Bookkeeping for Etsy Sellers – An Ultimate Guide

Etsy is a marketplace where you can sell your products to millions of people around the world. You need to take care of your sales, Etsy fees, and other transactional data. Recording transactions and maintaining tracks on your company's assets is done through bookkeeping. Hence, you must set up a bookkeeping system for your Etsy store.

This aids in fraud prevention and financial management for your company. Keeping track of your finances is one of the most crucial tasks when you start a business. Bookkeeping aims to balance your accounts, show you your company's overall financial picture, and strategically enhance cash flow management. There would be plenty of questions about setting a system in place. Let us see how we can approach that.

Benefits of bookkeeping for Etsy businesses:

1. By keeping track of all the financial transactions that take place in your firm, bookkeeping makes this simple for business owners.

2. It helps evaluate cash flows for the business, and in-depth financial analysis helps the business get loans.

3. Financial decisions are smoothly taken with the help of bookkeeping processes.

4. Fraud and Error detections are caught, which eases the production of financial reports.

The first step in bookkeeping is identifying the data you need. We can begin documenting our transactions once we've tracked our essential data. The date, the person who made the purchase, and the total money. We need to look into the following aspects of bookkeeping:

1. Although the fundamentals of bookkeeping stay the same, there are a few e-commerce-specific issues you'll need to consider, such as Etsy fees, taxes, transaction volume, compliances, and inventory management. 

2. The accuracy of accounting analysis directly involves how accurate bookkeeping records are. 

3. Any accounting conclusions will be accurate if your bookkeeping is updated.

Financial statements provide vital insights into a business's performance. Every month businesses can receive a comprehensive view of their financial status by checking the Balance Sheet, Profit and Loss, and Cash Flow Statement. Businesses may make better decisions with the support of this information, which could result in improved outcomes down the road.

How can one ensure a systematic process through bookkeeping?

This requires tracking client information such as product IDs, order numbers, and contact details. First, keeping track of your sales and profits is one thing; Second is, communicating with clients and keeping track of orders.

What makes Etsy Bookkeeping unique:

1. It measures revenue and costs across various sectors, including sales, expenses, marketing, and delivery.

2. It can assist you in determining which costs contribute to your earnings and which can be reduced or eliminated.

3. It allows us to track progress over time and see how we can improve our business strategies.

Money and Time - Finite Resources

Etsy bookkeeping demands a lot of time and energy, and resources often need more from new business owners. It can be complicated as so many different reports show different figures and rarely match or are comprehensive in what they include.

But there are accounting software programs that can automate many of these processes since managing all of your transactions manually is tiresome and time-consuming; some of them have Etsy integrations. Thus, with this saved money and time, you can use them on critical aspects of the business.

There are many factors that one Etsy owner needs to keep in mind, and these are the ones.

When handling bookkeeping for Etsy, it is advised to balance your accounts once a month. This will help to assure accuracy and provide you with a clear picture of your company's financial situation. 

Regular account reconciliation leads you to find mistakes, identify odd transactions, and ensure that money is handled appropriately. Regularly doing this will enable you to quickly identify any inconsistencies or problems, allowing you to solve them before they worsen.

Tools Used by Etsy businesses for bookkeeping:

A small business owner with little accounting experience might use a free Etsy accounting spreadsheet at an initial stage. Although this is partially correct, utilizing spreadsheets to start bookkeeping and running your Etsy shop has some significant drawbacks.

Let us check them.

Limitations of Etsy bookkeeping with spreadsheets:

1. They're time-consuming: To use Excel to manage your cash flow, you need to set up a system from scratch that you can use regularly. 

2. They need to be corrected: Excel doesn't know what you're using it for or whether your calculations are taking into account all that is necessary, so it's simple to make mistakes.

3. They need to be more scalable: Excel is not intended to manage significant amounts of accounting data, so as your business expands, your files may become sluggish and even crash, increasing your margin for error.

4. They could be more secure: Spreadsheets may be password-protected, but accounting software provides additional layers of security.

Using accounting software from the beginning is the best way to ensure that you cover all reports for the entire course of your company. It is secure, effective, automatic, and scalable. Some of the most commonly used accounting software include QuickBooks and Xero.

QuickBooks - It is one of the most favorable accounting software for small businesses and will be most suited for Etsy Businesses. It's a terrific option for users wishing to manage their accounts and make tax season simple, thanks to a recent Etsy integration. It will automatically import all of your Etsy transactions. The program will classify expenses automatically, and you can specify bank criteria for handling transactions. It helps in tracking sales and gives alerts for payment reminders. This software helps with invoicing, tracking expenses, employee payroll activities, and online payment integration.

Xero - It is also one of the prominent and daily drivers for your accounting and bookkeeping needs. It facilitates business processes by streamlining workflows and automating compliance tasks, which gives you ample time for other matters. It has a system of centralized working in a place that collaborates with various other tools to give a complete bird's eye view of the entire business. It helps in managing clients and employees and automates the processes for both of them. Thus, this software is also highly recommended for Etsy Businesses.

