An accountant in the Shopify ecosystem land doing Accounting for shopify

Accounting For Shopify: Shopify Xero Integration

Want to automate accounting for Shopify, but confused by the integration process? Here are Shopify ecosystem solutions for different size stores, with a focus on Shopify Xero integrations.

In this article:

  • Benefits of Xero accounting for Shopify
  • Shopify Xero accounting solutions for your business
  • The difference between Bold vs A2X for Shopify
  • How to do a Shopify Xero integration with the Bold app

Benefits Of Xero Accounting For Shopify

Spending too much time trying to figure out the backend, and not enough time on the business itself? On the hunt for accounting software to track Shopify profitability? We like Xero accounting for its efficient accounting processes that open a window to your business performance. Here are the benefits of Xero Accounting for Shopify eCommerce:

Advanced Shopify Reporting

Knowledge is power when it comes to reducing costs. Through the Xero chart of accounts, you can track sales and expenses in real-time. Having a dynamic view of changes to all your accounts drives improvement in the areas that are impacting your store the most. Hidden fees? Poor shipping cost calculations? Incorrect sales tax rates? All of these items are monitored so you understand what is affecting your revenue.  

Accounting Workflow Management

As an eCommerce owner in a fast-moving market, spending time organizing your money is the last thing on your mind. A Shopify Xero integration will match an invoice or journal entry to each sales transaction. This helps you see beyond bank deposits by itemizing payments and fees and siphoning them directly to their specified financial accounts. All of this saves time on data entry and optimizes your accounting workflow.

Shopify Taxes

Many Shopify owners improperly record bank deposits as revenue. Doing accounting this way delivers quite a different business picture at tax time because only a percentage of that bank deposit is income. Xero accounting for Shopify is a method of recording all of your incoming and outgoing activity throughout the year. That way you have a copy + paste tax season, from your accounting software to tax forms.

Accountants encountering Shopify Xero accounting issues

Shopify Xero Accounting Solutions For Your Business

As Xero Migration Specialists it would be a disservice to not warn you on the complexity of building out a Shopify Xero ecosystem. Cloud-based tech is developed to serve the needs of target customers, not other markets. Xero and Shopify did not evolve together, therefore the software does not sync perfectly. Go through this section to get an idea of the best integration solutions for your business size.

Understanding The Shopify Xero Integration Process

A basic Shopify Xero integration may still require manual entry of critical accounting. That is not to say the integration is pointless, only that you may not be able to automate everything for free or without additional tech. Here are the accounting functions that store owners want to automate but cannot with the standard Shopify Xero sync:

1. Migrating information from all merchant gateways

Xero will easily migrate Paypal and Shopify payments. This automation has advanced to the point that it will isolate fees when invoices from Shopify come in. However, when you are accepting payments from other merchant gateways (Stripe, Square, Afterpay, etc) you will be at the mercy of Xero’s available options with those specific payment processors. Without an integration, you will need to reconcile payments via your bank deposits.

Manually going into each deposit to organize merchant fees is tedious. Luckily Xero has a way to get around this but it does require advanced knowledge of Xero accounting. You can customize the process for merchants that don’t integrate by creating bank rules for your deposits. Bank rules allow you to allocate a percentage of the payment to its appropriate expense account.  

For Example: You charge 8% sales tax, 9% shipping, and you pay a 1% processing fee per transaction to your merchant. You would set a rule to itemize each deposit from this merchant and push money to the appropriate accounts.

2. Managing high unit inventories

The Shopify Xero Integration does NOT manage inventory for you. Large inventories, with products that have many variations, need to be organized in an inventory management system. We see it like this: 

Your raw materials or items for resale are shipped from multiple suppliers either nationally or internationally. By the time items get to you, they have already accrued COGS expenses. Then, you prepare the product for sale, more COGS accounting. Next, you will need to market your product to your audience potentially across multiple sales channels.

Accountants managing high unit inventories in Shopify

You may have to ship products to another warehouse or make an inventory transfer from one merchant to another. By the time it gets to your customer, you have spent a significant amount of time and money on perfecting your eCommerce pipeline to turn a profit. Calculating your profit is vital to understanding the performance of your store. 

The extent of this information cannot be easily transferred from Shopify to Xero. Integrating a separate system like DEAR or Cin7, will automate the inflow and outflow of inventory and most importantly COGS.

