage clients, track payments, and more in one platform. You can also manage projects to increase productivity, like using their time tracking and collaboration tools. Additionally, FreshBooks is known for providing high-quality customer support.

FreshBooks offers four plans:

• Lite is $7.60 per month and includes up to 5 clients, unlimited expense tracking, unlimited estimates, reports for tax time, and pay with credit cards and bank transfers
• Plus is $13.20 per month and includes everything in Lite plus unlimited invoices for up to 50 clients, recurring invoices, financial and accounting reports, and more
• Premium is $24.00 per month and includes everything in Plus and unlimited number of clients, track project profitability, and custom email templates
• Select requires you to talk to a specialist and includes everything in Premium plus removing branding, 2 team member accounts, help with migrating from another program, and exclusive support

They also offer a 30-day free trial.

How to do accounting for Shopify businesses 

Just like you have defined systems and processes for working with your factories, uploading products to your website and third-party marketplaces, customer support, and hiring freelancers and employees, accounting and bookkeeping are no different. 

Establishing a solid financial foundation with repeatable systems and processes is standard practice. This can be loosely defined as the following: 

1. Build your Shopify accounting tech stack 
2. Follow eCommerce accounting best practices 
3. Create repeatable systems and processes  

Build your accounting tech stack

Between the Xero App Marketplace and Shopify App Store, there are thousands of third-party apps you can use. It is growing bigger every day.

These apps range from direct eCommerce platform integrations – like Shopify – to expense management, payment processing, inventory, payroll, sales tax, and reporting. 

With our experience working with dozens of eCommerce clients using Shopify, here are some of the top categories of integrations you might want to look into.

1. Sales Tax Apps

Calculating and gathering sales tax accurately is essential for e-commerce businesses. But, complying with sales tax can be challenging given evolving rules and regulations, in addition to different areas having different requirements.

Using a sales tax app for your Shopify can help you streamline the calculation of sales tax, gathering sales taxes, and tracking sales tax. Additionally, a good sales tax app will give you peace of mind that you’re in compliance with rules and regulations and help you when it’s time to file taxes.

Some good sales tax app options for Shopify include:

• Avalara provides real-time tax rates from more than 12,000 tax jurisdictions, but it is a paid service only available for Shopify Plus plans.
• TaxJar simplifies and automates sales tax compliance with automations, calculations, tracking, and reporting.
• Zamp provides real-time calculations for accurate sales tax rates and generates sales tax reports.

2. Inventory Management Apps

As an e-commerce business, you don’t want to be out of stock when a customer is trying to buy from you. So, staying up to date on your inventory is essential to ensure you can meet consumer demands without overstocking items.

Inventory management software automates and streamlines inventory management so you know what’s in stock, when to reorder, and what’s selling. These programs also save you time, increase efficiency, and reduce manual data entry, ensuring more accurate numbers and calculations. It can also integrate with your other software, like your accounting software. So you get a complete and comprehensive picture of your ordering, inventory, and needs.

Some good inventory management app options for Shopify include:

• Cin7 provides web-based inventory management options that suit businesses of all sizes. This versatile software includes various features such as unlimited stock-keeping units, automation like a workflow for shopping and returns, and analytics such as inventory forecasting reports.
• Finale Whether managing multiple sales channels, warehouses, or complex supply chains, Finale Inventory provides robust features to streamline operations, optimize inventory levels, and enhance overall efficiency.
• Unleashed provides basic and advanced inventory management tools, making it useful for e-commerce retailers, wholesalers, and manufacturers. Key features include real-time insights into stock levels across multiple locations, order management from various sources such as Shopify, B2B platforms, and offline sales from one location, track variable costs, and the availability of various integrations with other commonly used platforms.

3. Connector Apps

Connector apps are powerful and flexible software tools that connect your e-commerce store and apps to your accounting solutions and other business applications. For instance, accounting software doesn’t often integrate directly with Shopify. So, you need a connector app to set up the integration.

Connector apps help streamline your business, save you time, and increase data accuracy through automation, as opposed to manual data entry, which can introduce errors. Connectors can speed up the flow of information from one software platform to another, allowing you access to the information you need quickly.

Some good connector app options for Shopify include:

• A2X Accounting connects Shopify and other e-commerce channels with QuickBooks Online, NetSuite, or Xero accounting software. It offers various powerful features to save you time, reduce errors, set up automation, and assist with tax reporting. Some features include auto-categorized summaries of sales, fees, taxes, and more. You can also assign rules to every transaction type and receive detailed reporting, such as tracking profit margins.
• Link My Books connects Shopify and other e-commerce channels to Xero and QuickBooks Online. It provides automation to save you time on bookkeeping, automatic bank deposit matching, and built-in support for VAT, sales tax, and GST. It has a user-friendly interface and one-click reconciliation.
• Webgility provides real-time accounting automation for e-commerce businesses. This software allows you to sync order details, refunds, taxes, fees, and more from Shopify and other online stores to QuickBooks Online. It saves you time and reduces data entry errors. It can also help streamline month-end reconciliation. This software can also easily scale to handle more channels, volume, and complexities as your business grows.

