How to Set Up Bookkeeping for a New E-commerce Store Without Losing Your Mind
You just launched your e-commerce store. Orders are coming in. You’re riding high on that entrepreneurial adrenaline.
Then tax season hits, and you realize you have no idea where half your money went. Your payment processor statements look like hieroglyphics. You’ve got receipts stuffed in a drawer somewhere, maybe. And the IRS? They don’t care that you were “too busy fulfilling orders.”
I’ve seen this nightmare play out dozens of times. Back in 2016, I worked with an online boutique owner who’d done nearly $200K in sales but couldn’t figure out if she’d actually made any profit. She had three different PayPal accounts, no idea what her cost of goods sold was, and a shoebox—literally a shoebox—full of supplier invoices. We spent weeks reconstructing an entire year of transactions. It was brutal.
You don’t want to be that person.
Setting up proper bookkeeping from day one isn’t glamorous. Nobody’s going to congratulate you for categorizing expenses correctly. But it’s the unglamorous stuff that keeps your business alive when things get complicated—and they always do.
Why Proper Bookkeeping Matters for E-commerce (And What Happens When You Skip It)
Most new e-commerce owners think bookkeeping is something they’ll “figure out later.” That’s a mistake I see constantly, and it’s an expensive one.
E-commerce bookkeeping isn’t like tracking a simple service business. You’ve got inventory moving in and out. Multiple sales channels—maybe you’re on Shopify, Amazon, and Etsy simultaneously. Payment processors like PayPal and Stripe taking their cuts. Sales tax obligations that change depending on where your customer lives. Refunds, chargebacks, shipping costs that eat into margins.
Without organized books, you’re flying blind. You can’t answer basic questions: Am I actually profitable? Can I afford to hire help? How much do I owe in quarterly taxes?
Worse, you’re setting yourself up for an audit disaster. The IRS has gotten increasingly sophisticated about tracking e-commerce income. They get reports from your payment processors. If your tax return doesn’t match what PayPal reported, you’re getting a letter. Maybe worse.
From my experience, proper bookkeeping also reveals problems early. When you’re checking your books weekly, you notice that your Facebook ad spend went up 40% but sales only increased 10%. You catch a supplier who double-charged you. You realize one product line consistently loses money once you factor in shipping and returns.
These insights don’t come from your Shopify dashboard. They come from actual bookkeeping.
Choosing Your Bookkeeping Method and Setting Up Your Chart of Accounts
Right from the start, you need to decide: cash basis or accrual basis accounting?
Cash basis is simpler. You record income when money hits your bank account and expenses when you pay them. Most small e-commerce stores start here because it’s intuitive. You sold something, got paid, money’s in your account—that’s revenue.
Accrual basis records income when you make the sale (even if payment comes later) and expenses when you incur them (even if you haven’t paid yet). It’s more accurate for businesses with inventory, which… well, that’s you.
The IRS generally requires accrual accounting if you carry inventory and your annual gross receipts exceed $26 million. You’re probably not there yet. But if you want accurate profit tracking—especially with inventory sitting on shelves—accrual makes more sense even when you’re small.
My opinion? Start with cash basis if you’re dropshipping or doing print-on-demand with minimal inventory. Switch to accrual once you’re stocking products. Your accountant will thank you, and your financial picture will be clearer.
Now, your chart of accounts. This is just a list of categories for organizing transactions. Every business has one, whether they know it or not.
For e-commerce, you need categories that reflect your actual money movements:
Revenue accounts:
- Product sales (break down by category if you sell diverse items)
- Shipping revenue (if you charge separately)
- Discounts and refunds (as negative revenue)
Cost of Goods Sold (COGS):
- Product purchases from suppliers
- Freight and shipping to your warehouse
- Manufacturing costs
Expense accounts:
- Merchant fees (PayPal, Stripe fees)
- Advertising (Facebook, Google, influencer payments)
- Shipping and fulfillment
- Software subscriptions (Shopify, email marketing, etc.)
- Packaging materials
- Returns and damaged goods
- Rent (if you have warehouse space)
- Professional services (accountant, lawyer)
Don’t go crazy creating 50 different categories. You can always add more later. But having clear separation between what you paid for inventory versus what you spent on advertising matters enormously.