3. Shopify store with multiple currency accounting (MCA)

Accounting for multiple currencies is NOT included in a basic Shopify Xero integration. You will need to purchase an advanced Xero plan, due to the complexity of accounting. Tax, import/export fees, gains and loss from exchange rates, and payment processing are going to be major hurdles for your business.

Your set-up needs to be installed by an accountant, there is no way around it. If you do it yourself just know—this type of task isn’t done by an entry-level accountant. It takes years of experience from an accounting team to support eCommerce businesses selling internationally.

What Is A Shopify Xero Bridge?

A Shopify Xero bridge improves functionality between Shopify and Xero. These platforms were developed independently, so integrating them is much like trying to fit pieces of two different puzzles together. 

Let’s Ledger utilizes an internal custom-coded Shopify Xero bridge. It increases accuracy and saves time on manually importing Shopify reports. Not only does it help with maintaining current accounting needs, but it can also be used to reconcile historical Shopify transactional data, going back years

Without custom coding from a bridge, you are limited to the prescribed automation from Shopify and Xero. Thus, there is going to be more manual work involved in accounting for Shopify. Unless your store serves as passive income from occasional sales, you will likely need enhanced features with a Shopify Xero bridge.

Accountants building a Shopify Xero bridge

Xero Integration By Bold App

Bold is a popular Shopify Xero bridge application. This is a great solution for those who are in the startup phase of selling. When you are still growing your store you don’t need to add anything complex to your Shopify ecosystem. Bold will take care of 30 Shopify orders per month for free. 

Since Bold supports multiple functions for Shopify (upsells, bundles, discounts, etc) it makes perfect sense to tack on accounting. Bold will facilitate daily transactional updates from Shopify to Xero. They automate invoicing for every sale and organize sales data from Shopify to Xero into specifically charted accounts. 

Issues with Bold Shopify Xero Bridge:

  • Recording every sale into your accounting system loads Xero with invoices and journal entries. These need to be organized and continuously managed for clear reporting.
  • Bank statement reconciliations become harder to handle as sales increase. Since Shopify bank statements group sales together you will be searching for matches to each of your sales invoices. That means that invoices need to have detailed notes, in case of error. 
  • Unpaid invoices will NOT be synced to Xero, this is troublesome for eCommerce models that work with pre-orders.

Xero Integration With A2X

Once you hit 20 orders/week, you may consider integrating with A2X.  This Shopify Xero link makes sure that your accounting system is not overloaded with data. It is great for Shopify store owners who have a large daily volume of sales. Why? Instead of attributing a single invoice per sale, A2X will perform batch bank reconciliations against your Shopify settlement statement. 

The Shopify settlement statement shows a consolidated summary of income and expenses. You still have journal entries for payments to your bank account, and they are posted to your Shopify reconciliation account. Those payments are then reconciled with one single statement summary and everything should add up!

Issues with A2X Shopify Xero Bridge:

This Shopify Xero bridge is highly nuanced, requires a good level of accounting and tech knowledge to link the two platforms correctly. Make sure to chart your accounts accurately, otherwise reporting will be way off.

How To Set-up Accounting For Shopify With Bold

Now you understand some of the issues you could run into with the Shopify Xero integration. For those with less than 30 orders/month, let’s jumpstart your accounting for Shopify, utilizing the Bold app. Follow these steps for the Shopify Xero integration with Bold:

Xero Accounting Settings

To set up accounting for Shopify, begin your journey in Xero. If you don’t have a plan sign up for one that fits your needs. We recommend the Growing or the Established plan. Both offer batch reconciliations plus reporting features to track your business performance.

1. Connect Your Business Bank Account, Paypal Account, and Other Merchant Gateway

You need to input your business banking information and integrate merchant providers. First link your bank and Paypal account with these steps:

  • Go to Accounting and select Bank Accounts
  • Search for your Bank, Paypal, and Merchant Gateway
  • Follow the prompts to link into Xero

Note: Linking Paypal is nice because it will separate your Paypal Fees for simple reconciliation. If your merchant gateway does not have a direct link to Xero, then you will need to create special bank rules to account for fees in those bank deposits.

Accountants directing Paypal fees into a computer

2. Entering Account Balances

Each account should have the most up-to-date balances entered into Xero. To enter your opening balances for your linked accounts follow these steps:

  • Go to Accounting and select Advanced
  • Select Conversion Balances 
  • First, enter your conversion date. This is the date you are going to start accounting for Shopify with Xero or the date you are adding any new bank accounts. 
  • Enter conversion balances, (current balances) for all accounts. We recommend manually adding balances versus importing. Always enter positive numbers: a debit for positive balances; a credit for negative balances. Use the closing balance of the day before you start using Xero. 
  • Once completed hit Save.
  • Then go to Reports and run a Balance Sheet for your conversion balance date. Ensure all balances match your ending balances from the day before the integration.
  • Go back into Conversion Balances, Lock the balances and Save.

