WooCommerce accounting: Complete guide to software, integrations, taxes and more
Laura Tien
January 14, 2024
Managing the accounting for a WooCommerce store can be a daunting task, but with the right tools and knowledge, it doesn’t have to be. In this article, we’ll go through how to choose an accounting software and how to integrate it with your WooCommerce store for automated data entry. After that, we’ll go through interpreting financial statements, preparing for tax time, special considerations for dropshipping, and when and how to hire an accounting professional.
Why WooCommerce stores need accounting and bookkeeping
WooCommerce businesses need accounting and bookkeeping to understand their financial health. Bookkeeping involves recording and organizing your finances, while accounting involves analyzing and interpreting those records. Without accurate and timely financial data, it can be difficult to make informed decisions and ensure long-term success.
WooCommerce businesses often face challenges such as multiple currencies, international tax, higher sales volumes, and complex inventory management. Keeping accurate records and staying on top of your accounting and bookkeeping can help you avoid costly mistakes, manage cash flow and stay compliant with tax laws.
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Choosing a cloud-based accounting software
The core of your bookkeeping and accounting processes should be a cloud-based accounting software that acts as the general ledger. This type of software, also known as online or web-based accounting software, is hosted remotely on the cloud instead of on your local computer. This allows you to access your financial data from anywhere with an internet connection, making it easy to manage your finances from your office, home, or on the go.
Advantages of cloud-based accounting software
- Automatic software updates
- Keep data encrypted and safe
- Give different levels of access to different people
- Connect apps to automate and streamline processes
- Have real-time data on sales, expenses, etc.
Disadvantages of cloud-based accounting software
- Requires an internet connection
- Subscription/ongoing fees (rather than a one-off)
- Demands strong security practices (2FA, strong passwords, etc.)
Choosing the right cloud-based accounting software provider for your WooCommerce store can be a daunting task, with so many options available in the market. We’ve put together a comprehensive checklist of key considerations to help you narrow down your options and make an informed decision. Please note that not all of these considerations may apply to your specific business needs.
Checklist for how to choose accounting software for WooCommerce
- Can it integrate with WooCommerce and other relevant apps?
- Is it within your budget, including any free plans offered?
- Does it provide comprehensive training and support options?
- Can it handle multiple currencies?
- Does it assist with compliance for both domestic and international sales tax?
- Can it manage multiple bank accounts?
- Does it have features for cash flow management?
- Does it assist with inventory management and cost of goods sold (COGS)?
- Can it handle receipt and expense tracking?
- Does it include invoicing capabilities?
- Can it handle accounts payable?
- Can it assist with bank reconciliation?
- Does it allow you to track separate financial transactions for different departments or businesses?
- Does it provide a variety of reports to give you the insights you need?
- Can it calculate all relevant payroll requirements?
Setting up a WooCommerce accounting integration
One of the key advantages of using WooCommerce for your business is the abundance of available applications that integrate with it. Amaka, the gold standard in accounting integrations, allows you to seamlessly connect your WooCommerce store to Xero, QuickBooks Online or MYOB to automate manual data entry and bank reconciliation.
What does a WooCommerce accounting integration do?
- Automatically sync an unlimited number of transactions
- Choose to sync each order into a single invoice or sync orders into a summarized invoice on a daily basis
- Capture all payment transactions including gift cards, tips, tax, refunds and payment fees
- Transactions are automatically matched to the bank feed for lightning-fast bank reconciliation
- 2-Minute Express, Advanced and Guided setup options
- Learn more about each integration:
How to connect WooCommerce to your accounting software in 2-minutes
- Register or sign in to Amaka at https://app.amaka.io/
- Click the New integration button and select the relevant integration to commence the setup
- Sign in to your WooCommerce and Xero accounts by clicking the Connect new account button and follow the wizard to grant all relevant permissions, then click Save + Continue
- Follow the wizard to choose your preferred setup method, invoice breakdown, invoice format, mapping and scheduler options to complete the setup of the integration
- Click Save + Continue to finish and activate the integration
Want more in-depth instructions? Read the full WooCommerce + Xero setup guide, WooCommerce + QuickBooks Online setup guide or WooCommerce + MYOB setup guide. Otherwise, you can book a free, 30-minute video call with one of our Integration Specialists to get a walkthrough of the integration or for a Guided setup.
