RESEARCH HORIZONS

Magazine 2015

International Peer-Reviewed Journal

RESEARCH HORIZONS, VOL. 5 JULY 2015

ACCOUNTING FOR E-COMMERCE ENTERPRISES

Megha Somani, Jyoti Bhatia

ABSTRACT

E-Commerce business has been very demanding in the recent times as compared to traditional

businesses. Due to lack of time, discounts, offers and busy schedules the consumers prefer to go for

online marketing as compared to personal purchases by analyzing the products in hand. This has given

a great chance to the business men to convert their activities convenient to their customers by offering

products and services online.

However it has been observed that these businesses are not listed on Exchanges in India nor do they

get financial support from investors. One of the main reason for this is their Accounting patterns which

are very unpredictable and unstable. Even the future of these enterprises is not felt secured by investors

in India.

This paper gives key areas of Accounting transactions which are peculiar to E-Commerce enterprises

through study of financial statements of EBay inc ( listed on NASDAQ).

Key Words : Online trading,FRS 28, E-business, accounting transactions, accounting entriesOPEX system

Introduction

Online business has a very high scope in India. With more and more people turning to smart phones

and tablets, retailers are entering into online business for sale of their products or services.According

to Motilal Oswal Research report on E-commerce, India’s Online market industry is projected to grow

to $ 45 billion by 2020 from $ 2 billion in 2013. Leading consumers of the usage of online products/

services are from Delhi, Gujarat, Rajasthan, Maharashtra and Karnataka. Right from purchase of books,

fashion accessories, electronic appliances, kitchen appliances, shoes, and recently apparels have

been successfully sold online these days. Examples of E-Commerce Enterprises are flipcart.com,

ebay.in, amazon.com, jabong.com, snapdeal,.com selling products whereas makemytrip.com,

yatra.com, bookmyshow.com, shiksha.com, naukri.com deal in services. Though as consumers we

concentrate only on purchases enterprises have a major role to play in accounting these transactions.

Coverage of this article is restricted to B2C (business to consumer).

Business or any transactions conducted directly between a company and consumers who are the

end- users of its products or services. Their features are as follows:

E-tailers who have no physical stores,

Have online presence

Provides a network of sellers and buyers together to sell/purchase goods.

Why E-Commerce enterprises emerge…..

Ecommerce enterprises emerge due to following reasons:

Rightly said, ‘if you don’t occupy e-space other people will.’ Make sure that no-one else gets in

between you and your customer. (In the current scenario, investment in the Internet space is

smart investment)

Better and smoother access to the Internet in current scenario.

Low cost of entry

Low capital investment for software.

Low development costs

Working capital demand for ecommerce firms is lower than off-line competitors.

As the number of online consumers grows, the opportunity to conduct business also increases.

Global reach and adaptability

Raises the stakes for company both in terms of opportunities and risks.

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International Peer-Reviewed Journal

RESEARCH HORIZONS, VOL. 5 JULY 2015

E-COMMERCE ENTREPRENEUR’S BRAIN

In an era where Real estate prizes are continuously rising, Contrast views are given by Entrepreneurs

of E-Commerce business. Following areas are planned into by such entrepreneur.

Low investment & high returns

Dynamic business ideas

Search engine optimization (SEO)-visibility of a website

Customer support system

Payment processing fees

Reviews

Shipping

STEPS TO START AN E-COMMERCE ENTERPRISE

Select and purchase a domain name and design a website.

Track customers choice by observing their clicking patterns

Market their products that appeal to these new consumers.

Provide convenience to consumers in online shopping.

Enhancing customer care, delivery, marketing techniques.

Tie ups with Banks using internet to offer tools like cash management, credit evaluation and links

to the lines of credits

Purchase of Application service providers (ASP) which provide services to multiple users- low

development costs , one stop shopping, lower cost of entry, low capital investment for software.

Current trends on services offered by Online E-Commerce websites:

Free shipping

Check prices online

Next day delivery

Flexibility

SOFTWARE FEATURES USED FOR SUCH BUSINESS

Accept common form of electronic payment and post them into accounting system.

