In case you weren’t already aware, no one is perfect. Everyone makes mistakes. And you can’t know everything. So it’s completely understandable that you might have made some accounting errors. Whether you realise it or not! The point of this blog is to make it so that you don’t repeat the same mistakes or new ones in the future.
As an e-commerce bookkeeper, I know first-hand where things can go wrong. Here are 5 of the most common issues I’ve seen in people’s accounts:
Let’s take a closer look at these common mistakes to avoid in ecommerce accounting:
When you make a sale Etsy charges you fees for using their platform. Keeping this as simple as possible, let’s say you sell a painting for £10. Etsy then charges you £2 in fees. They will send £8 to your bank account. I’ve seen Etsy sellers put the £8 down as the sale amount. Unfortunately, this isn’t correct. The sale amount is £10, which needs to show in your accounts.
If you haven’t shown the sale price correctly then it’s highly likely that you also haven’t included the fees. The fees need to show as a business expense. Once you’ve put the £10 in as a sale you would put the £2 into an Etsy fees expense account. This would then show the total profit for that sale as £8 (£10 – £2 = £8).
There will come a time when you have to refund someone. This will show in your bank as money going out of your account. At a quick glance, this can look like an expense. After all, the other items you’ve purchased for your business also show as money going out of your bank. But this isn’t the case. The refund needs to come out of the same place that the sale went into. So if you’ve shown the sale in your bookkeeping system in an Etsy account, the refund needs to go into the same account to maintain accurate financial statements.
When you’re making lots of sales in your Etsy shop, it can quickly add up. The current VAT threshold is £90,000 per rolling 12-month turnover. So in any 12-month period, if your turnover is over £90,000 you need to register for VAT. If you don’t stay on top of your bookkeeping you could miss that you’ve reached this threshold. And that could cause all sorts of issues with HMRC!
To have accurate bookkeeping you need to show your expenses in different categories. Putting that purchase of paint in the same category as your phone bill means you’ll never be able to determine how much you’ve spent on anything. If you don’t know how much you’re spending, you won’t know how much you could save.
As a business owner, you want your business to succeed right? No one starts a business hoping it will fail….do they? So you’re going to have to keep track of your finances. This is the only way to truly know how much money you are making in your business. Once you know that, you can make informed decisions about pricing or purchases. This will help your business to grow. And the only way to do that is to have good bookkeeping practices in place.
There are a number of different tools that I use with my Etsy bookkeeping clients. Some are better for sole traders rather than limited companies. Some are more useful for larger Etsy stores than smaller ones. But all of them will help you to manage your business finances.
The two main bookkeeping software I use with my clients are Xero and FreeAgent. Both have their strengths and weaknesses but whichever one you choose, using software is essential for good bookkeeping:
Strengths:
Weaknesses:
Strengths:
Weaknesses:
Once your Etsy shop starts to take off, you’ll want to look at ways you can automate your bookkeeping. One way to do this is to use software like Link My Books or Dext Commerce. They create a link between your Etsy shop and your bookkeeping software and feed in all your sales and fees, simplifying your financial management. They are incredibly useful for making sure your financial records are accurate. You won’t need to manually download your statements anymore. You’ll free up your time immensely, allowing you to focus on other aspects of your Etsy shop’s growth.
Xero has also recently released an app to connect your Etsy store directly to it. I am trialling it at the moment with some of my clients. I still recommend Dext Commerce or Link My Books, especially if you’ve got more than one online store that needs connecting.
When looking at bookkeeping tools try and find ones that will let you have a trial first. That way you can ensure you like the software before spending any money on it. I’ve suggested Xero and FreeAgent here but you might find that you prefer Quickbooks for example.
Check the prices and see if you can actually afford to use the tool. It might be all singing and dancing but if it’s going to send you into your overdraft, then it’s not worth it.
Look at what’s included and see if you can get rid of other things. Some software includes extras that might mean you can stop paying for others. For example, Xero comes with Hubdoc for you to upload your bills and receipts to.
Whatever tools you choose to use, just make informed decisions. Gather all the facts and don’t rush into anything.
I refer back to my opening statement, no one is perfect. Everyone makes mistakes. However, effective bookkeeping can help you avoid common mistakes that many Etsy sellers can make.
Make sure you separate your personal and business finances. It is very difficult to dig through hundreds of transactions to find the sales and expenses specific to the business.
Using accounting software is ideal for ecommerce bookkeeping however it does come with a cost. So at the very least use a spreadsheet to help you stay organised.
Schedule regular time to complete your bookkeeping tasks. At a minimum, you want to be doing monthly bookkeeping but ideally weekly.
Put bookkeeping processes in place to help you stay on top of things. Make yourself a step-by-step guide to follow so that it becomes easier to do.
Bookkeeping can be challenging. You need to stay organised. You need to make sure to keep your financial records accurate. You need to stay up to date with tax laws. It can all be too much when you’re busy selling on Etsy and trying to manage your cash flow. If you’re finding you don’t have time anymore to do your bookkeeping or you’re not understanding where things should go on your profit and loss, then look for some help. And when you do need help with your bookkeeping, ensure you use someone who has experience in bookkeeping for Etsy sellers. It is a unique skill and if you’re handing over your data, you want to have confidence they are doing proper bookkeeping.
Now you know the most common mistakes I see Etsy shop owners make, you know what to look for in your accounts.
Once you’ve found the errors you obviously need to fix them. However, you also need to look at whether it has affected anything else. For example, have you now underdeclared your income and expenses to HMRC? If so, you’ll need to look at resubmitting any official paperwork such as your self-assessment tax return. Have you made mistakes with your VAT rates? If so, you’ll need to resubmit any VAT returns it affects. Unfortunately, it might not be as simple as just fixing a single transaction to correct the error.
If you’re using Xero, one fabulous tool is “Find and Recode”. This will look through the financial data in your accounting software for the terms you specify. It will then let you change multiple transactions with the push of a button. So if you’ve accidentally put your Etsy transactions into an Amazon sales account, one click will move all of them. FreeAgent is also bringing out a similar tool soon.
Another tool you can use is Xenon Connect. This will look through all the financial transactions in your bookkeeping software. It will then find any mistakes made and suggest ways to fix them. This could be duplicate bills or transactions reconciled to the wrong account for example. You can fix the error right there in Xenon Connect and the problem is solved.
Ell Evan Bookkeeping are not Tax Advisors and so our advice and suggestions on the application of tax rules cannot be construed as tax advice.
