Shopify accounting: Complete guide to software, automation, taxes and more

Laura Tien November 03, 2023

Article E-Commerce

Managing the accounting for a Shopify store isn’t the easiest task but there is a lot of software and automation that you can use to simplify things. In this article, we’ll go through everything you need to know about building an ecosystem of connected apps, tracking your finances, preparing for taxes, dropshipping and accepting payments.

Make your way through this article or use the clickable table of contents if you want to skip to a certain section. At the end, we’ll discuss how to hire an accounting professional if you still need some extra help. Want a more in-depth guide? You can download our 54-page PDF guide for free! No email needed.

Why Shopify businesses need accounting and bookkeeping

Accounting and bookkeeping are essential to understand the financial health of your Shopify business. Making sure you always have accurate data, rather than rushing to get your books in order during tax time, will allow you to make well-informed decisions at any given time.

First of all, a quick rundown on the difference between bookkeeping and accounting: Bookkeeping involves recording and organizing your finances whereas accounting involves the analysis and insights gathered from these records.

Shopify businesses typically come with the additional challenges of international currencies, international tax obligations, high sales volumes, complicated inventory and a variety of different kinds of expenses. If you’re not staying on top of your accounting and bookkeeping, you can quickly find yourself out of cash, making mistakes and struggling to keep your business afloat.

Choosing a cloud-based accounting software

The core of your bookkeeping and accounting processes should be a cloud-based accounting software. Cloud-based accounting software has a lot of names; cloud accounting software, online accounting software, or web-based accounting software. As the name suggests, it’s a form of accounting software that’s hosted remotely on ‘the cloud’ rather than locally on your computer. Your data is stored on remote servers and can be accessed through the Internet.

Advantages of cloud-based accounting software

• No need for updating or maintenance
• Give access to other people
• Keep your data safe and secure
• Get real-time financial insights into your business
• Connect all your apps

Disadvantages of cloud-based accounting software

• Need an internet connection
• Demands strong security practices
• Pay an ongoing fee

Now that you know all the pros and cons of cloud-based accounting software, how in the world can you pick one provider out of the dozens in the market? We’ve put together an extensive checklist of considerations to consider when comparing the different solutions available to you. Note that not all of these will apply to your business.

Checklist for how to choose accounting software for Shopify

• Offer integrations to Shopify and a range of other apps?
• Offers a free plan or fits your budget?
• Offer extensive training and support in multiple forms?
• Handle multiple currencies?
• Handle domestic and global sales tax compliance?
• Handle multiple bank accounts?
• Handle cash flow management?
• Handle inventory management and COGS?
• Handle receipt management and expense tracking?
• Handle invoicing?
• Handle accounts payable?
• Allow you to do bank reconciliation?
• Track separate financial transactions for different departments or businesses?
• Include an array of reports that give you the insights you need?
• Calculate all relevant payroll requirements?

Setting up a Shopify accounting integration

One of the major benefits of running your business on Shopify is the access you have to a range of different apps. Amaka is the gold standard in accounting integrations, allowing you to sync your Shopify transactions to Xero, QBO or MYOB. Once you’re set up, data entry becomes completely automated and bank reconciliation becomes lighting-fast.

What does a Shopify accounting integration do?

• Sync transactions from your Shopify store to your accounting software on our 100% free plan or premium plan
• Choose to sync each order into a single invoice or sync orders into a summarized invoice on a daily basis
• You can customize your preferred sales summary view choosing from a wide array of formats
• Capture all payment transactions including gift cards, tips, tax and payment fees
• Easily reconcile Shopify sales and payments in your accounting software

How to connect Shopify to your accounting software

• Register or sign in to Amaka at https://app.amaka.io/
• Click the New integration button and select Shopify + Xero, Shopify + QuickBooks or Shopify + MYOB from the integrations list to commence the setup
• Sign in to your Shopify account by clicking the Connect new account button underneath Shopify logo and grant all relevant permissions
• Authenticate your Xero, QuickBooks Online or MYOB account by following the same procedure and 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

More articles to read about Shopify accounting integrations

• Recording and reconciling Shopify Payments and fees 
• How to manage multiple payment methods with Shopify
• Ideal way to structure your e-commerce product catalog
• Chart of accounts and account mapping for e-commerce businesses

Integrating your inventory and accounting

On top of syncing your sales data, it’s important to sync your inventory data to your accounting software to ensure you have the most in-depth and valuable financial information. We’ll explain what the cost of goods sold (COGS) is, how to sync it to your accounting system and the tools you need for inventory management.

Sync your COGS to your accounting system

COGS, the cost of producing any goods that are sold including materials and labor, appear on your balance sheet and cash flow statement and therefore, need to be accurately tracked. Any mistakes will carry on and affect your ability to make sound financial decisions. For instance, COGS directly impacts your gross profit.

Amaka’s Shopify accounting integrations automatically sync the COGS values from Shopify into your accounting software. At every sync, the integration will sum up all COGS values on the products sold. If there happens to be a refund, it will automatically take this into account and make adjustments.