Acceptable form of payments includes - Debit cards, credit cards and electronic transfer of funds.

Ability to accept online submission of expense reports.

Allows to access information and view purchase orders.

Billing and collection assistance for efficient sales and collection.

Strong and reliable internal controls on the system to avoid risk of fraudulent transactions by way

of hacking, cracking and user authentication & controls.

AN ONLINE PURCHASE PROCEDURE PROCEDURE

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International Peer-Reviewed Journal

CORE ACCOUNTING AREAS

RESEARCH HORIZONS, VOL. 5 JULY 2015

Accounting increases the transparency of volatility in earnings. Since this business revolves around

below given three areas, Core accounting areas include:

➘

Cash

Customers

Suppliers

Following financial statements are prepared.

➘

Receipt & Payment A/c

Cash flow statement

Balance Sheet

At the time of finalization of books of accounts, on a periodic basis the Accounting standards such as

Revenue Recognition, accounting for provisions & contingencies, Accounting for Depreciation and

Amortization of assets , Foreign exchange transactions etc should be followed to ensure True & fair

view of the financial position of the company

ADDITIONAL ACCOUNTING AREAS

a. In order to create and manage the ‘KNOWLEDGE INTENSIVE’ ENTERPRISE, intangible assets

require systematic development, maintenance and renewal.

b. Recognize set-up fees of the enterprise.

c. Expenses may include Subscription fees, payment gateway fees, shipping charges, domain

expenses, internet & intranet expenses, legal fees, packaging and courier expenses etc.

d. Preparation of Payroll and purchase ledger is generally outsourced.

e. Calculation of the cash flows (using transactions via banks).

f. Compliance to various laws and procedures of the home country for the time being in force and

hiring costs of professionals and/ or consultants for the same.

STEPS IN ONLINE TRADING AT CUSTOMER AND ENTERPRISE LEVEL AND ITS ACCOUNTING

AT CUSTOMER LEVEL

Step 1: Index Page/ Category page

Step 2: Selection of product

Step 3: Add selected products to the cart

Step 4: Place order: Details of Customer & Delivery Address

Step 5: Order Summary prepared

Step 6: Mode of payment

Step 7: Order Confirmation –Generate Bill

Step 8: Shipment Summary

AT ENTERPRISE LEVEL (after shipment) : As shown below, Inventory allocation, Shipment of order

and Feedback procedure are the main activities of the enterprises.

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International Peer-Reviewed Journal

RESEARCH HORIZONS, VOL. 5 JULY 2015

ACCOUNTING ENTRIES FOR E-COMMERCE ENTERPRISES

Accounting Entries

Purchase of equipment

Equipment A/c

To Cash/Bank A/c

A On recognition of sales,

receiving payment and issue of invoice Cash/ Bank A/c

To Order No. 100

To Profit on Order no. 100

Order No. 100 A/c

To Suppliers A/c

B On recognition of sales and issue of

invoice (Cash on delivery)

Customer A/c

To Suppliers A/c

Receipt of product by customer

Suppliers A/c

To Cash A/c

(

considering return time period)

Expenses incurred

Profit recognized

Expenses A/c

To Cash A/c

Profit on Order no. 100 A/c Dr.

To P & L A/c

For analysis, financial statements of EBAY INC. (LISTED ON NASDAQ) of 2013 and 2014 are

considered.

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International Peer-Reviewed Journal

RESEARCH HORIZONS, VOL. 5 JULY 2015

Following were the results observed :

a. Inventories: NIL

b. Land: NIL

c. Long term receivables: NIL

d. Net income reduces reflecting penetration policy used by the company.

e. Net operating cash flows increases.

Net investing cash flows reduces drastically.

g. Net financing cash flows reduces.

h. High working capital investment as compared to long term fund requirement

Accounts receivable turnover reduces

Limited/ low investment in fixed assets

k. Accounts payable turnover increases.

l. Reduction in shareholders equity to total assets

m. EPS reduces drastically

n. Reduction in Earnings before interest and tax.

