How to manage e-commerce accounting in Europe

Whether you plan to re-sell vintage items via an online marketplace, dropship products from abroad, or become an Amazon FBA seller, you need to get one thing right: e-commerce accounting. 

E-commerce accounting tracks your sales, expenses, taxes, and inventory, so you know where your money is going and how much you’re keeping. In the simplest terms, it involves properly categorizing all transactions (sales, expenses, fees, and taxes) for accurate cash flow projections and profit reporting. 

In theory, the above sounds breezy. In practice, many new e-commerce business owners soon realize that doing their books is as straightforward as typing on a keyboard missing the letter E.

Are you in that boat? Here’s a jargon-free primer on how to do e-commerce accounting. 

Main accounting tasks for e-commerce business owners

Accounting is all about proper record-keeping. You need to link all the in-and-out money flows to specific spending (e.g., inventory purchase), earnings (e.g. sold items), or tax payouts (e.g., VAT).  

For income and tax reporting, capture both the sums and supporting documents proving the provenance and destination of funds. Likewise, you’ll need the figures to manage your cash flow aka maintain enough money in reserves to keep running your business.

To simplify things, there are eight accounting tasks European e-commerce business owners must to do stay compliant. 

1. Issue sales invoices

 An e-commerce invoice must include a unique number, date, business information, customer details, an itemized list of what was bought, prices, discounts, taxes, and the total amount due. You’re legally obliged to issue an invoice for each sold product. 

2. Track all expenses  

Common e-commerce operating costs include inventory costs, payment processing fees, shipping, warehousing, marketing, and misc software purchases. Capture all these to calculate monthly operating expenses and measure profitability.

3. Monitor accounts receivable and payable

Accounts receivable indicate all money you’ve invoiced, but not yet received (e.g., due to delays in payment processing or cash withdrawals). Accounts payable represent future payment obligations to suppliers, employees, software, or service providers.

If your account payables are due before your accounts receivables arrive, you’ll go into a negative balance, which may not bode well with your bank. 

4. Stay on top of taxes 

E-commerce business owners must charge buyers VAT on every sale in the EU and then remit it to a local tax authority. If you’re selling to other countries, respective local sales taxes will likely apply.

European VAT rates differ across states and product categories. For easier reporting, register for the VAT One Stop Shop (OSS) scheme, which applies to B2C sales between EU member states (e.g., from an Estonian e-commerce business to Finnish consumers). And if you source goods from outside the EU and sell them to European consumers, the Import One-Stop Shop (IOSS) scheme applies. More on both in a bit! 

5. Record refunds and returns 

To account for these, you’ll need to create a special contra-revenue account, where you deduct a refund and all associated costs from your revenue and then update your inventory records. 

6. Calculate the cost of goods sold (COGS) 

COGS is the total cost of producing (or sourcing) and distributing a product. It includes all costs to sell a product (e.g., sourcing, warehousing, shipping, payment processing fees), but not overhead expenses like employee salaries or advertising.

Knowing your COGS is essential to properly price your goods and maintain a healthy e-commerce profit margin, which is about 30% for retailers.  

7. Reconcile your books

Match all e-commerce sales records against entries from a payment processor and your bank. Ensure you have a matching book record for every transaction—sale, expense, refund, fees, etc. All records should correspond to a cent.

8. Calculate cash flow and profitability 

Cash flow shows how much money your e-commerce business got and spent during the tracked period (e.g., a month). Cash flow can be positive (you’ve made a profit!) or negative (you’ve spent more than you earned). 

Occasional negative cash flow isn’t bad—you’re investing more money to grow or just entered a low season. But if you stay in the red too long, you’ll burn through your cash reserves and have to close your shop.

Online eyewear retailer Warby Parker reported a net loss of $44,150 for 2023 on its cash flow statement. But it’s not a big issue, given the company held over $216,894 in cash assets during the same period.

How to do accounting for e-commerce business in Europe

E-commerce accounting may sound intimidating due to big words like “liabilities”, “account payables”, and “VAT remittance”. 

While it requires some financial literacy and spreadsheet savviness, e-commerce accounting becomes relatively uncomplicated with the right practices and tools.

1. Understand your VAT obligations 

E-commerce business owners must obtain a VAT identification number in their home country or the country of their legal registration before they start selling. If you run an e-commerce business as an autonomo in Spain, you’ll need to register with the Spanish Tax Agency. But if you incorporate a company as an Estonian e-resident, you’ll register with Estonian authorities. To get your VAT number, you’ll need to have a legal entity established and open a business bank account. Estonian VAT numbers are then issued within 3-5 business days.

Afterward, you’ll need to include your VAT number on all customer invoices and charge appropriate VAT rates for sold goods. These vary by country and product type. Here are some examples. 

E-commerce VAT rates in Europe

Pro tip: B2B cross-border sales are subject to 0% VAT. If you’re selling goods to another registered legal entity in the EU, you don’t pay any VAT thanks to the intra-community supplies of goods rule. For example, if a Spanish business buys goods from an Estonian business no VAT applies. 

Now comes the tricky part—charging the correct VAT amount to customers in different EU countries. If you made a sale to a German B2C buyer (a regular consumer) and shipped your stock from Estonia, you’ll have to collect 19%. But if you sell to Estonian shoppers and ship locally, a 22% rate applies.