3. Tax Settings in Xero for Shopify Sales

You will need to have all tax settings inputted before using the Shopify Xero bridge. Add U.S. tax rates in Xero by following these steps. 

  • Go to Accounting and select Advanced
  • Select Tax Settings 
  • Make sure you select On for Sales Tax Lookup, this is for looking up tax rates on individual invoices to confirm tax rates per address.
  • Set your Local, City, and State sales tax rates under one display name “Sales Tax.” Break up each rate into different components.  
  • If you are registered to collect tax in multiple states you will want to fill in those states.

4. Edit Chart of Accounts in Xero for Shopify Ecosystem

For the most part, the default Xero Chart of Accounts is totally fine if you are new to accounting. But the Shopify Xero link with Bold requires the addition of a few accounts to this default. 

Here are the accounts you need to add:

First, dedicate a reconciliation account for your Shopify Payments. This will be a clearing account for orders that get paid through Shopify’s payment software. The account will be reconciled with your bank statements. Create a new account with these steps:

  • Go to Accounting select Chart of Accounts
  • Select Add Account
  • Select Account Type – Current Asset
  • Give it an available coding number. Usually, assets fall under codes 100-199
  • Set the name as Shopify Payments Reconciliation
  • Tax-Exempt 
  • Select Show on Dashboard Watchlist and Enable Payments to this account 

Next, Add a Shipping Charges Account 

  • Go to Accounting select Chart of Accounts
  • Select Add Account
  • Select Account Type -Revenue 
  • Give it an available coding number. Usually, revenue falls under codes 400-499
  • Set the name as Shipping on Sales
  • Sales Tax from your resident state. 
  • Select Show on Dashboard Watchlist and Enable Payments to this account
An accountants gathering gift cards in Shopify Xero Bridge accounting

Lastly, you need to add a gift card liability account. These are customer prepayments, and they are considered a promissory note that you owe the customer, making it separate from revenue. This account tracks how many gift cards have been sold and the amounts unredeemed. 

  • Go to Accounting select Chart of Accounts
  • Select Add Account
  • Select Account Type – Current Liability
  • Give it an available coding number. Usually, liabilities fall under codes 200-299
  • Set the name as Gift Cards
  • Tax-Exempt
  • Select Enable Payments to this account 

Note: This account does not track gift cards that are entered manually into Shopify For those you will need to go into Xero and make a separate journal entry. 

Shopify Account Settings In Bold

Shopify is your next stop on the journey. Download the Bold-Xero widget into Shopify, then log into the Bold application and sync via the instructions. They will prompt you to select the main accounts where money will be going. You will be selecting the accounts we set up, that Shopify will use to map your income and expenses.  

Follow these steps:

  • Link accounts for Shopify: Product Sales, Business Bank Account, Paypal Account, Gift Card Account, Shipping Charges.
  • Payment Accounts: check Export Payout Fees then select the Advertising account
  • Tax Settings
  • Set Customer Export Settings to “Export Customers to Xero”
  • Set Export Settings to “Export daily after midnight.”  

Special Note About Inventory Integration

A big part of accounting for Shopify is inventory costs. You have to keep up with the Cost of Goods Sold (COGS) for every product you sell. This is hard to do with a basic Shopify Xero integration because sales invoices will sync but product specs like cost per item do not. If you have an inventory system already integrated into Shopify, do NOT sync that system to Xero. This is because of the complexity of inventory management systems, it is an overload of data being sent to Xero. 

For Example: you have warehouses in multiple locations and sell across multiple channels, your inventory is circulating so much it can be hard to specify costs to Shopify.

Instead, use your inventory system as the source of truth for how much inventory was sold. Setup the inventory system to talk sales with Shopify, then input COGS journal entries into Xero. 

Accountant herding a bunch of box sheep in the Shopify Xero accounting ecosystem

Accounting For Shopify With Xero

Finding the right Shopify accounting ecosystem for your store will increase visibility into your business. Remember, no Shopify Xero integration is going to be perfectly seamless unless you get custom coding. If you need your accounting for Shopify to be hands-free, our team is happy to take the wheel. We ensure that all the moving parts of your finances are managed with precision and care.

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