A Guide to Accounting for E-Commerce Businesses

If you sell online, you're not just running a shop — you're running a payment reconciliation operation that happens to also sell stuff. You've got revenue coming in from multiple channels, each with different fee structures and tax rules. You've got inventory that needs to be accurate or you'll oversell. And you've got tax obligations that span multiple jurisdictions. This guide covers the accounting fundamentals that every e-commerce business needs to get right, before the complexity becomes unmanageable.

How to Record Sales and Revenue

When an online order comes in, three things happen simultaneously: the customer pays, the payment processor takes a fee, and you (theoretically) get to keep the difference. The question is how to record this accurately.

Recording gross revenue, not net. Record your gross revenue (the full sale price) as income, and record the payment processor fee as a separate expense. Not the net amount you receive — that makes your sales volume invisible.

Example:

• Customer pays £100
• Payment processor takes 2.9% + £0.30 = £3.20
• You receive £96.80

Record: £100 revenue, £3.20 payment processing expense. Not: £96.80 revenue. This gives you an accurate picture of your sales and makes the cost of payment processing visible (and often shocking).

Timing of revenue recognition. Revenue should be recognised when the order is fulfilled — when the product ships or the service is delivered — not when payment hits your bank account. If you take payment on 28 March but don't ship until 2 April, the revenue belongs in April.

For small businesses using cash-basis accounting, this distinction matters less in practice. But if you use accrual accounting or have significant order-to-delivery lead times, timing matters.

Pre-orders and gift cards. These create "deferred revenue" — accounting's fancy way of saying "you got paid but haven't earned it yet." Record them as liabilities when received, and recognise them as revenue when the order ships or the card is redeemed.

Cost of Goods Sold and Inventory Valuation

Cost of goods sold (COGS) represents the direct cost of products you sell. For e-commerce, this typically includes:

• Product cost — what you pay suppliers for the products (or raw materials if you manufacture)
• Inbound shipping — freight costs to get inventory to your warehouse
• Customs and duties — import taxes and fees on international sourcing
• Packaging — boxes, bags, branded materials
• Direct labour — warehouse staff wages for picking and packing

How you handle outbound shipping depends on your business model. If you charge customers for shipping, the shipping charge is revenue and the actual cost is COGS. If you offer free shipping, the cost is part of COGS or a sales expense — choose one and stick with it.

Inventory valuation methods. You must track inventory consistently using one of three methods:

• FIFO (First In, First Out) — the oldest inventory sells first, the most common approach
• LIFO (Last In, First Out) — the newest inventory sells first, not permitted in all jurisdictions
• Weighted average — the cost per unit is the average cost of all units available

Your chosen method affects your COGS and therefore your reported profit. Pick one, document it, and apply it consistently.

Write-downs and obsolescence. Inventory that can't be sold at its original value needs to be written down — this is an expense that reduces profit but accurately reflects your stock's real value. Common reasons include damage, expiry, fashion or tech changes, and overstock. Track your inventory write-down rate as a metric (and a warning sign if it's climbing).

Payment Processors: Fees and Reconciliation

Every online sale involves a payment processor — Stripe, PayPal, Square, or similar. Each charges a percentage plus a per-transaction fee, which is their way of ensuring they profit whether your margins are healthy or not.

Tracking processor fees as a line item. These fees add up to 2–4% of your revenue, sometimes more. Track them as a separate expense rather than netting them against revenue. This helps you:

• Compare processor costs between platforms
• Evaluate whether switching processors would save money
• Understand your true cost of doing business

Reconciling payouts. Payment processors don't pay you per transaction. They batch transactions and make payouts on a schedule — daily, weekly, or monthly — minus fees, refunds, and chargebacks. Each payout bundles multiple sales.

Reconciling these payouts against your individual sales records is essential. Your accounting software should match each payout to the underlying transactions. If the numbers don't line up, investigate immediately — processor errors or fraud can be caught this way.

Multiple processors across multiple channels. If you're selling on your website, Amazon, Etsy, and TikTok Shop, you've got four separate income streams and exactly four times the accounting complexity. Each processor has a different fee structure, payout schedule, and reporting format. Track them separately in your accounting system so you can compare costs and spot issues.

Selling Across Multiple Channels

Multi-channel selling is efficient for revenue, but a nightmare for accounting — unless you centralise it.

Centralised accounting, not channel silos. Revenue, fees, and refunds come from multiple sources. Use one accounting system as your source of truth, not seven spreadsheets. Import or sync sales data from each platform (most offer direct integrations or CSV exports).

Profitability by channel. Track revenue and costs by sales channel. This shows which platforms are actually profitable after accounting for platform fees, advertising, and channel-specific costs. A platform with high volume but high fees might be less profitable than a lower-volume channel with better margins. Review this monthly — your channel mix should drive your business decisions. If you're managing multiple channels, our guide on consolidated reporting across businesses shows how to see the full picture.

Multi-currency handling. If you sell internationally, you're dealing with currency fluctuations. Your accounting software should handle multi-currency bookkeeping, or you'll spend weekends reconciling exchange rate differences.

Tax Across Jurisdictions

Tax on e-commerce sales is one of the most complex aspects of online selling. The rules depend on where you're based, where your customers are, what you sell, which platforms you sell through, and increasingly, how much revenue you generate.

