Accounting for e-Commerce Businesses

E-commerce, in simpler words, means the process of buying or selling goods or services through the internet or through online platforms. The ever-changing IT industry has compelled accountants to change and adapt to their evolving nature.

Accounting not only involves recording, categorizing, and reconciling transactions into sales, purchases, payments, receipts, journals, etc., but also encompasses interpreting, analyzing, and summarizing financial data into financial statements, budgets, and forecasts that aid in financial decisions.

Accounting for e-commerce businesses is not a simple job. This involves an extensive understanding of the business model, the reconciliation of different reports generated by the e-commerce platform, and accounting for such transactions in a manner that is compliant with laws and regulations.

In our blog today, let us explore the complexity of accounting for e-commerce businesses.

Important Points to Consider While Accounting for e-Commerce Businesses:

• Recognition of Sales:

The tracking and recording of sales revenue is the foundation of the accounting system. Generally, the platforms generate multiple reports that are to be analyzed and summarized to achieve the sales revenue of the business. The order intake, returns, platform charges, shipping charges, etc. are to be examined in detail, and a proper process must be implemented to recognize the revenue at regular interval.

• Tracking of inventory:

Efficient tracking of inventory plays a crucial role in the business. Irregular monitoring of the inventory could cause profit leakage. The e-commerce business involved with goods shall have inventory not only in their warehouse but also at the e-commerce platform’s warehouse. The business model and contracts with the platform must be studied intensely to design an accounting system for its effective tracking.

• Tracking of obsolete stocks and loss during transit:

An accurate accounting process tracks and considers the loss of goods during transit, expired products, and obsolete stocks. The agreement with the platform must be studied, and precise accounting entries must be passed.

• Managing accounts receivable:

The management of accounts receivable is essential for maintaining healthy financials. The realization of sales will not always be equal to the amount received from customers. Exchange fluctuations, commissions, platform charges, subscription charges, withholding of taxes, etc. are some of the items of reconciliation to be considered.

• Expense management:

E-commerce businesses incur various expenses, from advertising, storage, pick & pack fee, shipping & payment gateway charges. A thorough tracking system allows businesses to monitor these expenses, which in turn helps them identify areas where they can cut expenses and improve profitability.

• VAT compliance:

It is imperative to note that orders placed within the UAE attract a VAT levy. However, orders placed overseas might not attract the VAT levy. Therefore, the reports obtained from such platforms must be studied in depth to understand the cross-border or within-border transactions necessary to levy VAT accurately.

• Inter-ledger reconciliations:

While realization of sales may not be the same as sales recognized due to shipping, platform fees, etc. When the expense invoices are received from the e-commerce platform, reconciliation between the sales, accounts receivable, expenses, and accounts payable ledgers is necessary to draw the books of accounts diligently.

• Financial reporting:

The financials consist of the balance sheet, profit and loss account, and cash flow statements, which must be drawn frequently to provide insight into the wellness of the business. This also eases the audit process.

• Compliance with statutory regulations:

Accurate accounting helps in complying with the statutory regulations. It ensures that it meets the provisions of VAT and corporate taxes and is tax compliant. Further, the VAT inputs could be claimed with proper maintenance of the records.

• Analysis of profits:

As already established, accounting for e-commerce businesses requires extensive reconciliations. It is important for businesses to analyze the expenses and cost of the order while reconciling to help them make better decisions. The profitability of different products could be identified and used to make informed decisions.

You can also refer our most read guide on – Common Accounting Mistakes for Dubai Businesses

Therefore, accounting for e-commerce businesses requires extensive research on the industry and a detailed study of contracts and reports. By doing so, one can design the accounting processes in such a way that all areas can be covered and adhered to. It is advisable to reach out to the experts who could assist you with smoothing the accounting process and guide the business in matters of legal compliance.

At BCL Globiz, we bring a wealth of experience to this area. Connect with our expert at Punith@bclglobiz.com.