Basic Accounting for Etsy Shops: How to Track Sales, Deductions, and Prepare Invoices

Running an Etsy shop is half art and half admin—and on some days it feels like 60% admin. The upside: you don’t need fancy software or an accounting degree to stay on top of things. A small, repeatable system will tell you what’s selling, what it truly costs, and what you actually keep. That clarity is the quiet superpower behind sustainable creative businesses.

Why Etsy Sellers Need to Understand Basic Accounting

Accounting isn’t just about April taxes; it’s about visibility right now. With clean numbers, you can answer questions that shape every decision:

• Am I profitable per order? Gross sales are misleading without fees, shipping, packaging, and ads in the picture.
• What deserves my time? A “best-seller” can still be a margin trap if materials or postage nibble it to death.
• Can I scale without guesswork? Solid books help you price confidently, restock the winners, and qualify for financing if you ever need it.
• Less stress at filing time. Organized records turn tax season from chaos into… paperwork (which is better).

Think of it this way: if your numbers are foggy, you’re flying a plane with a smudged windshield.

How to Track Your Etsy Sales and Income Accurately

1) Choose a bookkeeping method—and keep it steady

• Cash basis: Record money when it hits or leaves your bank. Simple, great for most micro shops.
• Accrual basis: Record sales when earned and costs when incurred. Sharper monthly margins, helpful with inventory or wholesale cycles.

Not sure? Start cash. If complexity grows, you can switch later.

2) Build a lightweight chart of accounts

Just enough buckets to sort every dollar, not so many that you drown in them.

Income

• Product sales (gross)
• Shipping income
• Discounts & coupons (as contra-income)

Cost of Goods Sold (COGS)

• Materials & components
• Direct labor (if you pay helpers)
• Product-specific packaging

Operating Expenses

• Etsy fees & payment processing
• Shipping labels & postage
• Ads/Promoted listings
• Software & subscriptions
• Office supplies
• Equipment (larger items may be assets)
• Professional fees (accountant, legal)
• Bank/payment fees
• Travel/market booths (if applicable)

Taxes payable

• Sales tax/VAT collected (a liability until remitted)

3) Know where the truth lives

• Etsy reports: Orders, fees, ads, shipping labels—download the monthly CSVs.
• Bank/payment processor: Reconcile payouts to Etsy’s numbers.
• Receipts: Snap photos, save PDFs, file by month. Future-you will be grateful.

4) Record revenue correctly (the margin saver)

Always separate gross sales from net deposits.

• Gross sales = item totals + shipping charged + gift wrap.
• Deductions = platform & transaction fees, processing fees, ads, Etsy shipping labels, refunds.
• Net payout = what arrives in your bank.

If you only book deposits, fees disappear and your margins look artificially shiny. Tempting, but nope.

5) Handle inventory and COGS without turning into a warehouse manager

Use a simple periodic approach:

• Track material purchases during the month.
• Do a quick month-end count (even a spot check of best-sellers).
• COGS = Beginning inventory + Purchases − Ending inventory.

Make simple materials lists per product (e.g., candle wax, wick, scent oil). It’s a sanity check for pricing.

6) Sales tax and VAT: the short, honest version

• Marketplace laws often mean Etsy collects/remits sales tax for certain locations. That doesn’t always eliminate registrations or filings in your jurisdiction.
• Selling B2B in the EU/UK (or anywhere with VAT/GST)? Read your rules on tax invoices and registration numbers. When in doubt, ask a local pro. It’s cheaper than an audit.

7) Refunds, cancellations, chargebacks

Record them clearly:

• Book the refund against income.
• Reverse fees if Etsy returns them; if not, keep the non-refunded fee as an expense.
• Tag the order ID so your reports still reconcile.

8) Prefer software? Great. Prefer spreadsheets? Also great.

If you’re spreadsheeting, keep three tabs: Sales, Fees & Expenses, Inventory.

• Sales: Date, Order ID, Product, Qty, Gross Item Total, Shipping Charged, Discount, Tax Collected, Gross Revenue (calc), Refunds/Adj, Notes.
• Fees & Expenses: Date, Vendor (Etsy/Ship/Ads/Supplier), Category, Amount, Order ID (if tied), Notes.
• Inventory: SKU, Item/Material, Unit Cost, Units In, Units Out, On Hand, Reorder Level.

9) A mini month-end close (90 minutes, give or take)

1. Download Etsy CSVs (orders, fees, ads, shipping labels).
2. Categorize expenses.
3. Reconcile bank/processor deposits to Etsy payouts.
4. Update inventory purchases; quick spot count of fast movers.
5. Review a one-page dashboard:
   • Revenue (gross), COGS, Fees, Net profit
   • Top 5 products by profit (not just revenue)
   • ROAS for ads (is it pulling its weight?)
6. File your receipts to the month’s folder. Done. Tea break.

Do Etsy Sellers Need to Send Invoices? When and Why It Matters

For standard Etsy checkouts, buyers receive an Etsy receipt—usually enough for consumer purchases. You switch to a formal invoice when:

• A customer (often a business) asks for one for their books or tax claim.
• You do custom projects, deposits, or milestone payments.
• You take off-Etsy orders (wholesale, market preorders) and want clean records aligned with your inventory.
• Your local rules require tax invoices (common in VAT/GST systems).

Practical move: keep branded invoice templates handy. For one-off custom orders, spin up a quick invoice; for corporate or wholesale buyers, business invoice templates looks professional and captures extra compliance fields (VAT ID, PO number, terms).

What to Include in an Etsy Seller Invoice (Template Breakdown)

Include the essentials—tidy, transparent, complete:

1. Your details: Shop name, legal name (if different), address, email, phone, site/Etsy URL.
2. Buyer details: Name, company (if any), address, email.
3. Invoice metadata: Unique number (sequential), issue date, due date, currency.
4. Line items: Description, SKU (optional), quantity, unit price, line total.
5. Discounts: Shown separately so pricing logic stays clear.
6. Shipping & handling: Method and charge if applicable.
7. Taxes: Sales tax/VAT rate and amount; include your tax/VAT ID if required.
8. Totals: Subtotal, tax, shipping, grand total, payments received, balance due.
9. Payment terms: Net 7/14/30, late fees (if any), accepted methods.
10. Notes: Custom details, lead times, return/refund policy, purchase order # (for B2B).

A couple of admin niceties that save headaches later:

• Numbering: Use a simple sequence like 2025-1001, 2025-1002… and never reuse numbers.
• Branding: Add your logo and colors when exporting to PDF—it signals “I run a real shop.”
• Recordkeeping: Save a copy, log the invoice number/amount/status, and (if tied to an Etsy order) reference the Order ID so everything connects.

Putting it all together

• Record gross sales and all deductions (fees, labels, ads) separately—so margins aren’t a mirage.
• Reconcile Etsy payouts monthly. Small habit, huge leverage.
• Keep a minimalist chart of accounts and a quick month-end close.
• Issue invoices for B2B, customs, deposits, or whenever someone asks. Keep both a quick invoice and a robust business invoice template at the ready, and your future self will clap.