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How to Prepare an Income Statement for an Ecommerce Business

Behind every thriving online store lies a solid understanding of finances—specifically, your income statement.
Think of it as the heartbeat of your business; it not only tracks your revenues and expenses but also helps you make informed decisions that drive growth.
Whether you’re a budding entrepreneur or looking to refine your financial skills, doola Bookkeeping can help you master the art of preparing an income statement for an ecommerce business and set you on the path to sustainable success.
Ready to dive in? Let’s unravel how to craft this crucial document and empower your ecommerce journey!
What Is an Income Statement?
An income statement, also known as a profit and loss statement or P&L, is a financial report that summarizes a business’s revenue, expenses, and profits over a specific period of time.
The main purpose of an income statement is to show a business’s profitability or loss by comparing its revenues against its expenses. This allows business owners to assess their financial health and make informed decisions about their operations.
There are 3 key components to an income statement: revenues, expenses, and net income.
- Revenues: Business’s sources of income, and this would include sales from products or services offered on the website. It may also include revenue from advertising, affiliate partnerships, or any other sources of income related to the business.
- Expenses: all costs incurred in running the business and generating revenue, which may include operational expenses such as website hosting fees, marketing costs, shipping fees, and inventory purchases.
- Net Income: Calculated by subtracting total expenses from total revenues. It represents how much money the company has earned after all necessary expenses have been paid.
An important aspect of an income statement is that it only includes transactions related to operating activities. This means that this report does not include any company investments or one-time events like lawsuits.
Furthermore, an income statement shows results over a specific period of time—usually monthly, quarterly, or annually.
As such, it should be regularly prepared and analyzed so that businesses can make timely adjustments if needed.
How to Prepare an Income Statement for an Ecommerce Business
Preparing an income statement for an ecommerce business may seem daunting at first, but it is necessary to achieve financial stability.
We have therefore provided you with the vital information you need to prepare this document easily and monitor your business’s financial health.
Step 1: Gather Financial Data
The first step in preparing an income statement for an ecommerce business is to gather all the necessary financial data, such as sales reports, transaction records, and bank statements.
This includes sales figures, expenses, and any other relevant financial information for a specific period of time—usually monthly or annual.
The best way to gather this data is to use automated bookkeeping and accounting software, which will track and record this information accurately and in real-time.
If you do not have accounting software, you can manually gather data from your sales records and expense reports.
Step 2: Determine Your Revenue Sources
Once you have gathered all the financial data, it’s crucial to determine your revenue sources, and this would mainly be the sales made through your online store.
However, if you offer additional services, such as paid subscriptions or advertisements on your website, these should also be included as revenue sources.
Step 3: Calculate the Cost of Goods Sold (COGS)
Next, you need to calculate the cost of goods sold (COGS), which includes all the direct costs associated with producing or acquiring the products that were sold during the specified period.
This can include raw materials, packaging supplies, shipping costs, and any other fees paid to third-party platforms like Amazon or Etsy.
For example, if you sell handmade jewelry on your ecommerce website and spend $500 on materials and shipping for a particular month’s sales inventory worth $2000, then COGS would be calculated as follows:
COGS = Beginning Inventory + Purchases – Ending Inventory
= $0 + $500 – $1000
= $500
Step 4: Identify Operating Expenses
Operating expenses are those that are incurred in running your ecommerce business and are not directly related to producing or acquiring goods for sale.
These can include rent/mortgage payments for office space or warehouse storage used for inventory management purposes, employee salaries/wages, advertising and marketing expenses, utilities, website hosting fees, etc.
It’s crucial to accurately identify and list all of your operating expenses in order to get a clear understanding of the overall financial performance of your ecommerce business.
Step 5: Include Other Income and Expenses
In addition to revenue from sales, ecommerce businesses may also have other sources of income, such as interest earned on savings or investments.
On the other hand, there could also be one-off or unexpected expenses that may not fall under the usual operating expenditures.
Make sure to include both positive and negative adjustments so that you get an accurate net profit figure at the end.
Step 6: Calculate Net Profit or Loss
Once you have gathered all the necessary data and listed all sources of income and expenses, you can now calculate your net profit or loss by subtracting total expenses from total revenue.
This is a crucial figure as it indicates the overall profitability of your ecommerce business. A positive number indicates a profit, while a negative number indicates a loss.
Common Challenges in Preparing an Ecommerce Income Statement
For ecommerce businesses, preparing an income statement can be slightly more complicated compared to traditional brick-and-mortar businesses.
This is due to the unique nature of online sales and the various factors that can affect the accuracy of the financial data.
Below are some common challenges that ecommerce business owners may face when preparing an income statement:
⚠️ Tracking Online Sales and Expenses
With various payment methods available for online transactions, such as credit cards, PayPal, or e-wallets, it can be difficult to keep track of all the incoming revenue.
