Ecommerce Accounting Mastery: Master the Fundamentals of Cash and Accrual, Bank Reconciliation, P&L, Balance Sheets, Retained Earnings, and Director Loans
Hey eCommerce sellers, it's USMAN here, your go-to guide for all things accounting and finance. I know you've got a lot on your plate, so I'm going to make this as easy and painless as possible. And trust me, as someone who's worked with hundreds of eCommerce sellers, I know that these topics can be confusing and overwhelming. But don't worry, I'm here to break it down for you.
Let's start with the basics: Cash and Accrual Basis Accounting.
''Cash is king, but accrual is the queen''
When it comes to keeping track of your financial transactions, you've got two options: cash
basis or accrual basis. Cash basis accounting only records transactions when cash is received
or spent. So, if you sell a product on credit, the sale doesn't get recorded until the cash
actually comes in. Accrual basis accounting, on the other hand, records transactions as they
happen, regardless of when the cash comes in. So, if you sell a product on credit, the sale gets
recorded right away. It's important to choose the best method for your business and keep
Next, let's talk about Bank Reconciliation.
"If you don't reconcile, you'll be sorry."
This is the process of comparing your company's bank statement to your internal records to
make sure everything lines up. It's like a financial check-up, and it's important to do it
regularly to catch any discrepancies and to ensure that your financial records are accurate.
Now, let's move on to the heavy hitters: Profit and Loss (P&L) and Balance Sheet.
"P&L and balance sheet: the yin and yang of financial statements."
These are two important financial statements that businesses use to track their performance.
A P&L statement shows your business's revenue, expenses, and resulting profit or loss over a
period of time, while a balance sheet shows your assets, liabilities, and equity at a specific
point in time. These statements are crucial for understanding your business's financial health
and making informed decisions.
Next, let's talk about Retained Earnings.
"Retained earnings: the savings account for your business."
Retained earnings are the portion of a business's profits that are kept by the company rather
than being distributed to shareholders as dividends. These funds can be used to reinvest in the
business or to pay off debts. A business needs to keep track of retained earnings and use them
in a way that will benefit the company in the long term.
And finally, let's talk about the Chart of Accounts.
"A chart of accounts: the roadmap to your business's financials."
A chart of accounts is a list of all the accounts used by a business to record financial
transactions. These accounts can be organized into categories such as assets, liabilities, and
income. Having a clear and organized chart of accounts is important for keeping accurate
financial records and understanding a business's financial position.
When it comes to using your personal bank account for business expenses, it is important to
keep track of these expenses separately and clearly in your bookkeeping records. This can be
done by creating a separate account or category in your chart of accounts specifically for
business expenses. It's important to keep accurate records and not mix personal and business
expenses to avoid confusion and to maintain accurate financial records.
And finally, when it comes to treating a director loan to the company, it is important to record
the loan as a liability and make regular payments on the loan, just as with any other loan. It is
also important to keep