Selecting the Right Bookkeeping Software for Your E-commerce Store
You cannot—I repeat, cannot—manage e-commerce bookkeeping in Excel spreadsheets once you’re doing more than a handful of sales monthly. I’ve watched people try. It always ends badly.
You need actual bookkeeping software for online stores that connects to your sales channels and automatically pulls in transactions.
QuickBooks Online is the standard. It’s not the cheapest, but it integrates with virtually every e-commerce platform. The Shopify integration is particularly smooth—sales data flows in automatically, and QuickBooks categorizes most of it correctly after some initial setup. QuickBooks also handles inventory tracking, which matters once you’re stocking products.
From my experience, QuickBooks has a learning curve. The interface can be overwhelming at first. But there’s a massive user base, tons of YouTube tutorials, and most accountants know it inside and out. When tax time comes, handing your accountant a QuickBooks file makes everything smoother.
Xero is QuickBooks’ main competitor. Honestly? It’s comparable in features and price. Some people find the interface cleaner. It also integrates well with Shopify, WooCommerce, and other platforms. The choice between QuickBooks and Xero often comes down to personal preference and what your accountant recommends.
Wave Accounting is free. Completely free for the core accounting features. They make money on payment processing and payroll add-ons. For a brand-new e-commerce store on a tight budget, Wave is incredible. The inventory management isn’t as robust as QuickBooks, but for basic tracking online sales revenue and expenses, it works.
The catch? Fewer integrations. You might be manually importing more transactions. And if you grow quickly, you’ll probably outgrow Wave and need to migrate to QuickBooks or Xero anyway. Migration is annoying.
FreshBooks is built more for service businesses and invoicing. I don’t typically recommend it for product-based e-commerce unless you’re doing custom orders with invoices rather than standard online checkout.
What worked for me—and what I recommend—is starting with Wave if money’s tight and you have time to manually check imports. Once you’re doing $10K+ monthly in sales or feeling overwhelmed, upgrade to QuickBooks Online. The mid-tier plan with inventory tracking is worth the investment.
Whatever you choose, set it up on day one. Don’t wait until you have six months of transactions to untangle.
Connecting Your Sales Channels and Payment Processors
Here’s where e-commerce bookkeeping gets messy if you don’t stay organized.
You’re probably selling through multiple channels. Maybe Shopify is your main store, but you’re also on Amazon, or Etsy, or even Facebook Marketplace. Each platform has its own reporting. Each one might use a different payment processor or take different fees.
Your bookkeeping software needs to capture all of it, ideally automatically.
Most platforms offer direct integrations with bookkeeping software. Shopify integrates with QuickBooks through an official app. Sales, refunds, fees, and taxes all sync over. You’ll need to map your Shopify data to the right accounts in QuickBooks during setup—match Shopify’s “product sales” to your revenue account, “shipping” to your shipping revenue account, etc.
WooCommerce has similar integrations, though it’s a bit more technical since WooCommerce runs on WordPress. You might need a plugin like Zapier to connect it to your bookkeeping software smoothly.
Amazon is trickier. Amazon doesn’t pay you immediately when you make a sale—they hold funds, take fees, deduct returns, and then pay out every two weeks. Your bank deposit doesn’t match individual sales, which confuses people endlessly. You need software that reconciles Amazon’s settlement reports with your bookkeeping. Some third-party tools specifically handle Amazon accounting integration.
Then there are your payment processors. Stripe and PayPal also integrate with QuickBooks and Xero. But here’s something that trips people up: the money flow.
When a customer buys something for $100, you don’t receive $100. Stripe takes maybe $3. So your bank deposit is $97. Your bookkeeping needs to record $100 in revenue, $3 in merchant fees, and $97 as the deposit. Otherwise, your revenue is understated and your books won’t reconcile with bank statements.
Good integrations handle this automatically. The transaction imports as $100 revenue with a $3 fee expense, netting to the $97 that hit your account.
If you’re manually entering transactions (please don’t do this long-term), you need to record it the same way. Revenue is the gross sale amount. Fees are separate expenses. What hits your bank is the net.
