Accounting for E-commerce Business - 2 | Financial Analysis and Reporting - B Com PDF Download

Recognition and Measurement of Costs

• To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into: (a) a research phase; and (b) a development phase. 
• As per AS 26, no website arising from research should be recognised. Expenditure on research should be recognised as an expense when it is incurred.
• Expenditure related to development of website (after research phase), once it is established that future economic benefit will be generated from it, will be capitalised to the cost of the website. 
• All costs incurred, including those for development of new websites, after the first website of the company becomes open to the users should be expensed in the period in which they are incurred, 
• An e-commerce company would also incur expenditure on certain items that are similar to entities in other businesses, e.g., expenditure incurred in the acquisition or construction of tangible and intangible assets such as land, buildings, computer hardware, software and knowledge-based content. Since the items of the aforesaid nature are not peculiar only to e- commerce companies, the treatment thereof should be the same as in the case of other businesses.

Rebates, Discounts and Other Sales Incentives 

(a) Where an e-commerce company offers rebates or introductory offers at heavily reduced prices in order to stimulate sales and generate new customers 

• Treatment: The value of such rebates should be reduced from turnover. This treatment is similar to that accorded to trade discounts. 

(b) Where the rebates, discounts and other sal es inc entives are specific in relation to a particular customer  

• Treatment: These 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 

(c) Other forms of rebate or discount, which are general in nature -  

• Treatment: Should be treated as a selling and marketing expense and charged separately in the profit and loss account.  

Points and Loyalty Programmes

Point and loyalty programmes have varied features and may be structured in different ways. In some cases, an e-commerce company may sell points to its business partners, who then issue the same to their customers based on purchases or other actions.

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. 

Equity Based Consideration

Some e-commerce companies use equity-based consideration to fund expenditures as cash is not an available alternative to attract new business relationships, alliances, or supplier agreements.

When a product, service or an asset is acquired in exchange of equity shares by an e-commerce company, it should be recorded as below: 

Where a value is placed by the parties to the transaction in respect of a product, service or asset acquired in exchange of equity shares and the transaction is between unrelated parties 

• Treatment: The said product, service or asset should be recorded at the value so placed, since presumably the said value will represent the fair value thereof.

Where the value is not placed by the parties to the transaction in respect of the product, or service or asset acquired in exchange of equity shares or the transaction is between the related parties.

• 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. 

Accounting for GST in E-Commerce Companies

Under Goods and Service Tax (GST), e-commerce has been identified as “Supply of goods and/or services including digital products over digital or electronic network”.  An e-commerce operator is also defined to include every person who directly or indirectly owns, operates or manages an electronic platform that facilitates the supply of any goods and s erv ices. A person s upply ing goods/services on his own account, however, would not be considered as an Operator.

In an e-commerce business, when goods are purchased / sold in the state wherein the seller operates, Central GST (CGST) and State GST (SGST) come into the picture, When the goods are purchased / sold in the state other than the state in which the seller operates, Integrated GST (IGST) comes into the picture. Credit of CGST on purchase (input service) can be availed by the CGST paid on the sale (output service). Similar is the case with SGST. However, credit of IGST for input service can be availed sequentially by IGST, CGST and then by SGST.

In an e-commerce business, the customer makes payment to the e-commerce company, which is finally remitted to the vendor, as the case may be. In such a case, e-commerce company will be collecting tax (Tac Coiiection at Source (TCS)) at the time of payment to the vendor. However, TCS provisions have been deferred for the time being. Therefore, entry for TCS has not been passed in the ensuing examples and illustrations. 

Accounting under Three Models of E-Commerce Business 

Accounting under Inventory led Model:
Under Inventory Led Model, accounting will not be based on e-commerce transactions. It will account for GST as in the case of a trader company.

(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%.

