E-Commerce accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of an E-Commerce entity or else it is simply the process
of transforming the financial data related to an E-Commerce entity (source documents) into valuable concise financial information. (Financial statements)
There are two types of accounting methods, which can be followed by an E-Commerce
entity. Those are:
Cash Basis –
All the transactions (revenues and expenses) are
recorded when they are actually received or spent.
Accrual basis –
All the transactions are recorded promptly manner
without considering the actual occurrence.
Prerequisites
1. Legal Setup
The nature of the business and your personal preferences will determine the most appropriate legal setup for the company. Whether you choose sole proprietorship or
limited company, they consist of their own pros and cons.
2. Bookkeeping
Many people have misunderstood that accounting and bookkeeping as one function. However, these can be identified as two separate functions, which are closely associated with each other. Bookkeeping is simply recording all the transactions while accounting consists of much more activities. Maintaining error–free records will eventually lead to accurate reporting.
3. Financial Statements
The need for preparation of financial statements, period, and format will be based on the chosen legal setup.
4. VAT registration
Companies with a taxable turnover of more than £85000 (within 12 months) are required to register for VAT. However, a voluntary registration procedure can be used
for the companies, which could not satisfy the threshold requirement.
5. Legal Setup
In order to avoid unnecessary legal interventions every entity has to register for and complete the self-assessment.
Why Accounting is so IMPORTANT?
Practical Implications – Accounting Treatments
Sources of income
1. Foreign Sales
E-Commerce entities sell products across the world since their functioning is not limited by geographical locations.
– Identify the value of the gross sale and merchant fee in foreign currency.
– Identify the exact conversion rate used by the E-commerce platform.
– If there is a difference between foreign sales and the final deposit, record it as a gain or loss on foreign exchange.
2. Gift cards
Initially record the sale value of the gift card in unearned revenue account as a liability because creates a future obligation to deliver products. Once the gift card is
redeemed, it can be recognized in the income statement.
3. Income from maintaining and web hosting
Revenue earned from maintaining or hosting websites should be recognized over the period for which the website is hosted or maintained.
Sources of expenditure
1. Merchant Fee
Most of the platforms charge a percentage from every unit of sale you make. Therefore, the money that appears in your bank account can be identified as the Net Sales Value
rather than Gross Sales Value because the platform has already deducted its fee before transferring your money. As this practice increase the complexity of the accounting
process, keep a record of the gross sales separately, deduct its value from the balance of your bank account, and get the merchant fee.
2. Third-party payment processor
Using a third-party payment processor that enables you to offer more payment options will make bookkeeping task much more difficult. Some well-known third-party
payment processors are as follows: Square, PayPal, Stripe and Stax. These providers generally subtract an interchange fee, which will be paid to the financial services
companies like MasterCard, Visa etc.
Further, they will charge a fee for themselves and for merchant account as well. However, this will only be a minor percentage of your total processing cost. Despite
the fact that cost calculation differs from one provider to the other, there are fourgenerally used pricing approaches.
| Flat rate Pricing | Tiered Pricing | Interchange Plus Pricing | Membership Pricing |
| • Fixed or same rate for every transaction | • Depending on the tier, different transactions are priced at varying rates | • Seperate the charges of credit card comapany and your processor. | • Lower your per transaction fee, in return for a monthly subscription |
3. Inventory Management
Inventory is the lifeblood or the most important element that a business requires for its existence, development or success.
– Purchase Order and Down Payment
As an opening move, you will order some goods from a supplier to add value or to resell. You need to pay a down payment to the supplier, which cannot be identified as
an inventory. It should be recognized as prepaid inventory, which will be a current asset in the balance sheet.
– FOB Shipping Point vs FOB Destination – Title passing
Freight on Board Shipping Point means the ownership and the responsibility of the products transfers from the seller to the buyer at the point of transit even though you
did not actually receive it. The total value should be recognized as “Inventory in Transit” in the balance sheet.
Freight on Board Destination means the ownership and the responsibility or the legal title stays with the supplier till the items arrive in the buyer’s warehouse. Therefore, no
accounting treatment is needed.
– Receiving the Order
– Storage charges
This is simply the cash spent over storage or holding of inventory. For example, Amazon charges a monthly fee for the goods in their fulfilment centres and there is
also an additional charge for the items kept in centres for more than 365 days.
– Cost of Goods Sold
The entire cost of the inventory, which is purchased with the intention of re-selling, is not recognized as an expense at once. Once the item is sold on a cash or credit basis, it
will be identified as the cost of goods sold. Cost of Goods consists of all the direct costs and expenses related to manufacturing a product.
4. Shipping Fee
The pricing strategy used for shipping will always decide the total shipping cost of your organization. Deciding on a pricing strategy, which is appropriate to the company’s financial condition, is an exceptionally important decision.
– Free Shipping
As shipping is not a free service, you can
1. Cover the entire cost by increasing the price of the product. There is no need for an Accounting treatment as the customer bears the cost.
2. Get a partial payment from the customer by increasing the product price and bearing the other half by the company. The charge made by the company
needs to be recorded as shipping cost.
3. Pay the entire shipping cost by the company. This will be a costly decision and the whole amount need to be identified as shipping cost.
– Real-Time Carrier Rates
A convenient and effective pricing strategy, which uses the real-time rates and shipping integrations within the E-commerce platforms. This will provide various shipping
options to the customers and charges will be purely based on their preferences. Usually, E-Commerce platforms will also charge for the transactions.
– Flat rate
This means the shipping cost will not vary with the weight, size or shape of the shipped item.
5. Sales Tax
Sales tax is usually added to the product price and will be borne by the consumer. However, the company is responsible for collecting and paying the tax to the relevant
governing authority.
Some E-commerce platforms transfer the accumulated tax amount to the tax authority while most platforms deposit the tax amount in your bank account. The tax value in
the bank account should be remitted to the authority and should not be identified as revenue.
6. Cyber Security
Companies need to invest in precautions against cyber-attacks. Therefore, depending on the nature of the investment, it will be classified as either capital or as operational
expenses.
7. Cost of Subscription Services
E-commerce entities require the support of subscription services as their transactions operate in a virtual environment. For example Slack for communication if the
employees are hired on remote basis and cloud-based accounting solutions. (Xero,QuickBooks) The Accounting treatment for these expenses depends upon their nature.
Factors to consider for “top notch” Accounting Software
Your accounting software, professional accountant or outsourcing company need to have the ability to address and handle all the E-commerce accounting-related issues.
Therefore, consider the below factors before purchasing, hiring, or outsourcing your accounting function.
