An Ultimate Accounting Guide for Etsy Sellers

When we think about accounting for an eCommerce store, we think of endless number crunching, numerous spreadsheets, a long list of transactions, and complex tax laws. However, only some business owners are number ninjas, and making sense of the confusing financial data can be daunting. 

If you are also among them, don’t fret! This accounting guide for Etsy sellers will walk you through the basic concepts of accounting and its importance for Etsy sellers. It will also provide you with some practical bookkeeping tips.

So, let’s get started!

What is Different About Etsy Accounting?  

While you might think you can manage the accounting for Etsy sellers just like a general business, it needs to be validated. Since Etsy is an online eCommerce platform, its accounting differs slightly from that of general business accounting. Although the basic concepts remain the same, there are some things that you need to account for while accounting for Etsy. 

Sales Tax—Business owners often find tax-related matters complicated, time-consuming, and confusing. Despite this, as an Etsy seller, you might want to get a glimpse of your accrued taxes and due dates from time to time. So, you must consider your sales tax while accounting for your Etsy shop. 

Inventory Management—The frustration caused by the lack of inventory when orders pour in is not a secret. As an eCommerce business owner, you must consider your inventory while accounting for your Etsy shop. This way, you will know when to restock and get information about which products are being sold quickly. 

Tax Deductions—Necessary business expenses such as vehicles, shipping, cell phones, internet, and advertising are allowed as deductions for business owners. You might want to claim these deductions to save tax as an eCommerce business owner. Accounting for these expenses can help you claim the available deductions and make significant tax savings. 

Compliance—Although an eCommerce business can be highly profitable, it has many compliances. You must meet the compliance requirements to avoid getting into trouble. Therefore, you are advised to consider the legal requirements when accounting for your Etsy shop. 

Merchant Fees—Whenever you make a sale through Etsy, you must pay a percentage of the transaction value as merchant fees. This might seem small, but it can significantly impact your total earnings. Remember to account for the merchant fees while setting the price of your products. 

Returns—eCommerce businesses cannot afford to overlook the importance of sales returns. Remember to take these into account when bookkeeping for your Etsy shop. Software like QuickBooks provides the best accounting solutions for Etsy sellers. 

Does Etsy Do Bookkeeping?   

While 82% of small businesses fail because they need a proper understanding of cash flow statements, 77% fail because they do not account for all expenses while setting prices. If you are an Etsy seller, bookkeeping and accounting are must-haves to run a successful business. Bookkeeping helps you keep track of your cash flows, costs, inventory, taxes, etc. Similarly, accounting enables you to conduct risk analysis, financial forecasts, and audits. 

What is the Difference Between Etsy Accounting and Etsy Bookkeeping?

The terms accounting and bookkeeping are often used interchangeably but are slightly different. Here’s how Etsy accounting differs from Etsy Bookkeeping.

As an Etsy seller, you should know more about your business finances and get an in-depth view of your profits. Even though Etsy bookkeeping and accounting are different from each other, they are heavily co-dependent. A better accounting analysis requires an accurate bookkeeping system. 

How Does Bookkeeping Help Etsy Sellers?

The growth trajectory of your business relies on the accuracy of your books of records. Here’s why Etsy sellers should do bookkeeping -

• Set up an Accounting System—No perfect accounting system fits every business. Depending on the type of your business, you might have different needs. Bookkeeping helps you identify your business's important features and set up your accounting system. 

• Helps Track Sales—You posted great sales numbers in November and gained new customers. As exciting as it sounds, it also comes with the need to file taxes. Now imagine the scavenger hunt you will have to pull off at the end of the financial year if you do not maintain the sales records. A proper bookkeeping system will help you record your business transactions regularly. With PayTraQer, you can automatically sync your e-commerce and payment gateway transactions directly into QuickBooks and Xero for an automated bookkeeping process.

• Organizes and Records Data - Unorganized financial data can be hard to access and understand. As an Etsy seller, you must have a proper data storage system. QuickBooks and Xero are some of the best accounting software to help you organize your data. You can also install accounting automation apps like SaasAnt Transactions to make your QuickBooks experience smoother. 

• Identifies Tax Deductions—You must know that you can claim deductions for business expenses made during a year. But without a bookkeeping system, the chances of missing out on some deductible expenses are pretty high. A bookkeeping system can help you claim deductions for all your costs and save taxes. 

• Facilitates Early Identification of Frauds and Errors—Since bookkeeping is a regular process that helps keep track of all business transactions, it is easier to identify banking errors and frauds as and when they happen. You can correct these errors and ensure that your books are free from fraud and errors. 

• Provides Financial Records for Loan Applications - A bank loan is the most apparent option for expanding your business. To get a bank loan, you need to present your financial records. A bookkeeping system can help you show the necessary financial data and avail of a loan. 

• Let’s You Effectively Communicate with Customers and Track Orders—Bookkeeping facilitates customer communication. It helps you track the order ID, product ID, and customer contact details. You can use these details to establish contact with your customers and direct your marketing efforts. 

• Makes Inventory Forecasts—For an e-commerce business, the constantly changing inventory status calls for a solid inventory management system. When the customer does not get the desired product, it can lead to significant disappointment. Therefore, ensuring that the top-selling items are always in stock is vital. The bookkeeping system helps you make inventory forecasts and restock on time. 

