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ACCOUNTING FOR
E-COMMERCE BUSINESS
LEARNING OUTCOMES
Deal with the Accounting Entries for GST in the e-commerce business
CHAPTER OVERVIEW
Definition
Principal to Principal to Aggregator
Principal Agent (P2A)
Advantages of e- (P2P)
commerce
business
Elements of e-
commerce Inventory Open Managed
business Led Model Market Market Place
(ILM) Place Model
Model
Challenges in e-
(OMP)
commerce
business
Revenue Cost
1. INTRODUCTION
Electronic commerce (e-commerce) has become a buzzword for businesses over the past few
years, with increased awareness about the use of computer and communication technologies to
simplify business procedures and increase efficiency. E-commerce is more than a technology, it
is a business model built around the application of information and communication technologies
to cover any aspect of the value chain for products and services. Perhaps the clearest indication
of the growing importance of e-commerce in the global economy is the rapidity with which internet
use has grown and spread during the last decade. The boom in e-commerce also includes
increased use of other media for trade, such as the telephone, television, fax, and electronic
payment.
In recent years e-commerce in India has managed to capture the eye-balls and also the mind-space
of the consumers at large such as never before and with this unprecedented growth, India has
become the second largest market for e-commerce.
2. DEFINITION OF E-COMMERCE
Electronic commerce (e-commerce) means supply of goods and/or services including digital
products over digital or electronic network. In common parlance, e-commerce is the buying and
selling of goods and services on the Internet electronically, especially the World Wide Web and
making payment electronically or via any other mode. Generally, e-commerce may be comprised
of:
• E-tailing or "virtual storefronts" on web sites with online catalogues, sometimes gathered into
a "virtual mail";
• Gathering and use of demographic data through Web contacts;
• Electronic Data Interchange (EDI), the business-to-business exchange of data
• E-mail and e-fax and their use as media for reaching prospective and established customers
(for example, with newsletters) including internet telephony;
• Business-to-business buying and selling;
• The security of business transactions services;
• Any other activity of similar nature
provided on the website, for example, information of the exact status of an order may be provided
to the customer.
Example
Ease due to on-line booking of train tickets and air tickets, trading in stock market, on-line
purchase of movie tickets, on-line auction and shopping, on-line supply chain management, on-
line banking, etc.
If we look at these changes closely, we will find that e-commerce is an enabler and has not
changed the basics of the traditional business.
Commission charges
(iii) Aggregator
Business Consumer
Business
B2B C2B
B2C C2C
Consumer
Example:
This includes purchasing and procurement, supplier management, inventory, etc. like
indiaconstruction.com, clickforsteel.com and seekandsource.com
Example:
Those managed by on-line bookshops, e-mail and information websites like rediff.com, jaldi.com,
indiatimes.com, zipahead.com, and fabmart.com.
Example:
Auction websites and Job search websites like bazee.com and bidorbuy.com.
Example:
razorfinish.com and priceline.com.
expenses relating to such sale like cost of transportation, all kinds of discounts allowed at
the time of sale including cash discounts shall be borne by the vendor.
2. That a debit note shall be raised against the vendor in all cases where the goods supplied
by it are returned to it at any stage and all expenses relating to such sale and sales returned
like cost of transportation, all kinds of discounts allowed at the time of sale including cash
discount shall be borne by the vendor.
3. That during the course of specific event or promotion or any other marketing activity
undertaken by the e-commerce operator, any planned liability on the sale of merchandise or
services shall be communicated to the vendor and a decision on shared liability shall be
taken on case to case basis and shall be communicated to and debited to the account of the
vendor from time to time.
4. That the purchase order or the amended purchase order shall be deemed to have been
accepted by the vendor, if the same is not otherwise communicated to the e-commerce
operator within three common working days from the date of placement of such order.
5. That all goods and/ or services shall be delivered by the vendor in accordance with the time
and delivery terms as contained in the purchase order/ amended purchase order. Else, the
same may be accepted at a discounted price at the discretion of the concerned manager of
the e-commerce operator.
6. That in case of change in price or MRP the vendor should give minimum 15 days-time to the
e-commerce operator.
Treatment:
Under such contracts, companies would recognise revenue on despatch of goods from
the warehouse.
(ii) Sometimes, cost of delivery is built in to the pricing of the product and the cost of
transport is borne by the e-commerce entity; then the risk of delivery and loss is still
with the e-commerce company.