What is a chart of accounts?
A chart of accounts serves as a categorized list that organizations establish to classify financial transactions. Typically, the primary categories encompass assets, liabilities, and shareholder’s equity for the balance sheet, as well as revenue and expenses for the income statement.
Within each account, organizations often include sub-accounts or sub-categories, tailored to the specific transactions they handle. These sub-accounts can evolve with the organization’s development and prove valuable when generating detailed and insightful reports.
If you’re using one of Amaka’s accounting integrations, it will give you the option of automatically creating a default set of accounts. However, if you want it to be more customised to your business needs, you can learn how to set up a chart of accounts manually.
Financial statements: Balance sheet, P&L and cash flow statement
The three key financial statements for your WooCommerce business are the balance sheet, P&L statement (income statement), and cash flow statement. These statements provide a detailed overview of your financial position, performance and cash flow. We’ll go through how to read and interpret these at a high-level.
What’s on the balance sheet?
The balance sheet includes a summary of your assets, liabilities, and owner’s equity in two columns that ‘balance’ or have an equal amount. It provides a snapshot of your business’ financial position at a specific point in time such as at the end of a month, quarter or year. Here are examples of what you might find on your WooCommerce store’s balance sheet.
Assets are the items owned by the business. For example:
- Cash
- Accounts receivable
- Inventory
- Equipment
Liabilities are owed by the business to others. For example:
- Bank loans
- Accounts payable
- Wages owed
Owner’s equity is the difference between assets and liabilities and represents the portion of the business that belongs to the owners.
What’s on the income statement?
The income statement, also known as the profit and loss (P&L) statement, includes revenues and expenses. It shows your financial performance over a period of time rather than at a single point. For example, it shows all revenues and expenses that were incurred over a month, quarter or year.
Revenues are the total amount of income generated by the business, such as:
- Income from primary activity such as merchandise sales
- Income from non-primary activity such as training or interest
- Profits from the sale of assets
- Cost of goods sold (COGS)
Expenses, or losses. are the outflows of money, such as:
- Expenses from primary activity such as procurement costs
- Expenses from non-primary activity such as interest
- Losses from the sale of assets
What’s on the cash flow statement?
The cash flow statement combines data from the balance sheet and income statement to calculate the amount of cash available for a given period. It helps you understand whether you can pay debts and expenses using the revenue and income available. It is divided into three sections; operating, investing, and financing activities. Each section provides an overview of the cash inflows and outflows related to that activity.
Operating activities includes:
- Sales of goods
- Payments to suppliers
- Salaries and wages
- Rent
Investing activities include:
- Purchase of an asset
- Sale of an asset
- Loans made to vendors
Financing activities include:
- Loan from the bank
- Repayments of term debt
More articles to read about financial statements:
- How to analyze your balance sheet
- Mistakes to avoid on your income statement and how to analyze it
- Why and how to do a cash flow statement for e-commerce?
- Cash flow forecasting for e-commerce businesses
KPIs to set as part of your WooCommerce accounting
Monitoring and tracking the performance of your WooCommerce store is crucial for its success. One way to do this is by selecting key performance indicators (KPIs) that you can measure regularly. While there are many options to choose from, it’s important to focus on the most relevant ones for your business, especially when starting out.
Here are five key KPIs that can help you understand your financial position and evaluate the success of your store:
- Cost per acquisition: The expense incurred to acquire a new customer, including advertising, email campaigns, discounts, etc.