Also—and this is critical—don’t mix business and personal accounts. Open a dedicated business checking account. Run all your e-commerce income and expenses through it. Trying to separate business transactions from your personal checking account later is a nightmare. I’ve done it. Never again.
Tracking Inventory, Cost of Goods Sold, and Expenses
Inventory accounting is where e-commerce bookkeeping diverges sharply from simple freelance or service business tracking.
When you buy inventory, that’s not immediately an expense. You’re converting cash into another asset—products sitting on your shelf (or in Amazon’s warehouse, or wherever). The expense happens when you sell the product. That’s your cost of goods sold.
So if you buy 100 widgets for $10 each, you spent $1,000. But that $1,000 doesn’t hit your profit and loss statement as an expense yet. It’s just inventory on your balance sheet. When you sell 30 widgets, you record $300 in COGS. Now you’ve got 70 widgets left in inventory worth $700.
This matters enormously for understanding profitability. If you treated the initial $1,000 purchase as an immediate expense, your books would show a huge loss that month even though you’re sitting on valuable inventory.
Most e-commerce bookkeeping software handles this with inventory tracking features. You set up each product, record the cost per unit, and the software automatically calculates COGS when sales come in.
But you need to keep inventory counts accurate. If your software says you have 70 widgets but you actually only have 65 because some got damaged or stolen, your numbers are wrong. Regular physical counts—even if it’s just you walking through your garage with a clipboard—keep things honest.
Cost of goods sold calculation isn’t just the product cost, either. Include shipping from suppliers to you. Include customs and duties if you’re importing. Some businesses even include payment processing fees as part of COGS, though others treat those as operating expenses. Be consistent.
Beyond COGS, track expenses rigorously. Every dollar spent on the business gets categorized:
- That Facebook ad? Marketing expense.
- Shopify’s monthly fee? Software subscription.
- Shipping labels? Shipping expense.
- Boxes and bubble wrap? Packaging materials.
- The coffee you bought while working? Nope, that’s personal unless you’re meeting with a supplier—then it’s meals and entertainment (and only 50% deductible per IRS rules).
Save receipts. Take photos with your phone if they’re paper. Most bookkeeping software lets you attach receipt images to transactions. Do it. When the IRS asks you to prove that $347 Facebook ad charge three years from now, you’ll be glad you kept records.
One mistake I see constantly: mixing personal purchases into business accounts and then trying to remember later which was which. Just… don’t. Keep it clean from day one.
Managing Sales Tax, Quarterly Taxes, and Staying Compliant
Sales tax is genuinely one of the most confusing parts of e-commerce accounting, and it’s gotten more complicated since the 2018 Supreme Court decision in South Dakota v. Wayfair.
Before Wayfair, you generally only collected sales tax in states where you had physical presence. Now, states can require you to collect tax based on “economic nexus”—basically, if you sell enough in their state (often $100K in sales or 200 transactions annually), you need to register, collect, and remit sales tax there.
Every state has different thresholds. Different rates. Different rules about what’s taxable. Clothing is tax-exempt in some states but not others. Digital products, shipping charges, gift wrapping—all treated differently depending on location.
The Small Business Administration offers guidance on navigating business permits and tax registration, but honestly, sales tax compliance for e-commerce can quickly become overwhelming.
If you’re on Shopify or similar platforms, they can calculate sales tax automatically based on customer location. That helps. But you’re still responsible for actually registering in each state, filing returns (monthly, quarterly, or annually depending on volume), and remitting the tax you collected.
Some businesses use services like TaxJar or Avalara that integrate with bookkeeping software, track nexus thresholds, file returns automatically, and keep you compliant. They’re not cheap, but the time saved and penalty avoidance often justify the cost once you’re selling in multiple states.
From my experience, if you’re only selling in your home state initially, handle it yourself. Register for a sales tax permit with your state revenue department. Collect the tax. File returns on schedule. Once you cross nexus thresholds in other states, seriously consider automation or hiring help.
Beyond sales tax, don’t forget income taxes. As a business owner, you likely owe quarterly estimated tax payments to the IRS and your state. Employees get taxes withheld from paychecks automatically. You don’t. So the IRS expects you to pay throughout the year.