(b) Inter-state Purchase and Sale: Suppose the same e-commerce company sells different goods e.g. AC in the state of Gujarat by purchasing it from anywhere other than the state of sales. The retail purchase value is ₹ 1,50,000 and sales value is ₹ 1,00,000. In this case only one rate would be applicable i.e. IGST @ 18%
(c) For depositing cash into Cash GST ledgers (separately): On 20th of the month, these debits and credits will be shown in the ledger of e-commerce company and the company will make cash payment to the government after adjusting the credit available as under:

(d) For set-off: For closing of receivable and payable account, following entries are passed:
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. 
Sol: 
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:

(2) Accounting under Open Market Place Model 
An e-commerce operators are facilitating actual suppliers to supply goods through their platform. For this an e-commerce company charge commission and remit the sale amount to the vendor after deducting commission on it. Vendors directly issue the invoice to the customers. However, the payment is received through an e-commerce company.

Let us understand the accounting entries under this model with the help of an example 
An e-commerce company located at Pune sells Laptop to its customers within its own states i.e Maharashtra, The vendor sells at ₹ 1,20,000. He purchases the goods worth ₹1,00,000 from the same state where he is located i.e within Maharashtra. Also a commission of 2% is paid to the e-commerce operator, In this case the GST component 18% will be divided into CGST 9% and SGST @ 9%.

(a) Entry in the books of the vendor: 
(i) For Intrastate Purchase, Sale and Commission

(ii) For Inter-state Purchase, Sale and Commission
When the Vendor purchases the goods worth ₹ 1,00,000 from Gujarat, the following entry would be passed.
(iii) For cash payment to the government after adjusting the credit available
(iv) For payment received from the e-commerce operator
(v) For set off

(b) Entry in the books of E-Commerce Operator The e-commerce is merely acting as an agent between the vendor and the customer, thus he will receive commission.

Illustration: 2 B an E-commerce operator is acting as an agent between the Vendor ‘S’ and Customer ‘P’.
The E commerce operator is located in Mumbai. While the Vendor is in Delhi who sells the Pendrive worth ₹ 1,00,000 to Customer in Gujarat at ₹ 1,50,000. Pendrives are purchased by Vendor S from Vendor H from Kolkata. The E commerce operator charges commission at 2%.
Pass the necessary Journal Entries in the Books of Vendor and E commerce operator, taking into consideration 18% GST.
Sol:

In the books of E-Commerce Operator

 (3) Accounting for Aggregator In case of an aggregator, Reverse Charge (RC) and Forward Charge (FC) provision both are to be followed.

• Reverse Charge : It is the GST paid by the aggregator on behalf of the unregistered driver for the services provided by the unregistered driver to the customer.
• The aim of reverse charge is to bring unorganised sector into the tax umbrella. It also removes the burden of tax compliance from individuals with limited resources (drivers) to large companies with enough resources.
• Forward Charge: It is the GST paid by the aggregator for providing the services i.e. electronic platform to the unregistered driver. In other words, it is GST on the commission charged from the customer.
• 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.

Debit Note by E-commerce Companies

A debit note shall be raised against the vendor in all cases where the goods supplied by it are found defective at any stage and such defective goods shall be sent back to it, All 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.
Following Journal Entry is to be passed
In the Books of an e-commerce company 

Situation 1: If the expenses are borne by the Vendor on the defective goods which are returned 

Situation 2: If the expenses are borne by the amazon on the defective goods which are returned to the Vendor. E-commerce company will claim the expenses from the Vendor 

In the books of the Vendor

Indian Accounting Standard and Its Implication On E-Commerce Companies  

• Ind AS are principle based standards. Therefore, for e-commerce business all Ind AS will apply except those which are sector specific. Ind AS 104 Insurance Contracts could become applicable if any of the product offered in e-commerce business includes insurance contract as defined in Ind AS 104 and within the scope of that Standard.
• For e-commerce business, the major impact on transition to Ind AS will be due to Ind AS 18 Revenue where issues of principal vs. agent, muitipie element transactions with loyalty points, barter transactions etc. arise. These are the areas that cause difference in accounting as per Ind AS and AS. There could be impact due to other Ind AS such as Ind AS 17 where certain arrangements could, in substance, be a lease.
• Under AS, there is no guidance for barter transactions, accounting for loyalty points, accounting for multiple elements of a transaction separately, ind AS 18 has limited guidance. Ind AS 115 provides reasonable level of guidance for these transactions.