To streamline this process, register for the One-Stop-Shop (OSS) system for centralized tax reporting. It simplifies filings for 95% of sellers. OSS declarations are filed quarterly, while domestic VAT tax returns may be due monthly, quarterly, or annually, depending on your location. 

If you run a dropshipping or an import-based business (meaning you sell goods that originate from outside of the EU to local B2C shoppers), you’ll have to register for an Import One-Stop Shop (IOSS), created specifically for these scenarios. It simplifies VAT reporting for goods, valued under €150. 

To better understand how both schemes work, consult with an e-commerce accountant. 

2. Decide on your accounting method

There are two main accounting methods cash-basis and accrual. 

Cash-basis accounting records income and expenses only when money actually arrives or leaves your account. Say, you sold €100 worth of candles on the 1st. You also paid €25 for shipping on the same day and ordered €50 worth of materials. But the money arrived in your bank account only on the 5th. 

Your bookkeeping entry will look like this:

Many small e-commerce business owners start with a cash-basis accounting method (if it’s allowed in their jurisdiction). But later switch to accrual accounting because it better reflects the state of their finances. 

Accrual accounting records income and expenses as they happen, regardless of when cash is received or paid. Using the same example with candles, here’s how an accrual accounting entry would look like: 

Accrual accounting gives a better representation of business cash flow, showing both available assets and liabilities on your balance sheet. For larger businesses, it’s also required under most accounting standards. So prepare to make a switch if your e-commerce business grows. 

3. Open a business bank account 

You must have a separate business bank account if you run an e-commerce business (even if you operate as a self-employed person).

When shopping around, look for banks with a convenient online interface (you’ll have to export your statements a lot!), integrations with popular payment processors (e.g., Stripe, PayPal, etc), and affordable fees for processing a high volume of low-value transactions. 

Digital banks usually charge lower account fees and offer a better UX. Popular ones include Wise and Revolut. Both will also hook you up with a free business debit card. Wise also offers integrated payment processing (similar to Stripe). 

💡Xolo now offers a business bank account and debit card within your subscription. Learn more →

4. Choose an appropriate accounting system 

The best investment you can make for your e-commerce business is to get a convenient accounting app. You’ll save hundreds of hours on mentally-taxing tasks like transaction categorization, expense reporting, account reconciliation, and invoicing. 

Features to look for in an e-commerce accounting app: 

• E-commerce platform integrations. Ability to link sales and transactional data from popular platforms like Amazon, Shopify, Etsy, eBay, and others. 
• Account reconciliation. The app must match transactions from all sales channels with bank deposits.
• Multi-currency support — there are 8 currencies in the EU and many more around the globe. You don’t want to struggle with manual conversions. 
• Tax management. VAT calculations for different sales scenarios and easy data exports for local VAT reporting and OSS submissions. 
• Expense capture to store all relevant receipts and documents around how your business spends the money. 
• Financial reports. You’ll want to see stats like total revenue, expenses, and cash flow on a rotating basis, plus generate more in-depth reports like a profit and loss (P&L) statement or balance sheet. 

The best e-commerce account tools automate repetitive, attention-demanding tasks like sales data capture, discounts application, expense categorization, COGS calculation, and account payable management among others. 

5. Review your financials regularly 

Novice e-commerce operators mostly obsess about their revenue—the total value of goods sold. But it’s only one metric, which can be deceptive because it doesn’t tell you how much you’re spending to make those sales. 

Let's say, your September revenue was €10K. Yay 🥳. But your COGS was €8K and you also spent another €3K on miscellaneous overheads, so you’ve got a negative profit of €1K. Yikes! 😱

To get the full picture, track and analyze a bevy of e-commerce metrics:

• Gross Merchandise Value (GMV) — total value of all products sold in your online store. 
• Cash flow — the amounts entering and leaving your business every week, month, and quarter. 
• COSG — all expenses, associated with producing/sourcing and shipping your merchandise. 
• Gross profit margin — the difference between revenue and COGS, expressed in a percentage equivalent that indicates your profitability. The higher—the better! 
• Profit — the amount you keep in the bank after deducting all expenses from revenue. 
• Average order value (AOV) — how much customers spend with your store on average.
• Refund and return rate — the percentage of orders that arrive back to your business. 

Do I need an accountant to manage my e-commerce business? 

In Estonia, you’re not obliged to have an e-commerce accountant. But it’s a very good idea to hire one nonetheless. 

E-commerce operations mean you’ll have a high volume of low-value transactions. So record accuracy is paramount. Likewise, there’s the issue of proper VAT/sales tax remittance.  Correcting records post-submission or ordering a retrospective accounting revision is way more expensive than submitting immaculate reports. 

So it’s best to have an accounting professional by your side to help you organize your books, taxation advice, and handle more advanced financial analysis tasks. 

Why start or move your e-commerce business to Estonia 

If you want to start selling in the EU, Estonia serves as an excellent gateway to this €958 billion market. Thanks to the e-Residency program, you can start and run an e-commerce business fully online in a matter of weeks. Thanks to an advanced e-Government ecosystem and favorable taxation, you’d face much less red tape than in other EU jurisdictions.  

And Xolo makes the market entry even more seamless. Our service marries intuitive automation of common e-commerce bookkeeping tasks and tax reporting with ad-hoc accounting advisory. Get everything you need to start an e-commerce business with an Estonian company — legal entity incorporation, business banking services, online accounting tools, and flexible support for different e-commerce business models. 

Discover Xolo e-commerce!