Setting up a chart of accounts (CoA) for your ecommerce business is critical. It gives you a much-needed framework to keep your book of accounts in order. 

This comprehensive catalog of accounts helps you sort through and categorize the hundreds of transactions every day, allowing you to understand your business’s financial standing better.

In this article, we get down to the basics of an ecommerce chart of accounts. From its importance to how to set up the best ecommerce chart of accounts for your business—we’ve got it all covered.

What is the chart of accounts for ecommerce businesses?

An ecommerce chart of accounts is a structured list of all the account names that a company uses to categorize financial transactions during a specific accounting period. The chart of accounts can include an identification number and a brief description of what should be included in each account. 

Think of it as the pillar supporting an online store’s accounting and financial reporting system. Every transaction is organized by a category that represents a specific type of activity. This, in turn, helps you keep a tab on the money that is coming in and flowing out of the business.

Typically, the chart of accounts has five categories, which include—assets, liabilities, owner’s equity, revenue, and expenses. The more complex an organization is, the more accounts it has. The accounts can further be broken down into sub-categories or sub-accounts to develop in-depth financial reports.

10 reasons why it’s important to maintain a proper chart of accounts for your ecommerce business

From providing a structured framework to track all financial transactions—to helping ecommerce businesses stay on top of multiple revenue streams and closely monitoring cash flow, there are several reasons why a chart of accounts is critical for your ecommerce business.

1. Structured financial records

As a well-structured filing system, the chart of accounts will help you access all of your transactions in one place, making it easier to locate and generate financial reports. It classifies the financial data of your ecommerce business like shipping expenses or sales from specific channels. 

2. Timely tax preparation

With tax regulations becoming more complex for ecommerce businesses (primarily those operating in multiple jurisdictions), the chart of accounts simplifies the tax preparation process by clearly classifying taxable income and expenses.

3. Streamlined financial reporting

Categorizing transactions accurately enables ecommerce businesses to prepare detailed financial reports with ease. It also provides real-time insights to help businesses make timely and informed decisions.

4. Analysis of different revenue streams

Let’s say, as an ecommerce business, you generate sales from multiple channels like Amazon and Shopify in addition to the sales from your website. The sales from each channel can be categorized into sub-accounts to gauge the performance of each channel.

5. Effective audit trail

A well-designed chart of accounts improves audit readiness, providing auditors with a clear and transparent trail of financial transactions. This not only provides a comprehensive look into the source of transactions but also facilitates the verification of transactions and the identification of discrepancies.

6. Compliance with accounting regulations

Maintaining a robust chart of accounts ensures that your ecommerce business is compliant with local and international accounting standards. Compliance with Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS) is vital as regulations around cross-border sales become more stringent.

7. Budgetary control

A structured chart of accounts helps a business understand how actual expenses stack up against budget amounts. Ecommerce businesses can easily spot any budget deviations and further refine their financial projections.

8. Enhanced cash flow monitoring

Closely monitoring and optimizing cash flow is crucial for ecommerce businesses to survive slumps and economic setbacks. A chart of accounts tracks the inflow and outflow of money, helping ecommerce businesses analyze their financial standing and devise strategies to avoid cash burnout. 

9. Inventory management

For every ecommerce business, inventory management is crucial. Maintaining a chart of accounts is essential to tracking inventory valuations and making adjustments. Let’s say you discover that some of your inventory is damaged. You can record a write-off and make an adjustment by reducing the inventory account and recognizing the damaged inventory as an expense.

10. Performance benchmarking

The chart of accounts helps a business assess its performance and benchmark it against industry standards. In the face of rising competitive pressures, this level of evaluation helps you improve financial strategies to match industry performance standards.

How to set up a chart of accounts for an ecommerce business

There are several steps for an ecommerce business to follow to set up a chart of accounts.

1. Determine your business needs

The first step before you set up your chart of accounts is to have a good understanding of the specific financial reporting needs of your ecommerce business. 