Treatment:
In such cases, it may be appropriate to recognise revenues only once the products are
delivered to the customer.
• Issue 2: Repercussions of Sales Return on Accounting
(i) In practice, an option is given to the customers to return the goods sold. There are
cases when the buyer has a right of return and there is uncertainty about the possibility
of return.
Treatment:
Revenue is not recognised until the shipment has been accepted by the customer or
the goods have been delivered and the time period for rejection has elapsed.
(ii) Based on past experience, there may be cases, when the entity can make a reliable
estimate of the amount of goods that will be returned
Treatment:
It would be appropriate to recognise revenue for the amount that is expected to be
received for items that are not returned (assuming that the other conditions for revenue
recognition are met).
Illustration 1
An e-commerce company purchases traded goods from a wholesaler. It would sell these goods to
the end customer and may or may not carry the associated inventory risk as it purchases goods
from the wholesaler only when it receives orders from the end customer. However, it may bear
the risk of those inventory items that have been returned by the customers. Determine the revenue
recognition for e-commerce company.
Solution
In the given case, the e-commerce company does not seem to bear significant inventory risk,
however, it may bear the following:
1. credit risk
2. is primarily responsible for providing the goods to the customer, i.e., fulfilling the order
2. Refundable fee subject to the fulfilment of certain conditions stipulated in the subscription
agreement.
3. Periodic membership/subscription fee on monthly, quarterly, annual or such other basis.
Their accounting treatment is explained below
(a) Non-refundable fee that entitle a member to use the services of the website by making
payment for all services separately-
♦ The initial membership fee is of the nature of an entrance fee which should be
capitalised and
♦ revenue from rendering of services or supply of products should be recognised on the
basis specified in AS 9.
Example:
Amazon Prime is a facility which is a paid service. In this facility during the seasonal sale
of Amazon, the subscribers of Amazon prime are provided the accessibility to the website
about an hour prior to the other customers.
This facility is available on payment of a subscription or membership fee. The
subscription fee is only for the accessibility of website. It does not include anything for
the products purchased. The products which are purchased are charged separately.
Thus this has two components
1. Towards subscription for the Amazon Prime facility which is to be capitalised
2. The other is towards sale of goods on the website, which is revenue in nature and
should be accounted on the basis of AS 9
(b) Non-refundable fee that entitle a member to use the services of the website indefinitely
without making any further payment for use of services
Their accounting treatment is explained as follows:
♦ The initial fee, in substance, represents wholly or partly an advance payment for
products or services to be provided in future. This implies that it is expected that the
services would be provided on a continuous basis after payment of up-front fee.
Accordingly, up-front membership fee, even if non-refundable, is actually earned as the
products and/or services are delivered and/or rendered over the term of the
arrangement or the expected period of performance.
♦ Consequently, recognition of such non-refundable fee should be generally deferred and
the same should be recognised systematically over the period(s) during which fee is
earned.
Example:
Paid services of Naukri.com
If one opts for the paid services of naukri.com which for a period of one year from
January to December, the service charge is Rs 1200 for a year, then it should be
accounted as follows in case of e-commerce companies
When money is received for service to be provided over a year
Bank A/c Dr. 1,200
To Deferred Revenue Income A/c 1,200
In the month of January when the service is actually provided, revenue should be
recognised to that extent
Deferred Revenue Income A/c Dr. 100
To Revenue A/c 100
(c) Fee that is refundable subject to the fulfilment of certain conditions stipulated in the
subscription agreement
♦ In respect of membership fee that is refundable to members subject to fulfilment of
certain conditions (for example, a stipulated volume of usage within a specified period,
etc.), it is not appropriate to recognise such fees as revenue on receipt thereof since it
is expected that a member would ordinarily fulfil the conditions.
♦ Accordingly, the revenue from such transactions should be recognised when it becomes
reasonably certain that conditions would not be fulfilled. Pending the recognition of
revenue as aforesaid, the amounts received from customers should be credited and
retained in a liability account such as ‘Customers Refundable Fees Account’.
(d) Periodic membership/subscription fees on monthly, quarterly, annual or such other basis
♦ Periodic membership subscriptions paid by members to avail of the services offered by
the website should be recognised as revenue over the period of the subscription, in
accordance with the established principles of accrual accounting.
