If you are planning to set up an e-commerce business in Singapore, you also need to have a good understanding and knowledge of e-commerce accounting. It’s essential to run your business smoothly and remain operational. Also, you will be able to evaluate the financial status of your business accurately if you understand e-commerce accounting.
You do not have to worry if you are new to e-commerce accounting. We are here to show you everything you need to know about e-commerce accounting.
Difference Between E-Commerce Accounting vs Bookkeeping
Although the term accounting may appear similar to bookkeeping, the two terms can not interchange their functions.
Bookkeeping involves the day-to-day accurate recording of every financial transaction and document. The record helps you to stay organized.
On the other hand, accounting goes beyond mere recording of financial transactions. Accounting involves a detailed analysis of recorded financial transactions. You can use this information to produce models and financial reports and forecast your business.
There are two different methods you can consider for e-commerce accounting.
The Two Basic Types of Accounting
Note none of the methods is superior to the other. Instead, make an effort to understand the benefits of each method and choose the one that works best for your kind of business.
The way records are maintained when cash is received or paid is referred to as cash accounting.
For instance, when you get paid for rendered services or sold products, the amount you receive is considered income. When you pay for goods or services, the amount that flows out is considered an expense. This practice allows you to understand your cash flow process.
The table below is an example of a cash accounting record:
|Week 1||+$400 (sale of the vase)||Received||-$60 (shipping cost)||Deducted|
|Week 2||+$322 (sale of beverages)||Received||-$40 (packaging fees)||Deducted|
Bi-weekly income: $622
This accounting method is usually used by community associations, government agencies, small businesses, and non-profit organizations.
Cash accounting works best for businesses that pay bills as soon as they incur and don’t sell on credit.
If you will be dealing with inventory in your business or you intend to operate your business on a large scale, you may decide to use this method of accounting. For accrual accounting, you have to maintain records of expenses and sales revenue as soon as they take place, regardless of whether the account leaves or reaches your business bank account when you are recording the transaction.
The table below is an example of an accrual accounting record:
|Week 1||+$2,400 (sale of sculpture)||Immediate||-$800 (artists’ commission)||Pending|
|Week 2||+$3,000 (sale of gadgets)||Pending||-$1,000 (shipping cost)||Immediate|
Bi-weekly income: $3,600
The company in the above example generated $2,400 from the online sale of sculpture. The amount has been transferred to the bank account of the company. However, the $3,000 cheque for week 2 is yet to be cleared from the bank and may be received in week 3.
The $1000 shipping costs were instantly deducted from the bank account of the company, but the $800 artists’ commission won’t be due till the following month. Hence the money will still be in the company’s bank for some time.
The accrual method is more complicated compared to cash accounting, but the information it provides is more authentic and realistic.
Most accounting firms in Singapore prefer the accrual accounting method because of how it reveals the exact financial status of companies.
Unique Nuances of E-Commerce Accounting
E-commerce accounting is different from traditional accounting. One of the major factors that make e-commerce different from traditional accounting is that e-commerce activities occur around the clock. Here are the two major e-commerce accounting aspects that will help you get accurate figures:
1. Analysing Transactional Data
The transactional data for an e-commerce store is primarily saved on selling channels and not credit cards or bank accounts.
E-commerce businesses usually incur some additional fees on sales, depending on the platforms. For instance, Lazada charges commission fees, transaction fees, and shipping fees. These fees don’t exist in non-e-commerce accounting. These are categorized under merchant fees.
If your bookkeeper isn’t familiar with e-commerce accounting, he may treat the bank transactions just the same way as other industries. For instance, he may simply record “income” when he sees a payment in the business’s bank account from Lazada.
However, the following would be inaccurate because of such an error:
Income and Other Numbers
Some bookkeepers don’t know that deposits reflected in a bank account don’t reflect income numbers. You can view these deposits as “net deposits” gotten from selling channels, which involve other transactions aside from sales. The truth is that almost all the “net deposits” reflected in your bank account are likely to include between 20 to 30 transactions, including chargebacks, sales, sales tax, returns, and shipping cost paid by customers.
The appropriate way to go about this is to get a detailed breakdown of all your sales and other activities. Check the example below to fully understand the concept.
Stephanie received $5,000 in her business bank account in January. Instead of recording $5,000, her skilled bookkeeper checked the backend of her selling channels and discovered that her total gross sales for January were $4,284 when merchant fees had been deducted.
Timing of Transactions
If you record your bank account’s “net deposit”, the record won’t have the right timing of transactions. Kindly check the example below.
Elizabeth sold her PlayStation 4 on the 25th of January, but Shopee didn’t process the payment until the 8th of February. As a result, the date that Elizabeth’s bank account will reflect is 8 February. If her bookkeeper records this exact information, the date of sales transactions in her accounting book won’t be accurate. If such continues to happen for a long period, her sales, liabilities, and expenses will be affected negatively.
2. Understanding Your Inventory and COGs
If you are running an e-commerce business, you need to pay special attention to your inventory and the Cost of Goods Sold (COGS). The acquisition cost of all the items you sell is your COGS.
Any bookkeeper who wants to handle this accounting area must fully understand how it works, particularly for a typical business. In essence, here are the most important points to focus on:
- Accounting for your business’s flow of inventory
- Inventory management and the controls around your major assets
- Calculating merchant fees as part of your expenses instead of COGS
- Bookkeeping principles for inventory management and COGS
- Calculating advanced COGS number for every product SKU
Challenges of E-Commerce Accounting
Complex Inventory Management
Business owners sometimes find it hard to determine the quantity of stock en route to them, in production, awaiting returns, or in a customer’s shopping cart.
Kindly note that it’s your responsibility as a business owner to correctly determine your inventory value right from the stage of production to the sale stage. An increase in the number of SKUs, marketplace, and countries is very likely to make things more confusing.
Sales Tax Liability May be Confusing
The tax rules associated with online sales are complicated and are constantly changing, so it’s advisable to always get updates from the Inland Revenue Authority of Singapore. You are expected to tax Goods and Services Tax (GST) when the goods you sell via your e-commerce platforms deliver locally within Singapore.
Transaction Volume May Affect Your Accounting System
Once your business starts to grow, the volume of transactions that is accompanied by so many data points may become a challenge for you. A smart to handle the challenge would be to batch your transactions. The batching may be done every day, weekly, bi-weekly, or monthly. This provides you with the financial visibility you need without putting too much stress on your accounting system.
A Solution to Your Paperwork Headache
Does paperwork seem too demanding? You can invest in accounting software if you don’t have plenty of time to handle your paperwork and you want your e-commerce business to run smoothly.
While there is various cloud accounting software in the market, it is advisable to use those with balance sheet and profit and loss capabilities.
Alternatively, you can hire our e-commerce accounting experts to handle your paperwork. We reveal the profitability of all lines and channels after we carefully consolidate numbers for each SKU, market, and product group. We will help you identify where your money comes from. Also, we can read documents from any platform, including Lazada, Amazon, and Stripe. We will automatically convert accounting documents obtained from platforms to books. We can help you generate reports and tax returns.
Contact us today to enjoy our outstanding services.