When you set up QuickBooks Online, one of the first things you need is a Chart of Accounts. QuickBooks can give you a starting point, and for some ecommerce businesses that may be perfectly adequate.
The question is whether it will still be adequate once the business gets more complicated.
An ecommerce company may have Shopify sales, Amazon sales, merchant fees, refunds, discounts, shipping, advertising, inventory, cost of goods sold, gift cards, payment processor reserves and several different ways that cash moves through the business.
That doesn’t mean you need 150 accounts.
It does mean that the Chart of Accounts should be designed so the financial statements actually tell you something about the business.
What Is the Chart of Accounts Actually Supposed to Do?
The Chart of Accounts is simply the structure behind your financial statements. It determines where transactions end up on your balance sheet and income statement.
That’s why I don’t think the goal should be to create the most detailed Chart of Accounts possible.
The goal is to create financial statements that are accurate, consistent and useful.
If you look at your monthly income statement and can’t quickly understand sales, gross profit and the major costs of operating the business, adding another 30 accounts probably isn’t going to solve the problem.
In fact, it may make it worse.
Is the Default QuickBooks Chart of Accounts Wrong?
Not necessarily.
QuickBooks needs to give businesses somewhere to start. It creates standard accounts and can create additional accounts as you use different features and integrations.
For a relatively straightforward ecommerce business, that may work just fine.
Problems usually begin as the business grows.
Maybe you started with Shopify and then added Amazon. Then Walmart. You added a second payment processor. You started carrying more inventory. Advertising went from a relatively small expense to one of the largest expenses on the income statement.
At some point, the accounting structure that worked when the company was small may no longer provide enough useful information.
That’s when the Chart of Accounts should be reconsidered.
More Accounts Don’t Necessarily Mean Better Accounting
This is one of the easiest mistakes to make.
Suppose you sell through Shopify, Amazon, Walmart and eBay. It might seem logical to create separate accounts for every type of transaction on every platform.
Shopify sales. Amazon sales. Walmart sales. eBay sales.
Then separate refunds for each.
Separate fees for each.
Separate shipping accounts.
Before long, the income statement is several pages long and nobody wants to read it.
There are times when separate accounts make sense. There are also times when the detail is better maintained in the ecommerce platform, A2X or another reporting system.
The general ledger doesn’t have to contain every piece of information available about the business.
It needs to contain the information necessary to produce useful financial statements.
Don’t Build the Chart of Accounts Around Bank Deposits
This is especially important in ecommerce.
The amount deposited into your bank account by Shopify, Amazon or another platform isn’t necessarily your sales.
A deposit may already have been reduced by merchant fees, refunds, chargebacks, advertising costs or other amounts.
If a $25,000 deposit gets recorded as $25,000 of revenue simply because that’s what hit the bank, the income statement may be missing quite a bit of what actually happened.
The accounting should capture the underlying transactions, not just the movement of cash.
That becomes much easier when the Chart of Accounts and the ecommerce accounting process are designed to work together.
Inventory and Cost of Goods Sold Need to Make Sense
Inventory is another reason a basic Chart of Accounts may eventually need some work.
Buying inventory isn’t the same thing as selling inventory.
If you purchase $100,000 of product, that doesn’t necessarily mean you had $100,000 of cost of goods sold that month. Inventory generally remains on the balance sheet until the related products are sold.
There may also be freight, duties and other landed costs that need to be considered.
For an ecommerce business carrying significant inventory, getting this wrong can make gross profit fairly meaningless.
And gross profit is one of the first numbers I want an ecommerce owner to understand.
So Should You Build Your Own Ecommerce Chart of Accounts?
Maybe. But I wouldn’t start by downloading somebody else’s “perfect ecommerce Chart of Accounts” and adding every account on the list.
Start with the business.
How do you sell?
What information do you need every month?
What costs actually drive profitability?
Do you need to see results by sales channel?
How important is advertising?
How complicated is inventory?
What information is already available somewhere else and doesn’t need to clutter the general ledger?
The answers will be different from one ecommerce company to another.
A business selling its own products primarily through Shopify doesn’t necessarily need the same Chart of Accounts as an Amazon marketplace seller. A company selling wholesale and direct-to-consumer may need something different again.
That’s why there really isn’t one “ecommerce Chart of Accounts” that works for everybody.
This Is One Area Where Experience Helps
You certainly don’t need a CPA to add an account in QuickBooks.
The harder part is deciding what accounts should be there in the first place.
An ecommerce CPA or another accounting professional with ecommerce experience should be able to look at how the company operates and structure the accounts around that particular business model.
But there is another side to this that I think gets overlooked.
The financial statements shouldn’t only make sense to the person running the business today.
They should also make sense to somebody looking at the business tomorrow.
Think About the Person Who May Eventually Buy the Business
Most ecommerce owners aren’t thinking about due diligence when they set up QuickBooks.
They probably should think about it at least a little.
At some point, financial statements may be reviewed by a bank, investor, venture capital firm, private equity group or potential buyer.
Those people are accustomed to looking at financial statements in certain ways.
They are going to want to understand revenue, gross profit, cost of goods sold, advertising, fulfillment costs and operating expenses without spending hours figuring out what a collection of unusual accounts means.
That doesn’t mean every ecommerce company should have the same Chart of Accounts.
It means customization should still make sense to an outside financial professional.
A good Chart of Accounts should reflect the way your particular business operates while staying reasonably consistent with the way sophisticated investors and buyers expect financial information to be presented.
Fixing that structure while the company is growing is considerably easier than trying to clean up several years of financial statements when somebody is performing due diligence.
The Best Chart of Accounts Is Usually Somewhere in the Middle
For many ecommerce businesses, the default QuickBooks setup is a perfectly reasonable place to start.
As the business grows, some customization will probably make the financial statements more useful.
But there is a point where customization becomes overcomplication.
You don’t need an account for everything.
You need enough detail to understand what is happening with sales, gross profit and operating expenses and to make good decisions from month to month.
And if the company continues to grow, those same financial statements should still make sense when they’re handed to a lender, investor or potential buyer.
That’s really the test.
The best ecommerce Chart of Accounts isn’t the one with the most accounts. It’s the one that gives you the information you need without making the financial statements harder than they need to be.