Steps to be followed while executing Etsy bookkeeping activities:

1. Gather financial information: You must collect financial information from various payment platforms to execute bookkeeping tasks for Etsy. These include Square, PayPal, Venmo, Cash App, and Etsy. Each of these needs to be handled like a bank account to keep track of all transactions. In addition, when a person sells items on Etsy, the money is received into their Etsy account before being transferred to their bank account. Accurate bookkeeping procedures depend on a solid understanding of how money is transmitted from sales on these platforms.

2. Track sales and expenses: When doing bookkeeping activities for an Etsy business, it is essential to track sales and expenses to get an accurate picture of your business performance. To better correctly measure their financial situation, business owners should keep records of the goods sold, the cost of the goods sold, the gross profit (before taxes), and the net profit (after taxes). By doing this, it will be better to grasp the company's financial situation and general performance.

3. Download all your financial data: To ensure accuracy and completeness when completing bookkeeping tasks on Etsy, it's crucial to download all your financial information. Downloading the financial data allows for the identification of anomalies and irregularities as well as the tracking of changes over time. Additionally, organizing it will be more straightforward since everything will be in one location after exporting the data.

4. Review and adjust policies as needed: It is essential to review and adjust your bookkeeping policies periodically to ensure that you meet your business goals. Businesses should prioritize recording information necessary for tax and bookkeeping purposes. Still, they can opt to streamline processes to have a better notion of their financial state. With that, they can make informed decisions about their business.

Set of Processes that helps in building a bookkeeping system.

1. Create a system: Setting up a system is the first and most crucial step to excellent bookkeeping. Make sure you have a consistent method of logging and tracking your transactions, whether you utilize software or make your own Excel spreadsheet. You'll be more organized, and managing your money will take less time.

2. Understand financial statements: Ensure you comprehend your financial statements after you've recorded your sales and outlays. This will demonstrate if you are making or losing money and give you information about the general health of your company.

3. Stay up to date with tax laws: One needs to stay updated in the finance and accounting world to keep abreast of tax laws so that one can accurately account for all income and deductions related to your business. A late filing could result in penalties and interest costs, so make sure to file any tax returns on time.

4. Review and adjust policies as needed: It's crucial to analyze and modify your policies if your company is not operating as you had hoped. You could alter how you market your goods, set their prices, or run your company.

5. Track sales and expenses: It's important to track sales and expenses. This will give an accurate picture of how the business is performing. Ensure that you document the following details.

Steps to ensure Etsy Bookkeeping is accurate 

Recording transactions is just the beginning of bookkeeping chores on Etsy. We must put these into practice to ensure that everything is exact and correct:

1. Reconcile Payment Account: Check that all numbers have been correctly reported - you should be able to match your Deposits report (what you have received in your bank account) with the net amounts that have gone through your Payment Account.

2. Reconcile Bank account: This entails ensuring that all of your transactions on the bank statement have been documented and that there are no unforeseen items that require further investigation. Cloud automation software like PayTraQer automatically syncs Etsy transactions into accounting software, keeping your books' reconciliation ready.

3. Savings: Using your current data, estimate the amount that would be required to pay taxes and move it to a savings account. Keeping this money apart from the rest of your company's financial flow will help you avoid an unforeseen tax payment at the end of the year.

4. Future Investment: Start saving money now so that you have an investment fund set up if you have equipment that will need to be replaced in the future or if you want to enhance your equipment to make your firm more efficient.

Specific bookkeeping considerations for Etsy sellers

Being an Etsy seller has a particular set of difficulties in handling finances. To ensure the business succeeds, the following factors should be considered.

Decide your method of accounting.

There are two prominent types of e-commerce accounting: cash and accrual. As a business owner, you need to decide your method of accounting. If cash has involved in business transactions, it is recorded using cash accounting. In essence, we manage our accounts in the same manner. Besides, accrual accounting is a technique of accounting that records transactions as they happen, even if the firm owner still needs to receive payment.

Determine your sales tax nexus 

You may be expected to pay quarterly or monthly sales tax depending on your sales performance income and product. The sales tax nexus is when you live in one state but earn a specific amount of money in another.

Invest in inventory management

Effective inventory management is essential to running a successful online business as a seller. For any vendor, keeping track of your inventory efficiently is essential for business success. For a while, you might be able to get by without an inventory management system, but as you start to increase the number of products you offer and get more repeat business or referrals, it becomes increasingly clear that you need a robust inventory system that can give you data and keep track of a variety of products and variations.

There is no doubt that the success of the Etsy business is significantly influenced by bookkeeping. About 82 % of small businesses fail to achieve their financial goals because they cannot handle finances and cash flows; therefore, Etsy business owners must recognize the accuracy of their accounting as it directly depends on how precise their bookkeeping records are.