How to Build an eCommerce Chart of Accounts for Business Growth

A chart of accounts, or CoA, is a list of all the financial accounts a startup uses to record and track financial transactions and financial data. A key component of bookkeeping, accounting and financial reporting, CoAs are typically organized by account type (i.e., assets, liabilities, revenues, expenses).

CoAs help categorize transactions, create financial statements, identify discrepancies and provide greater insights into a startup’s overall business health. When it comes to your eComm startup, it's imperative to be informed to make the right decisions. CoAs help eCommerce companies organize financial transactions, track finances and make better decisions overall.

CoAs can also help eCommerce companies avoid some of the common financial pain points they often face, including cash flow challenges, difficulty managing inventory and logistics, navigating pricing strategies and acquiring new customers. In this post, we'll further detail why a CoA is essential to an eComm startup.

Why an eCommerce-Specific Chart of Accounts is Essential

Managing finances for an eCommerce startup can feel like trying to navigate a maze without a map. A well-structured Chart of Accounts (CoA) acts as your financial GPS, helping you track transactions, identify trends, and make informed decisions to drive growth. In this guide, we'll show you why a CoA is essential and how to build one tailored to your eCommerce business.

eCommerce companies rely on digital transactions, multiple revenue streams and a well-managed supply chain for success. An eCommerce-specific chart of accounts allows companies to accurately track and analyze online sales as well as all other unique aspects of their online operations (i.e., marketing costs, shipping expenses, etc.).

From detailed tracking of online sales channels to robust inventory management insights, a CoA for your eComm startup should be designed to paint a clear picture of your financial performance to help enable more informed decision-making for managing the startup within the digital retail landscape.

Key Categories in an eCommerce Chart of Accounts

The key categories within an eCommerce CoA help aid in structuring financial records. They include:

• Asset accounts: Asset accounts include business accounts like bank accounts, accounts receivable and inventory. Think of them as what a startup either currently owns or expects to own. Assets may be physical or intangible.
• Liability accounts: These accounts track what an eComm startup owes to others or what you hold on the behalf of others. This may include credit cards, accounts payable and loans.
• Equity accounts: Equity accounts represent the net amount of money that owners or shareholders have invested in the startup. They may include capital contributions or retained earnings. Equity accounts can provide significant insight into performance.
• Revenue accounts: Revenue accounts include sales, service revenue, and interest income. Revenue accounts keep track of any money that's coming into the business.
• Contra-revenue accounts: Contra-revenue accounts include returns and allowances, and discounts.. Contra-revenue accounts track deductions from the company’s total revenue to show actual earnings. 
• Expense accounts: Expense accounts track what a startup spends to generate income. This might include marketing, payroll, rent, insurance, cost of goods sold and more. Expense accounts tend to be the longest list in the chart of accounts, as they must keep track of all of the money spent to continue to operate.

Step-by-Step Guide to Creating an eCommerce Chart of Accounts

Wondering how to start up a CoA? Here's a look at the steps to take for best results:

1. Determine the number of parent accounts you'll need (i.e., assets, liabilities, equity, etc.) and create business accounts for each.
2. Add sub-accounts for each parent account to further break out costs for each category. For instance, shipping would fall under the "expense" parent account. Inventory would fall under the "asset" parent account.
3. Assign naming conventions for each category: Creating a naming system can help with easy referencing and also help you locate certain line items faster.
4. Review and adjust: Once the CoA is created, be sure to periodically review it and adjust it as necessary.

In addition to conducting regular reviews, some other best practices for maintaining an organized CoA include being consistent with numbering and considering using accounting software to help with management and reporting.

Best Practices for Maintaining Your eCommerce Chart of Accounts

A well-managed CoA is a successful one, and your CoA needs routine upkeep to continue to serve as a successful resource for your eComm startup. Some of the best practices for keeping your CoA up to date so it can continue to serve your startup the way that you need it to include:

• Keep the number of accounts manageable. In other words, don't complicate things too much. Be sure to also keep coding and numbering consistent.
• Review the CoA at least annually to adjust for changes in the business. Part of this review should include deleting or deactivating any outdated accounts. It's important to make adjustments as necessary to ensure the chart of accounts is serving its end goal of helping your eCommerce firm make better overall financial decisions.
• Use accounting software to help automate and track transactions. Accounting software can also help with reporting and streamlining accounting processes.