Example
1. ABC Ltd. is a software business that makes inventory tracking software. A customer
can use ABC Ltd.’s software to track the different products they sell, including quantity
available and the date they should place their next order to restock.ABC Ltd.'s software
is accessed online (Software as a Service, or "SaaS"). Their customers have to come
to the website and login to gain access to the software and see the list of their inventory
products' information.
2. The company charges a monthly subscription fee of ` 6,000 for access to the service.
The customer is charged the first month's ` 6,000 fee as a part of the signup process.
3. Once the customer has paid the ` 6,000, they immediately have access to the software
for the next month.
4. At the start of each new month, ABC Ltd. charges the customer another ` 6,000. ABC
Ltd. will continue to provide access to their software as and when the customer will pay
the monthly fee.
On day one of the customer's subscription, ABC Ltd. has collected ` 6,000. The money is
in their bank account. But the money cannot be recognized as revenue because the service
has not yet been delivered by the Company to the customer. If ABC Ltd. decides tomorrow
to stop providing their inventory tracking software, the customer will have paid ` 6,000 for
30 days of access to the software, and only received one day. To account for this
discrepancy between money the customer has paid and services the company has provided
the above rules are to be applied
When the customer signs up and pays their first month of service, ABC Ltd. needs to account
for that money by placing the balance in a deferred revenue account instead of directly into
revenue. The accounting impact would look something like this:
Debit Credit
Accounts Receivable Dr. 6,000
To Deferred Revenue 6,000
When the month has passed, and the service for that month has been completely delivered,
ABC Ltd. has delivered the service to the customer, which means they can recognize the full
amount of that sale as revenue. The accounting impact would look something like this:
Debit Credit
Deferred Revenue Dr. 6,000
To Revenue 6,000
From a financial reporting standpoint, a business should be able to see at any given time how
much money they have collected from customers for subscription revenue, how much of that
money is still in a deferred revenue account, and how much of that revenue has actually been
recognized because the service has been fully delivered to the customer.
10.2 Merchandising Services
One of the significant issues in accounting by e-commerce companies is whether to recognise
gross amount of revenues and the related cost of sales or to recognise the revenue on net basis,
similar to commission.
The question of gross versus net revenue and cost recognition ordinarily arises in connection with
e-commerce companies that distribute or resell third party products or services. This issue
typically arises in the B2C sites.
In assessing whether revenue should be reported on gross basis with separate recognition of cost
of sales or on net basis, it should be considered whether the e-commerce company:
(a) If the company acts as a principal in the transaction, i.e., it assumes significant risks and
rewards of ownership, such as the risk of loss in collection, delivery, or returns then it is
appropriate to recognise revenues and the related costs on a gross basis.
Example:
Flipkart recognises revenue on gross mercantile system ie. they account for revenue on
gross basis and the corresponding costs of the products
(b) If the company acts as an agent or broker for sale of goods or rendering of services, i.e.,
does not assume significant risks and rewards of ownership; compensation being
commission or fee. In this case, the e-commerce company is merely engaged in providing
the service of bringing the purchaser and the seller together then it would be appropriate to
recognise only the service charges as revenue, similar to commission.
Example:
Magic bricks is a company that deals in real estate sale on internet. They only take quotation
from the seller of the property and approaches the buyer with options of the property
available. They only act as an intermediary between the buyer and the seller. They do not
maintain inventory neither bears any risk and rewards in the property. Thus income source
for this company is commission.
10.2.1 Auctions
Some e-commerce companies host auction sites as part of their on-line activities where users can
purchase or sell goods or services. The e-commerce company ordinarily earns auction revenues
through two sources:
(a) Listing fee is the up-front fee that the e-commerce company receives at the time a seller
registers for a listing to be maintained over a specified period of time. The purchaser is
paying for a service that is delivered over time. It is appropriate that listing fee is recognised
over the period of the contract or arrangement, provided there are no significant outstanding
vendor obligations to be fulfilled and collection of the related receivable is reasonably certain.