As seen below, businesses will need to identify different sources of revenue and expense categories, among others. Doing this will help you capture all relevant information and ensure a more accurate analysis.

2. Define the different account categories 

The main purpose of a chart of accounts is to include specific categories to classify financial transactions. Each category serves a distinct purpose. For example, ‘Assets’ are the resources that are owned by the ecommerce business while ‘Revenue’ is the income earned. In addition to defining these categories, adding a short description for each of them will ensure great transparency and the accurate categorization of financial transactions.

3. Decide on the sub-accounts

Once you've defined the accounts, you need to create sub-accounts that will ensure more detailed tracing within each main account. Let's consider the 'Assets' account. For this, you can have sub-accounts for cash, accounts receivable, and inventory. Breaking up the main accounts this way will provide a more granular view of the financial activities.

4. Assign account numbers

Next up, allot numbers to each account and sub-account. This provides a more structured and systematic model to reference and manage data. 

Ideally, the number system involves assigning ranges of numbers to different categories (e.g., 1000–1999 for assets, 2000–2999 for liabilities). This numerical breakdown aids in the sorting of accounts quickly and ensures consistency in financial reporting.

5. Leverage accounting software

There are tools on the market that simplify the process of setting up a chart of accounts by offering automated templates tailored specifically for ecommerce businesses. When you first set up the software, it prompts you to input basic information about your business, such as industry, size, and revenue streams. Based on this information, the tool automatically generates a CoA that includes all necessary categories like Assets, Liabilities, Equity, Revenue, and Expenses, along with common sub-accounts such as Online Sales, or Payment Processing Fees.

Pro tip: With DayZero's pre-configured templates that are designed to fit the unique needs of ecommerce businesses, you can reduce setup time and ensure nothing is overlooked.

6. Set up internal controls

It's important to establish internal controls for maintaining the integrity and accuracy of the chart of accounts. Ensure regular account reconciliations and implement routine practices for the authorization requirements for financial transactions. Having such internal controls in place helps prevent errors and fraud.

7. Review and optimize the chart of accounts regularly

Lastly, to keep up with changing business needs and regulations, ensure continuous monitoring and optimization of the chart of accounts. By regularly reviewing the financial practices and gathering feedback, you can introduce timely changes and improvements to the chart of accounts. This will ensure that the chart of accounts remains relevant and effective in meeting your ecommerce business's financial goals.

8. Power through with the best chart of accounts for your ecommerce business

‍The chart of accounts adds a huge value to the performance management of your ecommerce business.

Creating a well-structured chart of accounts for your online business will help you effectively manage your finances and maximize your cash flow. 

Utilizing the right tools, like DayZero, provides a solid foundation, enabling you to customize the chart of accounts to reflect specific business needs. Further, it automatically syncs financial transactions from various sources, keeping your chart of accounts up-to-date.

Frequently Asked Questions (FAQs)

A handful of questions that we answer regularly for DayZero customers.

1. What are the five accounts in a chart of accounts?

In a chart of accounts, the five primary accounts are Assets, Liabilities, Equity, Revenue, and Expenses. Each of these accounts enables businesses to categorize financial transactions and makes it easier to manage and track their finances.

2. Is there a standard chart of accounts?

It's important to understand that there isn't a universal chart of accounts. Having said that, many businesses follow a general structure. The specific accounts can vary depending on the industry, size, and unique needs of the business.

3. How do you categorize a chart of accounts?

You can categorize a chart by accounting by classifying similar types of financial transactions under main accounts like Assets, Liabilities, Equity, Revenue, and Expenses. Furthermore, sub-accounts are then created to provide more detailed tracking within each category.

4. What should my chart of accounts look like?

Ensure that your chart of accounts reflects your business's specific needs. You need to create specific categories for all key financial areas. Make sure that the accounts and sub-accounts that you create are simple enough to be used by your team but detailed enough to provide clear insights into your financial activities.