A Guide to Accounting for E-Commerce Businesses

Selling online is different from selling in a physical shop, and the accounting reflects that. E-commerce businesses deal with payment processor fees on every transaction, sales across multiple platforms, inventory that might be stored in multiple locations, and tax obligations that span jurisdictions. Without a solid accounting system, the complexity quickly becomes overwhelming.

This guide covers the accounting fundamentals that every e-commerce business needs to get right.

Revenue recognition

Recording sales correctly

When an online order comes in, several things happen almost simultaneously: the customer pays, the payment processor takes a fee, and the order is confirmed. The question is how to record this in your accounts.

Gross revenue vs net revenue: You should record your gross revenue (the full sale price) as income, and record the payment processor fee as a separate expense. Do not record only the net amount you receive. Recording gross gives you an accurate picture of your sales volume and makes the cost of payment processing visible.

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.

Timing of recognition

Revenue should be recognised when the order is fulfilled — when the product ships or the service is delivered — not necessarily when payment is received. If you take payment on 28 March but do not ship until 2 April, the revenue belongs in April.

For most small e-commerce businesses using cash basis accounting, the practical distinction matters less. But if you use accrual accounting or have significant order-to-delivery lead times, getting the timing right matters.

Handling pre-orders and gift cards

Pre-orders and gift cards create deferred revenue — you have received cash but have not yet delivered the product or service. Record these as liabilities (deferred revenue) when received, and recognise them as revenue when the order is fulfilled or the gift card is redeemed.

Cost of goods sold

What to include in COGS

Cost of goods sold (COGS) represents the direct cost of the products you sell. For an e-commerce business, 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, tissue paper, branded packaging
Direct labour — Warehouse staff wages for picking, packing, and shipping

Outbound shipping

How you treat outbound shipping costs (shipping to the customer) depends on your business model:

If you charge customers for shipping: The shipping charge is revenue, and the actual shipping cost is part of COGS
If you offer free shipping: The shipping cost is part of COGS or can be classified as a sales and marketing expense

Be consistent with your approach.

Inventory accounting

E-commerce businesses must track inventory values. The main methods are:

FIFO (First In, First Out) — The oldest inventory is sold first. This is the most common and usually the most appropriate method
LIFO (Last In, First Out) — The newest inventory is sold first. Not permitted in some jurisdictions
Weighted average — The cost of each unit is the average cost of all units available for sale

Your inventory method affects your COGS and therefore your reported profit. Choose a method and apply it consistently.

Payment processors and fees

Tracking processor fees

Every online sale involves a payment processor — Stripe, PayPal, Square, or similar. Each charges a fee per transaction. These fees add up quickly and can represent two to four percent of your total revenue.

Track payment processing fees as a separate expense line rather than netting them against revenue. This makes the cost visible and helps you:

Compare processor costs between platforms
Evaluate whether a different processor would save money
Understand your true cost of doing business

Reconciling processor payouts

Payment processors do not typically pay you per transaction. They batch transactions and make payouts on a schedule — daily, weekly, or as you request. Each payout bundles multiple transactions, minus fees and any refunds or chargebacks.

Reconciling these payouts against your individual sales records is essential. Your accounting software should match each payout to the underlying transactions.

Multiple processors

If you sell on multiple platforms — your own website, Amazon, Etsy, eBay — you likely deal with multiple payment processors. Each has its own fee structure, payout schedule, and reporting format. Track them separately so you can compare costs and identify issues.

Multi-channel sales

Centralised accounting

Selling on multiple platforms means revenue, fees, and refunds come from multiple sources. Centralise everything in one accounting system rather than trying to manage separate records for each channel.

Import or sync sales data from each platform into your accounting software. Many platforms offer direct integrations or export options that make this manageable.

Channel profitability

Track revenue and costs by sales channel. This lets you see which platforms are most profitable after accounting for platform fees, advertising costs, and any channel-specific expenses. A platform with high sales volume but high fees might be less profitable than a lower-volume channel with better margins.

Sales tax and VAT

The complexity of online sales tax

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

Key considerations:

In many jurisdictions, you must collect sales tax or VAT based on the customer's location, not yours
Different products may be taxed at different rates (or exempt entirely)
Tax thresholds and registration requirements vary by jurisdiction
Selling internationally creates additional obligations

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, do not charge tax again on those sales. Keep clear records of which transactions had tax collected by the marketplace and which you collected directly.

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 correctly. This data feeds into your tax returns and supports you if your tax position is ever questioned.

Returns and refunds

E-commerce return rates are typically much higher than brick-and-mortar retail — often 15 to 30 percent for certain product categories. Your accounting system needs to handle returns efficiently:

Issue credit notes for returned orders
Process refund payments (noting that 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

Track your return rate as a business metric. A high return rate affects profitability and may indicate issues with product descriptions, quality, or sizing.

Inventory management

Real-time tracking

For e-commerce businesses, accurate inventory data is critical. Overselling creates customer service problems. Overstocking ties up cash and risks obsolescence.

Your accounting and inventory systems should update in real time as sales are made, returns are processed, and new stock arrives.

Inventory valuation

At any point, you should know:

How many units of each product you have
What the total inventory value is
How quickly each product is selling (turnover rate)
Which products are slow-moving and may need discounting or write-off

Write-downs and obsolescence

Inventory that cannot be sold at its original value needs to be written down. This is an expense that reduces your reported profit but accurately reflects the reduced value of your stock. Common reasons include damage, expiry, fashion or technology changes, and overstock.

Choosing accounting software for e-commerce

E-commerce businesses need accounting software that can handle:

Multi-channel revenue tracking with sales data import or sync
Payment processor reconciliation for payouts from multiple processors
Inventory management integrated with financial records
Multi-currency support if you sell internationally
Tax handling across multiple jurisdictions
Return and refund processing with credit note support

Relentify's accounting platform provides the financial management foundation that e-commerce businesses need, with support for multiple revenue streams, payment reconciliation, and detailed reporting to track profitability by channel and product.

Get the basics right

E-commerce accounting can seem daunting, but the fundamentals are the same as any business: record revenue accurately, track costs carefully, manage inventory, and stay on top of tax obligations. With the right accounting software and good habits, the complexity is entirely manageable.

Start with clean records, reconcile regularly, and review your reports monthly. The businesses that succeed in e-commerce are not just good at selling — they are good at understanding their numbers.