Example
OLX deals in the listing of goods and services online to be purchased by the prospective
customer. As a part of listing agreement, OLX charges an upfront fee of say ` 2,000 while
the product is being listed for a period of 10 months on the OLX website. OLX should
recognise the income of listing fee as follows:
Bank A/c Dr. ` 2,000
To Deferred Revenue Income A/c ` 2,000
After the completion of 1 month of listing agreement following entry should be passed
Deferred Revenue Income A/c Dr. ` 200
To Revenue A/c ` 200
(b) Transaction fee is for facilitating the transaction and are usually based on a percentage of
the revenue earned by the seller from the on-line sale. Such fee should be recognised as
revenue by the e-commerce company upon completion of the transaction or at the time when
no further vendor obligations remain to be performed as per the terms with the vendor.
Continuing with the above example of OLX, when the product listed by the seller on the
website is sold, OLX in addition to the listing fee for the month, also charges transaction fee
which is some percentage of the product sold through website.
Say the product sold is worth ` 15,000, Transaction charges will be 2% of ` 15,000 i.e ` 300
` `
Example:
An e-commerce company may agree to host another company’s website and also provide web
maintenance service for a fixed fee of ` 15 lakh for a term of one year and six months, respectively.
If the e-commerce company has evidence that in its recent transactions, it has charged separate
fee for web hosting and web maintenance of ` 12 lakh for one year and ` 6 lakh for six months,
respectively, then revenue in respect of the composite service now being provided should be
recognised in the ratio of 2:1, i.e., ` 10 lakh from web hosting over one year and ` 5 lakh as
revenue from web maintenance services over a period of six months.
In the absence of availability of sufficient company-specific objective evidence of fair values for
the allocation of revenue between various elements, it would be appropriate to defer recognition
of the entire revenue from the contract until
(a) Sufficient company-specific objective evidence comes into existence, or
(b) All elements of the arrangement are delivered, whichever is earlier. In the latter case, the
composite amount is recognised as revenue on delivery of all elements of arrangement.
Associated costs related to such deferred revenues should also be carried forward until they are
capable of being matched against revenues recognised in the financial statements.
10.3 Advertising Services
One of the principal sources of revenue of e-commerce companies is from the sale of banner and
sponsorship advertisements.
• Banner advertisements are usually hosted for a short duration.
• Sponsorship advertising contracts have longer terms than banner advertising contracts and
also involve more service integration.
• High profile promotional sponsorships are typically focused on a particular event, such as
sweepstakes and lotteries. Visitors to the website are ordinarily encouraged to complete the
transaction by clicking on a hypertext link, also known as ‘click-through’.
10.3.1Advertisement for customers with guarantees of minimum number of
impressions or click-throughs
• It is appropriate to recognise revenue on the basis of the number of impressions or ‘click-
throughs’ unless another systematic and rational basis of revenue recognition is more
representative of the services rendered.
• This is in line with Appendix to AS 9 which states that for “advertising agencies, media
commissions will normally be recognised when the related advertisement or commercial
appears before the public and the necessary intimation is received by the agency
• To the extent the minimum guaranteed impressions are not met, recognition of the
corresponding revenue should be postponed until the guaranteed impression levels are
achieved. The advertising revenue should only be recognised when no significant obligations
remain at the end of the period and collection of the resulting receivable is reasonably certain.
Example:
ABC is the online advertising agency which has entered into a contract with the manufacturing
company PQR Ltd for advertisement of shirts manufactured by PQR Ltd.
Example:
ABC is a professional courier which enters into agreement with an online ticket booking website.
Undergoing the contract of advertisement, the space is allocated to the courier company on the
website irrespective of the clicks. i.e it is a banner advertisement.
Here the revenue of the ticket booking is based on the period of display of ad of the courier without
any consideration to the advertisements viewed by the customer.
The contract is for a year and the price of the contract is ` 12,000.
The ticketing company should recognise ` 12,000 as advance received for service to be provided
in future and every month ` 1,000 should be accounted as revenue.
1. When advertisement amount is received
Bank A/c Dr. ` 12,000
To Advance received ` 12,000
2. When advertisement amount is accounted as revenue
Advance received Dr. ` 1,000
To Revenue ` 1,000
Therefore, keeping in view the terms of individual arrangements and the other relevant facts
involved, the e-commerce company should determine the time at which the delivery of the content
is considered to be complete and recognise the corresponding revenue.
Example:
GK classes provide contents of their syllabus online to the students who purchase it. For the
students purchasing the content online a user name and a corresponding password is made
available to the students which can be used by the students for downloading the contents.
Thus, here the content is said to be delivered when the user id and password is made available
to the students.