Connect an inventory management system

Alongside managing your COGS, having an inventory management system (IMS) that connects to both Shopify and your accounting system will help you manage stock levels and cash flow. For instance, an IMS such as Unleashed will have features like automatic reordering, live stock value, stock age report, centralized visibility on supplier lead times and more. Before you connect your Shopify business to an IMS, it’s crucial to complete a stock take. The earlier in your business lifecycle that you do this, the easier it will be for you. Having precise data to start with will make your life easier as you grow, stock more products and have more warehouse locations.

The three key financial statements

Now that data is flowing into your accounting software, you can generate accurate financial statements. We’ll go through the basics of what you’ll find on the balance sheet, income statement and cash flow statement.

What’s on the balance sheet?

A balance sheet consists of two columns that should have an equal amount if accurate, hence the name. Assets are on the left side, and liabilities and owner’s equity are on the right side. This financial statement will give an indication of your business’s financial position at a single point in time. Typically, you’ll create a balance sheet at the end of a month, quarter or year.

Assets are the items owned by the company. For example:

• Cash
• Accounts receivable
• Inventory
• Equipment

Liabilities are owed by the company to others. For example:

• Bank loans
• Accounts payable
• Wages owed

Owner’s equity is assets minus liabilities. It represents the amount that can be claimed by the owners of the business.

What’s on the income statement?

An income statement, also known as the profit and loss (P&L) statement, gives you an indication of your financial position over a certain time frame rather than at a single point in time. For instance, over a month, quarter or year. The income statement includes your business’s revenues, and expenses and losses.

Revenue is the total amount of income generated. For example:

• Income from primary activity such as merchandise sales
• Income from non-primary activity such as training or interest
• Gains from profitable sale of an asset
• Cost of goods sold (COGS)

Expenses and losses are the outflows of money. For example:

• Expenses from primary activity such as procurement costs
• Expenses from non-primary activity such as interest
• Losses from non-profitable sale of an asset

What’s on the cash flow statement?

The cash flow statement takes data points from both the balance sheet and income statement to calculate the amount of cash you have on hand for a given period. It measures how well you’re managing cash flow or the ability for you to pay debts and expenses using the revenue and income available. There are three sections; operating, investing and financing activities.

Cash flow from operating activities includes the cash inflows and outflows from your general business activities. For example:

• Sales of goods
• Payments made to suppliers
• Salaries and wages
• Rent

Cash flow from investing activities includes any use of cash considered a business investment. For example:

• Purchase of an asset
• Sale of an asset
• Loans made to vendors

Cash flow from financing activities involves any cash from banks, investors or any other financing activity such as shareholders. For example:

• Loan from the bank
• Repayments of term debt

Note that there are actually two methods for creating a cash flow statement. The direct method looks at cash inflows from sales and cash outflows from expenses. The indirect method starts with the net income in the operating activities then adds and subtracts all other operating activities. Generally speaking, the indirect method is more simple and provides ample insights.

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 measure for your Shopify accounting

Part of managing your Shopify accounting is choosing key performance indicators or KPIs that you can track regularly to measure success. There are easily dozens of different options to consider. However, especially if you’re in the earlier stages of your business, you won’t need to be tracking this many.

Here are five key KPIs for e-commerce businesses that will influence your financial position These are a great starting point:

• Cost per acquisition: The cost it takes to gain a new customer, including advertising, email campaigns, discounts, etc.
• Customer lifetime value (CLV): The average revenue that can be earned from a customer throughout their entire lifetime with your company.
• Average order value (AOV): The average amount a customer spends on an order.
• Gross profit margin: The actual profit you earn once cost of goods sold (COGS) is considered.
• Inventory turnover: How often you sell through the inventory you have in-stock within a year, calculated by taking total sales, subtracting the cost of those, and dividing that number by your remaining inventory.

You can use Amaka’s business activity tracker, FitBiz for Shopify, to keep a finger on your store’s goals, growth and performance. After you connect your store, you can use the mobile app to view smart sales trends, smart comparisons, and comprehensive breakdowns by time and product on-the-go.

Tax time, income tax and international sales tax

Income tax

We’ll start with the more straightforward type of taxes you’ll need to pay; income taxes. The same way you have to report income and pay tax when working a regular job, you need to report income and pay tax when making an income for business. Note: The obligations change if your business is incorporated.

In most cases, you’ll be paying income tax to your local government. For instance, if you’re living in Australia, you’ll need to check the business income and taxes guidelines from the Australian Taxation Office. In some cases, you might have to pay income tax at two levels, such as in the US where you have to pay taxes at the local state level and to the federal government.

International sales taxes

Sales taxes are a flat rate or percentage tax applied to goods and services, and paid by the end customer. Depending on where you’re located and where you’re selling to, there are different rules for collecting sales taxes. For e-commerce businesses selling across multiple countries, it’s useful to have a basic understanding of how international sales taxes work in each region.

Fortunately, Shopify automatically collects the right amount of sales tax for you. Even so, it’s helpful to understand how different exemptions and rules apply to you. This way, you can avoid making mistakes, overpaying in tax or upsetting customers.