• Facilitates Decision-Making - While the right decisions can help your business grow leaps and bounds, a single wrong decision can even result in its closure. A robust bookkeeping system will help you analyze your business situation and make the right decisions. 

Etsy, an e-commerce platform, has many transactions, making it extremely difficult to manage without a proper bookkeeping system. You shouldn't anymore if you still wonder if Etsy sellers do bookkeeping. 

Do You Need an Accountant for Etsy? 

‘Do you need an accountant for Etsy?’ Many of you might have this question. Although an Etsy shop owner is not legally bound to keep an accountant if doing it yourself looks like too much on your plate, you can always consider hiring one to help you out. 

Accounting for an e-commerce business can be complicated. Professional help can save you from unnecessary stress, time, and money. 

Here are a few indications it might be time for you to hire an accountant.

Accounting Takes Up Too Much of Your Time 

If maintaining your accounts takes up the majority of your time and prevents you from focusing on other important aspects, it is a clear indication that you need an accountant. 

You are not able to figure out the right Accounting Software and Tools 

If your business is constantly expanding and demanding better technology and tools you need to be aware of, it is time to get professional help. An accountant can help you find the right accounting software and tools for your expanding business. 

You Run Your Business on Multiple E-commerce Platforms

When your business runs successfully and reaches market saturation, you can sell your products on e-commerce platforms other than Etsy. However, it means more complex accounting, which might require hiring an experienced accountant. 

Accounting Tips for Etsy Sellers  

Accounting for Etsy sellers differs slightly from general business accounting and requires some consideration. Here are some tips to help you manage your Etsy shop accounts. 

Decide Which Accounting Method to Use

There are two primary accounting methods for e-commerce accounting: cash accounting and accrual accounting. 

In cash accounting, you record the revenue in your books only after receiving the payment for a product. So, if you sold a shirt that will take 5 days to reach the buyer, but the buyer chooses to pay in advance, you can record it under cash-based accounting. However, if the customer chooses cash on delivery, you will receive the payment only after the product reaches the buyer. In this case, instead of recording the revenue at the time of sales, it is recorded at the time of delivery. 

In accrual accounting, you can record the revenue as soon as the transaction occurs, irrespective of whether you have received the payment. So, in the above example, you can record the transaction as soon as the order is confirmed without waiting for the payment. 

Most small business owners choose cash-based accounting because it is easier to understand and handle. On the other hand, accrual accounting presents the true picture of the business at a given point in time, is complex, and is used by large-scale organizations. 

You should decide which method is optimal for your business and stick to it. 

Keep in Mind that Etsy Seller Fees

Etsy charges a commission of 6.5% on every sale. This amount is known as a merchant fee and can significantly impact your earnings. In addition to this, you have to pay $0.20 for every listing or until they are sold. Other costs include the subscription fee for third-party tools that you purchase. Remember to account for these costs while preparing your books of accounts to ensure you do not miss out on any deductible expenses. 

Change Your Strategies as Needed

Now that you are maintaining a proper record of your business transactions, you can see how your business performs and make decisions accordingly. Ensure you keep changing your strategies depending on this information to run a successful Etsy Shop. You can remove the products with low sales numbers and increase the stock of the bestseller products. 

Stay Updated with the Tax Laws

‘Do I file taxes for my Etsy shop?’ is the most asked question by Etsy sellers. The answer is ‘Yes.’ You need to stay updated with the tax laws so that you can calculate your taxes and account for all expenses and deductions. Moreover, you can also avoid penalties caused by delayed return filing. 

What is the Best Accounting Software for Etsy Sellers? 

Regarding accounting and running the business, doing it all alone can be too overwhelming. If you are among those who want to focus more on their business, the best way is to look for accounting software to make your task easy. 

QuickBooks and Xero are cloud-based accounting software that allows you to access your books of accounts from anywhere in the world. So, if you are on a leisure trip with your family or shopping for inventory, you can still access your books on your mobile phone. In addition, you no longer have to worry about lost data because both QuickBooks and Xero store your data on remote servers that can be retrieved at any time. 

Once you have set up your accounting software, another daunting task is entering the data into QuickBooks/ Xero. This process might give you headaches as it will take a considerable amount of your time. By integrating the SaasAnt Transaction or PayTraQer with QuickBooks, you can reduce the work hours to a few minutes. Check out SaasAnt Transactions and PayTraQer.

FAQs

Do you need an accountant for Etsy?

It is not mandatory but beneficial for managing finances, especially when your business grows. An accountant can help with tax compliance, financial advice, and record-keeping, ensuring you maximize your profitability. As sales increase, financial complexity can, too, make professional guidance more valuable.

Does Etsy count as a business?

Yes, if you regularly sell and aim for profit, your Etsy shop is considered a business. This classification affects how you report income, manage taxes, and approach the overall operation, potentially influencing your legal and tax responsibilities. Treating your Etsy shop as a business can help you plan growth and investment.

How much does Etsy take per sale?

Etsy charges a $0.20 listing fee, a 5% transaction fee on the sale price, and a payment processing fee if Etsy Payments is used. These costs are crucial to consider in your pricing strategy to ensure profitability. Awareness of these fees helps in financial planning and understanding the net income from your sales.

Is there a monthly fee for Etsy?

There is no monthly fee for the standard account, but there's an optional Etsy Plus subscription that offers extra features for a fee. The subscription provides additional tools for shop promotion and customization, which can increase visibility and sales. It's a choice for sellers looking to expand their presence and capabilities on the platform.