Example:
An e-commerce company may arrange with a book store to issue reward points to the customers
of the book store based on the minimum volume of purchases made by the customers.
The customers can exchange these points with the e-commerce company for use of the e-
commerce company’s website for a specified period of time. In some cases, the e-commerce
company may itself award the points in order to encourage its members to take actions that will
generate payments from business partners to the company.
With regard to the costs related to incentives under point and loyalty programmes incurred by an
e-commerce company, the following accounting treatment should be adopted:
• Where the incentives under a point and loyalty programme are specific in relation to a
particular customer, the cost of providing the incentives should be shown by way of
deduction from the value of the turnover in the statement of profit and loss of the e-commerce
company. In respect of incentives in kind, an appropriate estimate of the costs thereof should
be made.
• In respect of incentives under a point and loyalty programme which are general in
nature, a general provision therefor should be made in the statement of profit and loss of the
e-commerce company based on an appropriate estimate of the costs itself.
Treatment:
The product, service or asset should be recorded on the following basis, since in case of
transactions between related parties, the value placed may not necessarily represent the
relevant fair value:
(a) Where fair value of the product, service or asset acquired is available, the product,
service or asset should be recorded at the said fair value.
(b) Where fair value of the product, or service or asset is not available but the fair value of
the equity transferred is available, the product, service or asset should be recorded at
the fair value of the equity consideration.
Let us understand the accounting entries under this model with the help of an example
A. Local Purchases and Sales
An e-commerce company located at Pune sells Laptop to its customers within its own
state Maharashtra by purchasing it within the state by paying GST. The retail purchase
value is ` 1,00,000 and sales value is ` 1,20,000. In this case since the goods are
purchased and sold locally, the GST component 18% will be divided into Central GST
(CGST) @ 9% and State GST (SGST) @ 9%.
Journal Entries
INR INR
INR INR
` `
` `
Illustration 1
An e-commerce dealer purchases goods from a dealer ‘P’ worth ` 2,00,000 from the local
state of Maharashtra and sells the same in Delhi for ` 2,50,000. Taking GST into
consideration, pass necessary Journal Entries.
Solution
Since the goods are purchased from same state but are sold in another Union Territory, the
goods are subject to IGST @ 18%. The Journal Entries will be as follows:
INR INR
INR INR
Intra-state Purchase
Intra-state Sale
INR INR
Inter-state Purchases
Inter-state Sales
Suppose the Vendor sells the goods to a customer in Rajasthan at ` 2,00,000, then
(iii) For cash payment to the government after adjusting the credit available
INR INR
To Commission 2,400
To Commission 4,000
To Bank 3,70,048
For set-off
INR INR
Inter-state Purchases by Vendor
Purchases A/c Dr. 1,00,000
IGST Receivable A/c Dr. 18,000
To H 1,18,000
Inter-state Sales by Vendor
P Dr. 1,77,000
To Sales A/c 1,50,000
To IGST Payable A/c 27,000
INR INR
P Dr. 1,77,000
To S 1,77,000
For Commission
S Dr. 3,540
To P 1,77,000
To Bank 1,68,540
For set-off
Example:
UrbanClap provides services of plumbers, electricians, teachers, beauticians etc. UrbanClap
is liable to pay GST and collect it from the customers instead of the unregistered service
providers
Note: It is advisable to make separate entries for Reverse Charge and Forward Charge
for clarity and data for filing of Return on GST.
For example, Oya Cabs enlist drivers to ply their cars. Drivers are providing chauffeur/driving
services to Oya. Oya is the service receiver and pays drivers a share of the fare collected
from passengers.
Oya pays GST on the drivers’ services on reverse charge basis. This becomes cost to Oya
who is later recovered from passengers.
Journal Entries in the Books of E-Commerce Operator
Oya provides service to a customer from Andheri to Churchgate and charges ` 3,294 which
constitutes ` 2,700 plus taxes for the services by the driver and ` 300 plus taxes as commission
of Oya.
INR INR
To Drivers 2,400
(b) Since the Membership fee is received for a year, it recognition should be deferred over
a year.
Bank A/c Dr.
To Advance membership fee
(When the amount is received towards Membership fee)
Advance Membership fee Dr.
To Revenue
(When amount for the month is recognised as revenue)
3. Journal Entries
INR INR
For set-off