5 warning signs you're not doing your Shopify bookkeeping right with QuickBooks Online
On a road trip, your vehicle will let you know if something’s not right by lighting up the dashboard with clear warning signs. When running a business however, it’s not always so easy to identify underlying problems before something goes wrong. If you’re a Shopify seller using QuickBooks Online for your bookkeeping, you may have tried out some integrations and automations in an effort to save time. Unfortunately, a lot of things can go wrong with app integrations and you might not even know there’s a problem. While working with Shopify sellers and helping them set up, organize and streamline their financial systems, we see some common red flags that tell me things aren’t being done correctly. Could you have any of these common warning signs in your QuickBooks too? Keep reading or watch the video linked below and I’ll go over 5 warning signs you’re not doing your Shopify bookkeeping right with QuickBooks Online.
#1 - Net deposits from payment processors
The first warning sign to watch out for is net deposits from payment processors. When we work with Shopify merchants, we see that we have some people using apps to integrate Shopify and QuickBooks Online and some who are not. First, I’m going to talk to those who are not using an integrator app. So you're trying to keep things simple, I get it. You're recording all of your deposits from Shopify and your payment processors as income into your QuickBooks. Unfortunately, what that's doing is just recording one line item in your profit and loss for income. But the reality is that if you look at the Shopify Finances summary, there are multiple line items on that summary, and those line items need to be reflected on your profit and loss. Whether it's Shopify income, returns, refunds, sales taxes collected, shipping income, or gift card transactions - all of that should be shown separately on your profit and loss and on your balance sheet. By recording net deposits, you're not getting a true picture of your profitability.
#2 - Integrations gone wrong
The second warning sign we see with Shopify bookkeeping is integrations gone wrong. Now this time I'm going to talk to those of you who are taking advantage of integrations and automation. Here's how it all starts - You go into Shopify, you look at the Shopify app Store and you find a random integration between Shopify and QuickBooks Online. It may even be the integration from QuickBooks that says it does the integration between Shopify and QuickBooks. Unfortunately, Most of those apps are just going to send over detailed transactions and will end up just doing a giant data dump into your books. Then when you look at your QuickBooks you'll see hundreds, maybe thousands of individual sales receipts that are cluttering your books. There's not really a good way to apply all of these individual transactions to the net deposits that you're getting from your payment processors or to reconcile them in your books. What’s the alternative? The way to fix that is to use an integrator app that's bringing over summarized transactions from Shopify into your QuickBooks, and that allows you to then be able to have a more streamlined way of reconciling the sales made to the deposits received from payment processors.
#3 - Duplicated income
The third warning sign we commonly see is duplicated income. How does this happen? Well, for those of you who are using those integrator apps, your app is recording income into your QuickBooks Online. But then, what you might be doing is going into the bank feeds in QuickBooks Online and recording the amounts received from your payment processors also into income. We see this a lot with PayPal in particular. When this happens you now have income recorded from your app and income recorded from the deposit from the payment processor which ends up duplicating your income. The way to fix that is to start with a good workflow. Understand what the app is doing to your books and how it’s recording income. Then know how you’re going to address the income that's being received from your payment processors and what’s the proper way to record it into your books so that you're not duplicating. Usually, that's done through clearing accounts. Clearing accounts are used as a way to then be able to reconcile the sales made from Shopify to the amount received from your payment processors.
#4 - Clearing account balances that keep growing
The fourth sign that something is wrong is when you see clearing account balances that keep growing. Let's say that you are using those clearing accounts or the app that you're using is recording balances to clearing accounts and suddenly those clearing account balances just keep growing and growing and they're not going away. This is actually related to what I talked about before - that duplicated income. Now you have your integrator app recording transactions into your clearing accounts and those balances keep growing, but you're not recording the deposits that you're receiving from your payment processors against those growing balances in your clearing accounts. You're probably also not recording your payment processor fees. So how do we fix that? Well, we have to have a good workflow for offsetting the deposits received from payment processors against the balances in the clearing accounts.
#5 - Inventory and cost of goods sold
The fifth warning sign that we often see is in inventory and cost of goods sold. Inventory balances are either wrong or they're never updated, and then cost of good sold balances just go up and down, and up and down. The problem with this is that you never have a true picture of your profitability. Then when it comes time to do your taxes, your tax preparer is probably going to point out to you that you need to update your inventory balance and that your cost of good sold isn't correct. When doing the accounting for inventory and recording those balances, there are a lot of different categories that you have to pay attention to. That may mean identifying what goes into inventory and what goes into inventory in transit (or inventory that you haven't received yet). It may be inventory you have paid for, or inventory you haven't paid for yet. It could also be advances to vendors for inventory you haven't received. We have to make sure that all of those different types of transactions are identified so that they can be recorded properly. Then you also have to address landed cost. Landed cost is the entire cost, the full cost that it takes for you to purchase inventory. It may be the inventory cost, it may be freight, it could be duties, and any other fees that you're incurring to receive your inventory. Your landed costs are probably now going up, so you have to have a good process to calculate that either using spreadsheets or using an inventory management system to be able to get a good and accurate amount for landed cost. As I mentioned before, the problems that we end up seeing on the books is that inventory balances are inaccurate and then cost of good sold just goes up and down and it's not giving you a true picture of profitability.
Closing and Resources
Now that I’ve shared 5 warning signs that you’re not doing your Shopify bookkeeping right with QuickBooks Online, do you know if you have these problems in your QuickBooks? If you find some of these problems and need some help, we highly encourage you to work with an experienced Shopify bookkeeping professional. By working with an experienced Shopify bookkeeping professional, they can help to diagnose your books, come up with a plan for cleaning up your books, and then to get you on the right track - whether you want to continue to do the books yourself or whether you want to work with them. If you are ready to work with a trusted and reliable Shopify bookkeeping team, you can use this link to learn more about Mavency to see if we are a good fit for working together.
Before you go, we’d also like to share some free resources with you. If you want to learn more about Shopify bookkeeping, I encourage you to explore our Mavency YouTube channel. Also make sure to get a copy of my free Shopify Bookkeeping Blueprint. For some additional support, come join my Facebook community where you can connect with other Shopify sellers and professional bookkeepers online.