Calculate roughly 25-30% of your profit (revenue minus COGS minus expenses) and set it aside. Make quarterly payments in April, June, September, and January using IRS Form 1040-ES. Miss these and you’ll owe penalties, even if you pay the full amount at year-end.
Your bookkeeping software should generate profit and loss statements that make quarterly tax calculations straightforward. Revenue minus COGS equals gross profit. Gross profit minus operating expenses equals net profit. Apply your estimated tax rate to net profit. Pay that to the IRS.
Also keep in mind: if you’re operating as a sole proprietor or single-member LLC, business profit flows through to your personal tax return. You’ll file Schedule C showing business income and expenses. An S-corp or partnership has different requirements. Talk to an actual accountant about the right structure—this is beyond bookkeeping basics but affects how you handle the books.
Daily, Weekly, and Monthly Bookkeeping Routines
Bookkeeping isn’t a once-a-year scramble before tax day. It’s a routine. Maybe even boring. But routine keeps you out of trouble.
Daily (or after each order batch):
You don’t need to do formal accounting entries every single day, but glance at your sales. Make sure payment processor deposits are coming through as expected. If you notice a chargeback or refund, flag it mentally so it doesn’t surprise you later.
If you’re shipping products yourself, save those shipping receipts. Note any inventory you just ran out of—you’ll need to reorder and track that purchase.
Weekly:
Reconcile your bank and credit card accounts. This just means checking that transactions in your bookkeeping software match what actually hit your bank account. Most software has a reconciliation feature that shows you side-by-side comparisons.
If something doesn’t match, figure out why. Did you forget to record an expense? Did a payment process twice by mistake? Catch these issues weekly and they’re quick fixes. Wait six months and you’ll have no idea what happened.
Also review your outstanding invoices if you do any B2B sales with payment terms. Follow up on anything overdue.
Monthly:
Generate a profit and loss statement (your bookkeeping software does this automatically). Look at:
- Total revenue
- Total COGS
- Gross profit margin (gross profit divided by revenue)
- Operating expenses by category
- Net profit
Compare to the previous month. Are margins shrinking? Did advertising costs spike without a corresponding sales increase? Is shipping eating more profit than expected?
Monthly is also when you review and categorize any transactions that imported incorrectly or got lumped into “uncategorized.” Clean up the books. Attach missing receipts.
If you have inventory, do a quick spot-check. Count a few high-value or fast-moving items and make sure your software inventory count matches reality.
File and pay any monthly sales tax obligations.
Quarterly:
Calculate estimated tax payments. Set aside money for the IRS and state. Actually make the payments on time.
Review your financial statements more deeply. Look at quarterly trends. Meet with your accountant if you have one (I strongly recommend at least a quarterly check-in once your business is established).
Assess your cash flow. E-commerce can be feast or famine. You might have strong sales in Q4 and slow January. Your bookkeeping data helps you plan for seasonal fluctuations.
Annually:
Tax time. If your books are clean all year, this isn’t stressful. Generate your annual P&L and balance sheet. Hand them to your accountant. They’ll prepare your tax returns.
Review the full year. What products were most profitable? Which marketing channels delivered the best return? Use this data to plan next year’s strategy.
Also, this is when you’ll receive 1099-K forms from payment processors if you processed over $600 (the threshold changed recently). Make sure the income reported on those matches your books. Discrepancies invite IRS scrutiny.
The monthly bookkeeping checklist alone keeps most small e-commerce stores in good shape. Miss a month and you’ll spend hours catching up. Stay current and it’s maybe two hours monthly—sometimes less with good automation.
Wrapping Up: Bookkeeping Is Your Business’s Foundation
Nobody starts an e-commerce store because they’re excited about tracking expenses and reconciling accounts. You want to sell products, build a brand, serve customers. I get it.
But here’s the reality: businesses that don’t track their money fail. Not because their products are bad or their marketing is weak. They fail because they run out of cash without realizing it. They get hit with tax bills they didn’t prepare for. They make decisions based on feelings instead of data.
Proper bookkeeping gives you control. You know exactly where you stand financially at any moment. You can make informed decisions about hiring, inventory purchases, or scaling advertising. You sleep better knowing that when tax season arrives, you’re ready.