- Customer lifetime value (CLV): The estimated revenue that a customer will generate throughout their lifetime with your company.
- Average order value (AOV): The average amount that a customer spends per order.
- Gross profit margin: The profit earned after deducting the cost of goods sold (COGS)
- Inventory turnover: The rate at which you sell your inventory within a year, calculated by dividing total sales by the remaining inventory.
Preparing for tax time: Income tax and international sales tax
One of the most important aspects of managing your accounting is understanding and complying with tax laws and regulations. Income tax, sales tax, and tax write-offs are all important areas that you need to be aware of as a WooCommerce business owner.
Income tax
Income tax is a tax that you need to pay on the income you earn from your business. Just like you report income and pay tax when working a regular job, you need to do the same for your business income. Note that the tax obligations may vary if your business is incorporated.
Most of the time, you’ll be paying income tax to your local government. For example, if you’re located in Australia, you’ll need to follow the business income and taxes guidelines from the Australian Taxation Office. Sometimes, you have to pay income tax at two levels, such as in the United States where you have to pay taxes at the local state and federal levels.
International sales taxes
Sales taxes are a flat rate or percentage tax applied to goods and services, paid by the end customer. The rate and rules for collecting sales taxes can vary depending on the location of your business and where you are selling to. For e-commerce businesses that operate in multiple countries, it’s important to have a basic understanding of how international sales taxes work in each region.
The WooCommerce platform will automatically collect sales taxes for you based on your location and customer locations. However, it’s important to be aware of the exemptions and regulations that apply to your business to avoid any errors, overpayment of taxes or dissatisfaction among customers.
Tax write-offs
Tax write-offs are deductions that you can claim from your taxable income for expenses incurred by your business. The rules for tax write-offs may vary across different regions, but in general, you can claim any appropriate expense as a tax write-off. You can manage your expenses with accounting software or with a tool such as Expensify or Dext.
Common business expenses that can be claimed as a tax write-off:
- Fees and interest (including WooCommerce fees!)
- Marketing and advertising
- Car, truck or other vehicle
- Business insurance
- Office supplies and equipment
- Utilities
- Depreciating assets
- Salaries and wages
- Education
- Rent or leases
- Repairs and maintenance
- Meals and entertainment
More articles to read about taxes:
When to hire an accounting professional and how to find one
For WooCommerce businesses that are still in their earlier stages, such as a side hustle or with no employees, it may be possible to manage your own bookkeeping with the help of software tools. However, it is still recommended to have an accountant to assist with tax returns.
As the business grows and becomes more established, an accountant can have a greater impact on the business. Accounting firms with specific experience in e-commerce and advisory services can help you improve processes and make the most of the data you gather from your bookkeeping.
Finally, established WooCommerce businesses are likely to see the greatest benefits from outsourcing both bookkeeping and accounting tasks. By outsourcing these tasks, business owners can focus their time and energy on more valuable areas of the business. A bookkeeper can help manage day-to-day financial tasks, while an accountant can provide in-depth analysis on complex cash flows, inventory management, and seasonal fluctuations in order to provide valuable business intelligence and guide decision making.
Questions to ask when comparing WooCommerce accountants
When comparing accounting professionals for your WooCommerce business, it is important to look for those that have experience in e-commerce and the tools you use. Specific questions that can be asked include their experience with e-commerce, their understanding of the industry and any additional services they may offer. For example:
- What qualifications does the accountant have?
- Does the accountant specialize in WooCommerce or e-commerce?
- Are they using cloud accounting and other cloud software?
- Does the accountant understand international tax obligations?
- Can the accountant advise you on complex cash flows?
- Can the accountant advise you on inventory management?
- Can the accountant advise you on seasonal fluctuations across multiple regions?
More articles to read about hiring an accounting professional:
- When to hire a bookkeeper or accountant for your e-commerce business
- Questions to ask when comparing e-commerce accounting professionals