Common Mistakes to Avoid When Setting Up Your eCommerce CoA

For your CoA to work to its highest potential, it's important to ensure you're setting it up correctly from the start. Unfortunately, this is an area where some struggle. Some common mistakes startups make setting up a CoA include:

• Loading up the CoA with too many accounts. It's best to keep things simple and use only the accounts that you'll need. A reduced quantity makes it easier to code and read.
• Not separating income streams. While it can be tempting to group all sales into one account, this makes it difficult to separate information for budgeting, forecasting and pricing.
• Neglecting tax categories, such as sales tax, which could lead to penalties and fines.

Sample eCommerce Chart of Accounts

An example of a simplified CoA for an eComm startup may look accordingly. Notice the parent categories, assets and liability listed as 1000 and 2000 and observe how the sub-accounts (1010, 1020, 2010, and 2020) fall into each of them:

How an Optimized Chart of Accounts Benefits Your eCommerce Startup

An optimized CoA can have significant benefits for your eComm startup. It can help with accurate financial reporting and budgeting, support efficient business operations, and aid in tax preparation and compliance. It can also support better overall decision-making through the clear insight that it's designed to provide.

The bottom line is that a good CoA helps eCommerce leaders better manage finances and make more informed decisions. This is crucial when you consider the continuously evolving landscape of the online retail world. That's why it's worth taking the time to create and optimize a CoA for your eComm startup.

Conclusion

Well-structured CoAs help with financial tracking, decision-making, expense management, budgeting and forecasting, and tax compliance. All in all, they can help streamline internal processes and minimize the risk of error. For more information on the importance of CoAs and how they can help your eComm startup, contact Graphite Financial or explore our accounting services for startups.

Ready to Optimize Your eCommerce Accounting?

Are you ready to take your eComm startup accounting to the next level? Graphite is here to help.

Visit our website to access a variety of accounting tools, templates and resources to help manage the accounting in your startup or contact us today to schedule a free consultation. As an experienced accounting services provider, we specialize in the likes of startup accounting services, financial modeling and CFO services, and tax and compliance management. 

Contact us today to learn more about how we can help optimize your eCommerce accounting with a chart of accounts or by implementing other strategies.

FAQs

What is a chart of accounts, and why is it important for eCommerce?

A chart of accounts, or CoA, is a list of all the financial accounts a startup uses to record and track financial transactions. CoAs are important for eCommerce companies because they help categorize transactions, create financial statements, identify discrepancies and provide greater insights into a startup’s overall business health.

How do I set up a chart of accounts for my eComm startup?

Set up a CoA by first determining the number of parent accounts you'll need (i.e., assets, liabilities, equity, etc.). From here, you'll add sub-accounts for each parernt account to further break out costs for each category. For instance, shipping would fall under the "expense" parent account. Inventory would fall under the "asset" parent account.

Next, assign naming conventions for each category to help with easy referencing. It's also important to periodically review your CoA and adjust as necessary.

What are the common categories in an eCommerce chart of accounts?

Key CoA categories include asset accounts, or what a startup owns or expects to own. There are also liability accounts, which track what an eComm startup owes to others. Equity accounts represent the net amount of money that owners or shareholders have invested in the startup. There are also revenue accounts, which include sales, returns and allowances, discounts and interest income. Finally, expense accounts track what a startup spends to generate income. This might include marketing, payroll, rent, insurance, cost of goods sold and more.

Can I use a general chart of accounts template for eCommerce?

A general chart of accounts template can be a good starting point, but it's best practice to customize it to reflect any unique transactions or the specific needs of your online store. For example, specific eCommerce expenses may include payment processing fees, shipping costs, website maintenance or marketing campaigns. It's also important to track inventory and your eCommerce firm may even need to separate revenue accounts to track performance across multiple sales channels.

How do I manage multiple revenue streams in my chart of accounts?

Managing multiple revenue streams starts with creating separate income accounts for each distinct revenue source. This can help ensure clear categorization and tracking of income from different products, services or customer segments within the program and better help you to analyze the performance of each revenue stream independently to make better decisions. To manage multiple revenue streams, identify the revenue sources, create separate income accounts, use descriptive naming, track income accurately, and be sure to regularly review and analyze.

What accounting software should I use to automate my CoA?

Some popular software options to automate a CoA might include QuickBooks Online, Xero, Sage Intacct, NetSuite or FreshBooks. The program you use should largely depend on your eComm startup’s size and specific needs. If you need assistance selecting the right software for your firm, consider working with an accounting services professional like Graphite.