Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Shopify is one of today’s leading eCommerce platforms that allow budding business owners to establish and scale their brands online. Shopify financial statements detail the company’s performance over time, including key metrics such as revenue and net income. If you're a Shopify user, your financial statements are automatically generated for you. You can view these reports on the reports section of your shop's settings page.
In this article, we take a look at what these financial statements mean for your business and how Shopify accounting differs from other types of accounting.
The Importance of Accounting
Accounting is vital because it projects the overall success and performance of a business. It serves as a reflection of the economic activity within an enterprise entity. An accounting report gives external users or entities such as investors, creditors, and regulators intelligence into how well financial decisions are formulated. It also allows for checks and balances to be put in place so these key decision-makers can work with appropriate oversight if something untoward occurs with your business.
The unique challenges that eCommerce companies usually face with accounting are related to the fact that they have to track and report inventory changes, as well as sales and revenue. In addition, these companies often have to deal with complex tax laws and regulations.
The Shopify Financial Statement
Shopify's annual financial statement includes a balance sheet, income statement, and cash flow statement. The balance sheet shows your Shopify store's assets, liabilities, and equity within certain periods. Meanwhile, the income statement shows how much revenue your business has earned over a specific period, as well as the expenses it incurred and the resulting net income. Finally, the cash flow statement tracks how much cash was generated or used by the store during a certain period.
Each of these statements can provide key findings that reflect your business's health and performance. Let's take a closer look at each one:
- Balance Sheet. This document lists what the store owns (assets) and owes (liabilities).
Aside from those, it projects how much money has been invested in your online store. The balance sheet is integral because it gives you an idea of your business's financial position at any given time. - Income Statement. As mentioned, this document reports your revenue, expenses, and net income earned within a given duration. It's important to look at both the top and bottom lines—the amount of revenue and net income generated. If your store is making more money but incurring more expenses, this could be a sign that you're not making wise decisions about your finances, and adjustments must be made.
- Cash Flow Statement. This statement tracks how much cash was generated or used by the store. Always keep an eye at the cash flow from both a positive and negative perspective by determining how much money your business brought in over time versus what it spent during that same period.
The Difference Between Shopify Accounting and Other Types Of Accounting
Shopify accounting differs from other types of accounting in several ways:
- Inventory Tracking. Since eCommerce companies usually have to deal with physical products and shipping costs, they must keep track of their inventory levels more closely than other businesses. For example, factory expenses are not tracked when using the Shopify financial reporting tool because there is no production process involved when running an online store. If you were running a restaurant or manufacturing plant, you would need this information.
- Currency Conversion. Most eCommerce companies are international businesses, which means they have to deal with multiple currencies on a daily basis. This can be challenging because it requires you to convert revenue and expenses into your home currency for reporting purposes. It means the currency in which your financial statements will ultimately need to be presented. For example, if you're based out of Europe but doing business with customers from all over the world, this would require Shopify accounting experts who understand the importance of keeping track of these transactions. Such an approach ensures the generation of accurate reports at any given time.
- Tax Laws & Regulations. Ecommerce companies often sell products across state lines, which means they need to stay compliant with various laws and regulations. It's especially true for businesses selling products subject to sales tax, such as physical goods like clothing or equipment. In contrast, non-profits might only have compliance issues in a few states where they do business. When using Shopify accounting services, you must choose an agency with experience dealing with complicated situations. Otherwise, there can be severe consequences that could hurt your finances and reputation.
- Financial Data. There are many different resources available where you can find financial data specific to the type of accounting your business is using. If you're using Shopify accounting, resources are available on the Shopify website tailored for eCommerce. It includes a comprehensive overview of various reports, templates, and tutorials to get you started or improve existing processes.
- COGS and Inventory Accounting Handling. COGS is typically handled by keeping track of how much inventory an organization has had at the end of the inventory period. The COGS calculation can also include depreciation or amortization of assets used during that inventory period. A more accurate way to calculate COGS for eCommerce is to keep track of units sold periodically and multiply it by the cost per unit.
- Financial Reporting. The reporting process for Shopify accounting is not much different than the reporting process that's used with other types of financial statement formats such as a cash basis, accrual, and LIFO methods. However, there are slight differences to note if you're using Shopify accounting services or software packages. These reports will be generated daily rather than monthly or quarterly. It can lead to generating up to 20 times more data depending on how frequently your company needs its financial statements prepared. The Shopify accounting processes make sure they have powerful tools available at their disposal to generate accurate results on time without sacrificing accuracy along the way.
- Shopify Accounting Fees. Shopify accounting fees can affect your business, so staying updated on the latest rates and methods used worldwide is important. These accounting fees might change how you price products compared to other businesses with newer technologies. It's especially true for eCommerce companies because they have a tough time competing against larger organizations. Established businesses can afford more expensive tools while keeping affordable service/product price.
Final Thoughts
Shopify financial statements are a great way to keep track of your company's finances in terms of inventory, revenue, and expenses. They work well for small businesses and large organizations with multiple locations since Shopify generates a daily financial report. Getting quotes from multiple businesses is always a good practice when choosing between different providers of any service. With enough insight, you can easily make an informed decision that works best for your eCommerce needs.
Are you looking for Shopify accounting experts? Visit Unloop today and get in touch with our team!