Pro Tip: Looking for a more detailed guide of Xero-specific third-party integrations? Check out this post with the top 19 Xero integrations.

For example, our current process with our clients is to use A2X to automate transactions from Shopify to Xero. I would only recommend the direct Xero integration to sellers with a low order volume. At scale, the direct integration presents more admin effort than direct value.

Follow eCommerce accounting best practices 

Regardless of what your mom and best friend might tell you, your business isn’t a special snowflake. Whether you are using Shopify, WooCommerce, Magento, BigCommerce, or something else, here are some best practices that all eCommerce businesses should follow. 

1. Keep your books up-to-date 

In Xero, your chart of accounts is how you can organize and keep track of all of your transactions. Whether you DIY it or have a bookkeeper maintain your chart of accounts, this is something that you should do monthly – if not weekly. This ensures that you are always making decisions based on accurate financial data.

2. Stick with accrual accounting 

For eCommerce businesses, accrual accounting tends to work better, especially if you are growing fast, have big sales spikes (for example, around the holidays), or have a lot of complexity. 

Pro Tip: What’s the difference between cash and accrual accounting? Check out our guide.  

3. Maintain proper inventory reporting 

Categorizing and keeping track of your inventory will allow you to make informed decisions about what products are selling through faster when to reorder more inventory, how to account for inventory shrinkage, and more. 

4. Set up fraud prevention measures 

Whether it is dealing with chargebacks or a rogue employee embezzling from your company – like this wild story from an 8-figure US ecommerce business, there are many things you can do to prevent fraud. 

These measures range from simple things like keeping a close eye on who has access to Xero, company bank accounts, payroll, etc., to reconciling your bank statements (We’ll share more on that later in this post!) to completing regular financial audits.

Pro Tip: Looking for additional fraud prevention tips? Check out this post.

Create repeatable financial systems and processes 

Many eCommerce entrepreneurs rely on bank balance accounting, where they check their bank balance one, two, or a few times a week. If everything checks out, they go back to business as usual. This works okay when you are small, but as soon as you have a few employees, a few hundred thousand in sales, and more frequent inventory runs, this informal system can quickly cause cash flow problems and stress.  

While you don’t need to completely stop your bank balance accounting tendencies, there are three additional processes that we recommend putting in place. 

1. Create a weekly or monthly financial reporting cadence

When you are wearing multiple hats in your eCommerce business, it can be too easy to stay in the weeds. Setting a system where you view your financial reports and key metrics on a regular basis- even 10 minutes once a week – can be beneficial. 

Here are the key reports that you should look at: 

• Profit and Loss Statement (a.k.a. P&L Statement) – this allows you to quickly see all of your revenue and expenses 
• Balance Sheet – this is the 10-foot pole view where you can see your business’s total assets and liabilities  
• Cash Flow Forecast – this allows you to model out and plan future cash flow in your business 
• Inventory Forecast – this allows you to see which products are selling through fastest, when you need to reorder, how to account for shrinkage, etc.  

2. Reconcile your bank statements regularly

As we alluded to earlier in this post, fraud prevention isn’t something you should overlook. One simple system you can put into place is to reconcile your bank statements monthly. This not only allows you to get in front of any potential fraud issues before they snowball, but you can also spot any inconsistencies in the data between your bank statements, credit card statements, and your Xero chart of accounts. This allows you to avoid over or underpaying at tax time.

3. Avoid any unpleasant surprises at tax time 

There are two certainties in life – taxes and death. At least with taxes, you can plan for it. 😉

Since you know you have to pay each year, setting up systems in advance, so you don’t have to do the mad scramble a week before the tax deadline is a wise move. Not to mention, you’ll be able to take advantage of tax planning to help you save more money. 

Shopify accounting key takeaways

Shopify accounting is so much easier when you use cloud accounting software, such as Xero, and take the time to establish a solid financial foundation, systems, and processes, including: 

• Setting up Xero correctly
• Building your Shopify accounting tech stack 
• Creating your eCommerce financial systems and processes 
• Following eCommerce accounting best practices 

Want to improve your cash flow and get more confident with your numbers? Learn how to use Xero effectively for your e-commerce business with our free Xero toolkit. This includes our profit margin calculator, eCommerce annual forecast template, salary cap calculator, financial roadmapping template, and more. Download now.