CRITICAL INFERENCE ON ACCOUNTING OF E-COMMERCE ENTERPRISES WITH SPECIFIC

REFERENCE TO EBAY

Positive

These enterprises saves on warehouse rent

There is high dependence on Technology by E-Commerce enterprises.

They depend on OPEX system- month to month expenses of rentals ( operating expenditure)

Negative

Enterprises depend low on CAPEX business ( fixed infrastructure) i.e. spends money either to

buy fixed assets or to add to the value of an existing fixed asset

Money coming v/s time taken to complete process documentation/ goods transferred.

High cumulative losses over a period of time.

Since the accounting involves large amount of intangible, it is difficult to evaluate the assets, liabilities

and expenses by EBAY as against trading companies whose detailed financial statements duly audited

by the auditor. Transparency in financial statements is also hampered since there is no clarity in

transactions w.r.t products purchased and sold to customers. Also analysis of financial transactions

using Ratios, trend analysis or other statistical tools may not give accurate results since customers are

not a constant factor here. Nor the products, their brands, quality remains same in such businesses.

Also there is no personal interaction between buyers and sellers which doesnot ensure loyalty in trade

among the parties.

CONCLUSION OR START OF AN E-ERA

In contrast to traditional business, E- business activity has no investment in Land, Stock or long term

receivables. Also cash utilization in investing activity is less. E-business activity favors intangible aspects

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International Peer-Reviewed Journal

RESEARCH HORIZONS, VOL. 5 JULY 2015

like ideas, innovation & relationships. It focuses on Communication, Customers and Complex

relationships to generate Cash Flows. Prudence refers to ensure that assets or income are not overstated,

and liabilities or expenses are not understated.

According to FRS 28 : Many financial statements show in their P&L Account a high cost of digitalisation

in Year 1 but low subsequent marginal costs. Income & expenditure fluctuates due to market forces.

Items such as patents and brands to human resources are not reflected in the Balance sheet unless

they are brought or sold (Book values differ widely in the companies that make acquisition and those

that develop products internally). Human capital, customer loyalty and product quality is difficult to

measure.

Accountants would continue to play an important role in the development of e-business initiatives until

effectively customized and full proof ERP software replaces the need of an accountant on the post

transaction front. The role of a traditional accountant has a great scope into customization and

development of automated accounting software in years to come. Rapid development of e-commerce

created challenges and opportunities for accounting professionals.

References

DiwanParag& Sharma Sunil. (2000). ‘E-Commerce-A Managers Guide to E-Business’; Excel Books,New

Delhi, ISBN 8174462031.

Prof Darrel Ince (2001).‘Introduction to Ecommerce and Distributed Applications’, Developing Distributed

and E-Commerce Applications,Addison-Wesley publishers.

Joseph P.T. (2008). ‘E-Commerce- An Indian Perspective’, PHI Learning Pvt ltd, Delhi.

Saxena M.K. (2004).‘E-commerce Fundamentals & Applications’; Mangal Deep Publications, Jaipur,ISBN

78817594625.

Vargo John & Hunt Ray. (1995). ‘Tele-communications in business- Strategy and applications’, McGraw

Hill, New York, USA Inc.ISBN 9780256197877.

RaiSaritha. (May 18, 2015). ‘Indian E-commerce Firm Flip kart Valued At $15.5 Billion Turning Founders

into Billionaires’; Forbes,155B.

KhanalBhupendra. (June 25, 2015) ‘Why E-Commerce might be winning battle against conventional

offline retailers’,Your story on its -Sachin-Binny-Bansal -Billionaires, pp.7-9.

ET Bureau Delhi.May 15, 2015‘Indian E-tailers Wary of Allowing FDI in e-commerce’.Economic

Times,Economy, Startups & Tech,pp7.

PTI. April 5, 2015 ‘Alibaba eyeing acquisition of Indian e-commerce firms’. Economic Times, International

Business, 8-10.

Dr. Megha S. Somani, Asst. Professor, M. M. K college of Commerce & Economics, Bandra

West, Mumbai

Jyoti Bhatia, Asst. Professor, St. Andrew’s College, Bandra (West), Mumbai

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