Set up your system now. Choose bookkeeping software that fits your budget and integrates with your sales channels. Decide on cash or accrual accounting. Create a chart of accounts that reflects your e-commerce reality. Connect your payment processors. Track inventory and COGS accurately. Stay on top of sales tax obligations. Build simple daily, weekly, and monthly routines.
It’s not complicated, but it does require consistency.
And if you feel overwhelmed, that’s normal. Consider working with a bookkeeper who specializes in e-commerce, even if just for a few months to set things up correctly. That boutique owner I mentioned earlier? After we reconstructed her books, she hired a part-time bookkeeper. Cost her $200 monthly. Saved her thousands in taxes and probably prevented an audit nightmare. Best money she ever spent.
Your future self—especially your future self in April holding a stack of tax forms—will be incredibly grateful that you took bookkeeping seriously from day one.
FAQ
Do I need an accountant or can I do e-commerce bookkeeping myself?
You can absolutely do bookkeeping yourself, especially starting out. Bookkeeping is recording transactions, categorizing expenses, and reconciling accounts—tasks that software makes manageable even without accounting expertise. However, an accountant is valuable for tax planning, choosing the right business structure, and ensuring compliance with complex regulations like sales tax nexus. Many e-commerce owners handle day-to-day bookkeeping themselves but work with an accountant quarterly or at minimum for annual tax preparation. That hybrid approach balances cost with expertise.
What’s the difference between cash and accrual accounting for e-commerce stores?
Cash basis accounting records income when you receive payment and expenses when you pay them—simple and intuitive for tracking actual cash flow. Accrual accounting records revenue when you make a sale (even if payment comes later) and expenses when incurred (even if unpaid), giving a more accurate picture of profitability, especially for businesses with inventory. E-commerce stores with physical inventory generally benefit from accrual accounting because it properly matches the cost of goods sold with the revenue from selling those goods, rather than distorting profit based on when you happened to pay suppliers.
How do I handle sales tax across multiple states?
After the Wayfair decision, you must collect sales tax in any state where you have economic nexus—usually $100,000 in sales or 200 transactions annually, though thresholds vary by state. Track your sales by state monthly. When you exceed a state’s threshold, register for a sales tax permit with that state’s revenue department, configure your e-commerce platform to collect the correct rate, and file returns according to their schedule (monthly, quarterly, or annually). Many e-commerce sellers use automation services like TaxJar or Avalara to monitor nexus, calculate rates, and file returns automatically, which becomes essential once you’re selling in five or more states.
What bookkeeping software works best with Shopify and other e-commerce platforms?
QuickBooks Online is the most widely used because it offers robust integrations with Shopify, WooCommerce, Amazon, and major payment processors, plus strong inventory tracking capabilities. Xero is comparable in features and integrations with a slightly cleaner interface. Wave Accounting is completely free for core features and works well for smaller stores, though with fewer automatic integrations. For most Shopify stores, QuickBooks Online (mid-tier plan with inventory) offers the best balance of features, reliability, and accountant compatibility. The integration automatically syncs sales, refunds, fees, and taxes, dramatically reducing manual data entry.
How often should I reconcile my e-commerce bookkeeping accounts?
Reconcile your bank accounts and payment processor accounts weekly if possible, at minimum monthly. Reconciliation means comparing your bookkeeping software records against actual bank and processor statements to catch errors, duplicate charges, missing transactions, or fraudulent activity. Weekly reconciliation keeps the task quick—usually 15-30 minutes—and catches problems while they’re fresh and fixable. Monthly reconciliation is the bare minimum for maintaining accurate books. Waiting longer makes errors harder to trace and increases the risk of significant mistakes going unnoticed until tax time or an audit.
Reviewed Sources: IRS (irs.gov), Small Business Administration (sba.gov), FASB, AICPA, Forbes, Entrepreneur.
Disclaimer: This article was reviewed by our financial content team to ensure factual accuracy and neutrality.
References
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Addresses specific compliance challenges for e-commerce businesses including bookkeeping and sales tax obligations.
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Directly addresses sales tax compliance complexity post-Wayfair decision, critical for e-commerce bookkeeping and tax management.
Note: All references are from verifiable academic and institutional sources published 2020-2023. Full reference details including DOIs and publishers are provided for transparency and source verification.