Tax write-offs

If you’re running a business to make a profit, one area you’ll want to pay close attention to is your expenses. The rules across different regions are different but in general, you can claim any appropriate expense as a tax write-off (deduction) from your taxable income. You can manage your expenses with your accounting software or with a tool such as Expensify or Dext.

Here is a list of common business expenses that you may be able to claim as a tax write-off:

• Marketing and advertising
• Car, truck or other vehicle
• Business insurance
• Office supplies and equipment
• Utilities
• Depreciating assets
• Salaries and wages
• Education
• Rent or leases
• Fees and interest (including Shopify fees!)
• Repairs and maintenance
• Meals and entertainment

More articles to read about taxes:

• How sales taxes work in every major region
• How to prepare for and track e-commerce expenses 

Managing accounting when Shopify dropshipping

Dropshipping with Shopify comes with a few unique challenges compared to other, more traditional businesses. First of all, rather than having one purchase order for a large volume of stock, you’ll be invoiced by your supplier for every order made. To overcome potential challenges, you’ll need to coordinate the information that needs to be on the invoice.

For instance, an invoice number, amount to be paid, handling cost, address, etc. Each data point can be given its own identifier, such as invoice_id. This will make organizing invoices significantly easier, particularly if you have multiple suppliers and have increasing sales volumes.

Another unique issue that you’ll need to manage when dropshipping is overselling. As we mentioned earlier, making sure you don’t have too little or too much inventory. However, since you wouldn’t be managing your own inventory, you need to instead keep track of how much inventory your suppliers have.

A reliable supplier should always have updated information on inventory levels. Double check who is liable for inaccurate item availability and overselling. You can read our dropshipping article to learn more about accounting technology, getting an accounting professional, chart of accounts and taxes unique to dropshipping.

When and how to hire accounting professionals

Whether or not you need a bookkeeper or accountant for your Shopify business, or both, usually depends on what stage your business is in.

For Shopify businesses still in their earlier stages, potentially it’s your side hustle or you don’t have any employees yet, you can generally manage your own bookkeeping with the help of a few software tools. An accountant that helps with tax returns is definitely useful. An accountant specialized in e-commerce can be beneficial for business growth but isn’t a need.

In the next stage, whether you’re working on your store full-time or you have a few employees, an accountant can start to make a massive impact. Accounting firms with specific experience in e-commerce and advisory services can help you to improve processes, and make the most of the data you gather from your bookkeeping.

Finally, an established Shopify business will benefit the most from outsourcing both the bookkeeping and an accountant. At this stage, a bookkeeper will allow you to use your time where it’s more valuable. An accountant will help to drill down on the complex cash flows, inventory management and seasonality that you’ll be dealing with and provide in-depth business intelligence that help guide your decisions.

Pros and cons of hiring an accountant or bookkeeper

There are many positive ways engaging with an accountant or bookkeeper can positively influence a business. Here are some pros to consider:

• Increased free time: Having someone dedicated to looking after the financial aspects of your business frees up your time. This means you can focus more on other areas and prioritize growing your business.
• Maintained accuracy: With trained accountants as part of your business, your records will be regularly checked and audited. This ensures your financial records are accurate and taxes are filed correctly.
• Ongoing financial advice: The e-commerce industry can see fluctuations in activity because of a variety of factors. With an accountant or bookkeeper, you’ll have access to consistent advice to help you make better business decisions when these changes happen.
• Overall financial health: Because your accountant or bookkeeper will continually keep responsibility over your finances, they will monitor key metrics and KPIs to track the financial health of your business.

Although there are many benefits to working with an accounting professional or accounting firm, there are also some cons to be aware of before you make a decision. Consider the following:

• Additional costs: Hiring an accountant incurs additional costs to your business. It’s important to ensure your business is at a stage where it can sustain the consistent cost of engaging with an external accounting professional or firm.
• Risk of a wrong hire: One of the risks involved in hiring an accountant/bookkeeper is engaging with one who doesn’t provide a return on investment. For example, an accounting professional may lack e-commerce experience. This can be avoided through thorough research and reading reviews.
• Confidentiality and trust: Hiring someone to look after the financial aspects of your business means they will gain access to sensitive financial information. To find a trustworthy person or firm, it’s important to ask the right questions to determine their level of experience and their integrity.

Accountants and bookkeepers can serve as invaluable resources to your business. In particular, when they are familiar with the e-commerce business landscape, they can provide a service that helps your business thrive. Engaging with an accounting professional or firm can be a challenge, but once you consider your business stage and understand the benefits of hiring an accountant or bookkeeper, you’re able to make an informed decision.

Questions to ask when comparing Shopify accountants

The right accountant for Shopify businesses will be able to provide unique insights that are specific to e-commerce and to the tools you use. Here are a few questions to ask when comparing e-commerce accounting professionals.

• What qualifications does the accountant have?
• Does the accountant specialize in Shopify?
• Are they using cloud accounting and other cloud software?
• Does the accountant understand international tax obligations?
• Can the accountant advise you on inventory management?