Key considerations:

• In many jurisdictions, you must collect sales tax or VAT based on the customer's location, not yours. The UK's VAT rules on distance selling and online marketplaces and the US post-Wayfair economic nexus rules are the primary examples.
• Different products are taxed at different rates (or exempt entirely).
• Tax thresholds and registration requirements vary by jurisdiction.
• Selling internationally creates additional obligations — and potential liability.

See our complete guide to VAT registration for small businesses for UK-specific rules.

Marketplace facilitator rules. Many jurisdictions now require online marketplaces (Amazon, eBay, Etsy) to collect and remit sales tax on behalf of their sellers. If a marketplace is handling tax collection for you, don't charge tax again on those sales. Keep clear records of which transactions had tax collected by the marketplace and which you collected directly. This matters when you file your tax return.

Record-keeping. Maintain detailed records of tax collected, by jurisdiction and rate. Your accounting software should track this automatically when you configure your tax settings. This data feeds into your tax returns and protects you if your tax position is ever questioned. For the practical steps, see our step-by-step guide to VAT returns.

Managing Returns, Refunds, and Write-Downs

E-commerce return rates are often double (or triple) retail store rates. That's not a bug; it's a feature of online retail — people are more willing to buy something if they can return it risk-free. Your accounting system needs to handle this efficiently.

Processing returns. When a customer returns an order:

• Issue a credit note (don't just refund — document it)
• Process the refund payment (note: processor fees on the original sale are usually not refunded)
• Return inventory to stock if items are resaleable
• Write off inventory if items are damaged or unsaleable

Return rate as a business metric. Track your return rate monthly. A high return rate affects profitability and may indicate issues with product descriptions, product quality, sizing information, or packaging damage. A sudden spike in returns deserves investigation.

If your return rates are climbing and you're worried about cash flow, see our guide on cash flow crisis recovery.

Picking Accounting Software Built for E-Commerce

Not all accounting software is built for e-commerce. You need:

• Multi-channel revenue tracking with sales data import or sync from your platforms
• Payment processor reconciliation that matches payouts to individual transactions
• Inventory management integrated with financial records (so COGS is calculated automatically)
• Multi-currency support if you sell internationally
• Tax handling across multiple jurisdictions with separate tracking by rate
• Return and refund processing with automatic credit note support

Relentify's accounting platform is built for online sellers. Multi-channel reconciliation, inventory integration, processor-agnostic payout matching, and tax tracking across regions — all in one system.

Frequently Asked Questions

Q: Should I use cash-basis or accrual-basis accounting? A: For most small e-commerce businesses, cash-basis is simpler — you record income when you receive it, expenses when you pay them. Accrual-basis (recording income when earned, expenses when incurred) is more complex but gives a truer picture of profitability if you have significant order-to-delivery lead times or pre-orders. Most accountants recommend cash-basis unless you're required to use accrual (which depends on your jurisdiction and revenue size).

Q: How do I know if my COGS is accurate? A: Your COGS should include all direct costs of producing the product you sell — materials, direct labour, inbound freight. It should not include sales commissions, marketing, or general overhead. If your COGS is too low, your profitability looks better than it is. If it's too high, you're overstating costs. Review your COGS calculation quarterly by comparing your recorded COGS to your actual supplier invoices and labour records.

Q: Do I need separate accounting records for each sales channel? A: No. One accounting system for all channels is best — it's simpler, faster to reconcile, and gives you an accurate picture of total revenue. But you should track and report revenue by channel so you can see which platforms are most profitable.

Q: What if a marketplace says they've already collected VAT for me? A: Trust but verify. Confirm in the marketplace's tax report or seller dashboard that VAT was collected and remitted on your behalf. Keep records of these reports. If a marketplace is handling VAT, you still record the gross sale amount in your books, but you note that the VAT portion was remitted by the marketplace. Your accountant will need this detail at tax time.

Q: How often should I reconcile my payment processor payouts? A: Weekly minimum, daily if you have high transaction volume. Processor errors, refunds, and chargebacks can take days to settle, so daily reconciliation catches problems faster. Most accounting software allows automatic reconciliation if you've set up the processor connection correctly.

Q: Should I offer free shipping or charge for it? A: That's a business decision. Accounting-wise, the key is consistency. If you offer free shipping, the shipping cost is part of COGS (or a sales expense). If you charge customers, the shipping charge is revenue and the cost is part of COGS. Document your approach and stick with it.

Q: What's a reasonable inventory write-off rate? A: That depends on your product category, but typically 2–5% of inventory value per year is normal for most e-commerce businesses. If you're writing off more than that, investigate — it might indicate quality issues, poor demand forecasting, or packaging or shipping problems.

Get the numbers right, and the rest follows

E-commerce accounting can feel like you're juggling while riding a unicycle, but the fundamentals are the same as any business: record revenue accurately, track costs carefully, manage inventory, and stay on top of tax. With the right accounting system and good habits, the complexity is entirely manageable.

Start with clean records, reconcile weekly, and review your financial reports monthly. Successful e-commerce businesses aren't just good at selling — they're good at understanding their numbers.