E-commerce Drop Shipping Accounting

November 9, 2020 Fusion CPA

If you're a retailer who is selling products on the internet, you can either choose to pack and ship your goods directly to your customers or hand this part of the process over to a drop-shipping company that ships the products for you. The benefits of using a drop-ship supplier make this method of shipment quite attractive. It requires less capital, allows you to get established and start your business quicker, provides a low overhead cost and gives you the flexibility to operate your company from just about anywhere.

However, if you do decide to drop-ship your goods, there are accounting and tax details you should be aware of. Our team of e-commerce accountants is able to assist with drop-ship accounting and understand the complexities associated with this method of shipping.

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E-commerce Sales Tax Challenges

While drop-shipping looks like an efficient method when you are introduced to the general concept of the process, it does have some tax challenges that should be addressed before you jump right in. When you choose to have a supplier ship your products to your customers, sales tax must be addressed. This isn't extremely complicated if you are registered in the state that you reside in. However, it becomes more complex when the state you are based in is not the state your drop-ship company is operating in. Our e-commerce CPAs and tax specialists have the knowledge and experience to work with this type of situation and provide accurate accounting for your financial records.

E-commerce Accounting for Invoices

The traditional method of selling products involves acquiring inventory from a distributor or manufacturer and then shipping those products off to your customers when they are purchased. When utilizing this process, you'll be invoiced for the products you bought from your distributor. This differs in e-commerce drop-ship accounting.

Instead of receiving an invoice for the products you purchase, you may receive an invoice once your drop-ship company sends a product to a customer. This greatly increases the number of invoices and requires strict coordination between you and your drop-shipping partner to ensure you are properly accounting for each transaction. Our drop-ship accounting specialists understand the functions that are required to make this run smoothly and efficiently with accounting platforms such as Webgility and QuickBooks Online.

Troubles With Overselling

E-commerce inventory management is another factor that plays a crucial role in drop-ship accounting. While it's important for your business to make as many sales as possible, you don't want to run into a problem where you oversell the number of products that are available from your drop-ship supplier. This requires detailed integration of order management accounting between you and the drop-ship company you use. This can become even more complex if you are using multiple drop-ship suppliers to keep up with demand. Providing a proper accounting of inventory sold from various drop- shipping companies is a task our CPAs have a great deal of experiencing streamlining.

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.