Additionally, since most purchases are made digitally on ecommerce platforms like Shopify or Amazon, extra effort may be required to gather accurate data on expenses related to marketing campaigns or shipping fees.
⚠️ Managing Inventory Costs
Inventory management is another challenge faced by ecommerce businesses when preparing their income statements.
As products are sold directly from warehouses without any in-store sales activity, it can be challenging to calculate inventory costs such as storage fees or fulfillment costs accurately.
⚠️ Including Third-Party Fees
Ecommerce businesses often rely on third-party services to sell their products online; these include payment gateways (e.g., Stripe), fulfillment centers (e.g., Amazon FBA), or advertising platforms (e.g., Google AdWords).
Such services come with additional fees that need to be accounted for in the income statement but may not always be included in bank statements automatically.
⚠️ Accounting for Returns/Refunds
Returns and refunds are inevitable in any business; however, they can significantly impact an ecommerce company’s bottom line if not adequately accounted for.
As ecommerce businesses usually have a return policy in place, it is crucial to include any returns or refunds processed during the statement period in the income statement accurately.
⚠️ Dealing with Exchange Rates
For ecommerce businesses operating globally, fluctuations in exchange rates can significantly impact their financials. It adds another layer of complexity when converting sales and expenses incurred in different currencies.
Best Software for Ecommerce Financial Management
To overcome the common challenges in preparing income statements, ecommerce business owners need to set up a proper bookkeeping and accounting system from the start.
This includes utilizing reliable accounting software, keeping track of all transactions regularly, and adequately categorizing expenses to avoid inaccuracies in the income statement.
One such tool that stands out in the world of ecommerce financial management is doola Bookkeeping, a comprehensive online bookkeeping platform for the ecommerce industry.
With doola, you can easily import transactions from various sources such as bank accounts, credit cards, and PayPal. The software automatically categorizes these transactions into different accounts based on their descriptions. This saves you time from manually inputting each transaction and reduces human error.
Another helpful feature is its ability to create customizable reports, which give you a clear overview of your revenue streams and expenses. With just a few clicks, you can generate reports on income statements, balance sheets, cash flow statements, and more. These reports
Additionally, doola Bookkeeping has integrated tax compliance features that help simplify tax preparation processes for online sellers. Filing taxes becomes less daunting with automatic tax calculations based on current tax laws and regulations for different states.
Here are some ways in which incorporating this vital tool can benefit your business:
Track Profitability
By comparing these figures over time, you’ll be able to identify trends in profitability that can help guide strategic decisions for growth.
Identify Areas for Cost-cutting
By carefully analyzing expenses on your income statement, you can identify any unnecessary or excessive costs that can be reduced. This can help increase your bottom line and improve your overall financial health.
Evaluate Marketing Efforts
As an ecommerce business, you invest a significant amount of resources into marketing and advertising. An income statement helps you track the returns on these investments, allowing you to make data-driven decisions on future marketing strategies.
Utilize The Power of Income Statement for an Ecommerce Business With doola Bookkeeping
If you are wondering how to prepare an income statement and utilize its power for your business, doola Bookkeeping can help.
With its user-friendly interface and advanced features, the software makes preparing an income statement effortless.
One of the key advantages of using doola is that it automates most accounting tasks, saving you time and reducing human error. The software also generates detailed reports that can be easily exported or shared with stakeholders such as investors or lenders.
But doola doesn’t just stop at providing bookkeeping services; they also offer dedicated support from experienced accountants who understand the unique needs of ecommerce businesses.
These professionals work closely with you to ensure accuracy in your income statement preparation and provide valuable insights into improving your financial performance.
With doola’s bookkeeping software and dedicated services by your side, you can confidently utilize the power of income statements for your ecommerce business.
Don’t let your financials hold you back; book a demo today for a more streamlined accounting process.
FAQs
What is an income statement in ecommerce?
An income statement summarizes the revenue, expenses, and profitability of an ecommerce business over a specific time period.
What expenses should be included in an ecommerce income statement?
Operating expenses such as marketing, shipping, website hosting, and payment processor fees should be included.
How often should ecommerce businesses prepare income statements?
Monthly and quarterly statements are common for tracking performance and making strategic decisions.
Can ecommerce platforms provide data for income statements?
Yes, platforms like Shopify, Amazon, or WooCommerce often offer sales and expense reports that can help prepare your income statement.
What are common mistakes ecommerce businesses make with income statements?
Errors include not tracking all revenue streams, underestimating COGS, and neglecting to account for refunds or chargebacks.
How do income statements help with taxes?
They provide a clear breakdown of income and deductible expenses, making tax filing more accurate and efficient.