Almost no matter how big your eBay business grows, you’ll find it relatively easy to use QuickBooks for your eBay bookkeeping. Simply follow these five tips.

Tip #1: Setup a separate bank account for your eBay business

As an organizational tool–just to keep your business’s financial affairs well-organized–you’ll want to setup a separate bank account for your eBay business. Use this bank account for collecting the money you receive and for paying any of the businesses expenses.

Tip #2: Treat PayPal as just another bank account

From Quicken’s perspective, PayPal is just another bank account. So that’s the way you want to treat it.

Note: If you’re using only PayPal as your “business bank account,” that’s okay. But then be sure to pay expenses from and make sales deposits to your PayPal account.

Tip #3: Download PayPal transactions automatically

If your PayPal transaction volumes get large–say you’ve got hundreds of transactions a month–be sure to automatically download the transactions from your PayPal account into QuickBooks.

To automatically download transactions from PayPal into your QuickBooks data file, log on to PayPal, choose the Download History command from the History menu, specify the date range you want for which you want to download transactions, and indicate you want to use the QuickBooks download format.

After you download the PayPal transactions into the a QuickBooks download file, start QuickBooks and choose the File Utilties Import command and, when prompted, indicate you want to import the downloaded PayPal transactions.

Note: The precise procedures you use to export transactions from PayPal and then import the transactions into QuickBooks vary over time and from one version of QuickBooks to the other. You may see one or two differences between the instructions given here and the precise steps you ultimately take.

Tip #4: Be sure to regularly reconcile your bank accounts

You want to regularly reconcile your business bank accounts including the PayPal account. By balancing your bank accounts, you can probably spot and fix dumb data entry mistakes. Account reconciliations let you clean up your financial and accounting information.

Tip #5: Simplify your inventory accounting

The one complicating factor in a eBay business–at least in terms of the accounting–concerns the inventory. The accounting rules say that you can’t simply write off as a deduction the amounts you pay for the inventory until you sell the items in, for example, an eBay auction.

QuickBooks can handle inventory accounting with quite a bit of sophistication. But the usual QuickBooks approach may be overkill with an eBay business where you’re selling one or two of a bunch of different items. Fortunately, you can simplify your QuickBooks inventory accounting for an eBay business if you take a couple of simple steps: First, categorize your inventory purchases as, well, “purchases.”

Second, at the end of each year, do a physical count and valuation of the items you’re holding as inventory. You’re interested in knowing what the inventory you hold at year-end originally cost you.

With the year-end inventory balances and the annual purchases, either you or your accountant will easily be able to calculate the cost of the goods you sell over the course of the year using this formula: Last-years ending inventory + Purchases – This-year’s ending inventory

The preceding formula, by the way, is exactly what the Schedule C Sole Proprietorship tax form does to calculate a business’s cost of goods sold.

Seattle CPA Steve Nelson writes the Frequently Asked S Corp Questions column at the S Corporations Explained web site. His most recent posts were about the problem of Accidentally terminating an S corporation’s S status and Converting an S corporation to a C corporation

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