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20

ACCOUNTING FOR
E-COMMERCE BUSINESS
LEARNING OUTCOMES

After studying this chapter, you would be able to:


 Define e-commerce business and understand the characteristics and
technicalities of such type of business

 Appreciate the advantages and elements of e-commerce business

 Explain the challenges faced by the e-commerce companies

 Examine the various business models of e-commerce business

 Deal with recognition of revenues earned in the e-commerce business and


timings for its recognition.

 Measure the costs specifically related to e-commerce business

 Deal with the Accounting Entries for GST in the e-commerce business

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20.2 FINANCIAL REPORTING

CHAPTER OVERVIEW

Accounting for E-commerce Companies

E-commerce business Various models Accounting

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

Business to Business to Consumer to Consumer to


Business Consumer Consumer (C2C) Business (C2B)
(B2B) (B2C)

Revenue Cost

Sale of Goods Rendering of Services


Cost of setting the Operational
business or website cost

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.3

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

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20.4 FINANCIAL REPORTING

3. ADVANTAGES OF E-COMMERCE BUSINESS


E-commerce has been the catalyst for the enhancements and greater efficiency in areas that
include:
1. Selling products and processing orders;
2. Tracking customers’ buying habits;
3. Presenting customers and prospects with product catalogues;
4. Presenting financial statements to investors;
5. Providing customers with inventory availability information;
6. Providing message databases for off-site sales people and staff; and
7. Processing purchase orders and invoice from suppliers.

4. ELEMENTS OF E-COMMERCE TRANSACTION


In an e-commerce transaction, all the traditional elements of commerce exist though with some
differences. The following elements are ordinarily present in an e-commerce transaction:
1. A product or service;
2. A place, namely, a website, that displays the products/services and where a business
transaction takes place;
3. A way for the people to visit the place (website);
4. A way to accept orders, e.g., an on-line form;
5. A way to accept money – normally through credit cards. Alternatively, the companies may
use more traditional billing techniques either on-line or through the mail or cash on delivery;
6. A facility to ship products to customers (often, outsourced). In the case of software and
information, the product can be transferred over the Web through a file download mechanism;
7. A way to accept rejected/returned goods and services;
8. A way to handle warrantee claims, if necessary; and
9. A way to provide customer service [often through e-mail, on-line forms, on-line knowledge
bases and frequently asked questions (FAQs)].
These elements are not exhaustive considering the continuous changes in the domain of e-
commerce. Apart from the above elements of e-commerce transactions, certain facilities are also

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.5

provided on the website, for example, information of the exact status of an order may be provided
to the customer.

5. CHALLENGES IN E-COMMERCE BUSINESS


(i) Customer mindset
(ii) High cash-on-delivery (COD)
(iii) Payment Gateways have a failure rate and also has a cost associated
(iv) Internet connectivity
(v) Reachability
(vi) Poor Courier Services
(vii) Policy Related Issues
(viii) Aggressive Pricing Strategies
(ix) Heavy Discounts
(x) Free Delivery
(xi) High Commissions to vendors
(xii) Poor Logistics & Supply Chain
(xiii) Storage of goods
(xiv) High Cost of Customer Acquisition
(xv) Return of Goods
(xvi) High technical barriers to market entry

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20.6 FINANCIAL REPORTING

(xvii) Low level of digital literacy


(xviii) Regulatory Challenges–Taxation issues
Instead of above challenges, e-commerce has changed the way the organizations operated in
their traditional business environments. E-commerce implementations are often coupled with
reengineering of traditional business processes by examining how business should be conducted
by taking the advantage of the technology. Specifically, e-commerce replaces the traditional
manual business processes with their automated electronic equivalents to accelerate ordering,
delivery and payment procedures.

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.

6. VARIOUS BUSINESS MODELS FOR E-COMMERCE


In the most basic sense, a business model is the method of doing business by which an organization
can sustain itself ie., generate revenue. The need for e-commerce companies to adopt and innovate
in the light of technological challenges and rising competition, has led to the evolution of multiple
business models resulting into a very crowded and complex market.
Taking a holistic view of industry trends, with progressive liberalizations in the FDI policy, evolution
of tax laws governing digital channels and advent of secure technology, e-commerce is poised for
an exciting period of growth in times to come with simpler and legally compliant business structures.
6.1 Pictorial view of various E-Commerce Models
(i) Principal to Principal [P2P]

Example: Urban ladder

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.7

(ii) Principal to Agents [P2A]


Group

Site Owner Customer


Vendor

Commission charges

Example: Flipkart, Snapdeal, Amazon

(iii) Aggregator

Example: Trivago.com, Ola Cabs, Uber etc.

6.2 Pictorial View of Various Principal to Agent E-Commerce Models


• Various models adopted by e-commerce players include – managed marketplace model
(MMP), open market place model (OMM), inventory led model, social networks, aggregator
model etc. and many more hybrid models still developing.
• MMP is the most prevalent and preferred business model in the online retailing space. Under
MMP, fast moving goods are held on consignment basis wherein the e-tailor typically controls
order fulfillment and exert pricing through complex structures falling in regulatory grey area.
• On the other hand, the OMM, wherein no inventory is maintained by online retailer and goods
are directly shipped by reseller to customer, is considered to be the most compliant option from
the FDI standpoint.

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20.8 FINANCIAL REPORTING

(a) Inventory Led Model


Salient features-
• Inventory maintained by online retailer
• Superior quality assurance to consumers
• Timely delivery to consumers as stocks are maintained and monitored
• Capital Intensive model

(b) Open Market Place Model (OMP)


Salient features
• Product is directly shipped by re-seller to customer
• No influence on pricing
• No inventory maintained by the online retailer
• Prone to quality and delivery issues
• Minimal capital investment required
• As regulations currently stand, OMP is seen to be the most compliant from the FDI standpoint
Example: eBay

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.9

(c) Managed Market Place (MMP)


Salient features-
• Marketplace typically controls fulfilment
• Fast moving goods held on consignment
• Indirect influence on pricing and discounts
• Some products are also sold at marketplace by sellers
• Lower Inventory and warehousing cost
• Owing to the nascence of the ecosystem, companies typically look to MMP model to
control customer experience
• Through this model, portals are seen to exert indirect pricing control through complex
structures falling within regulatory grey area
Example: Amazon

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20.10 FINANCIAL REPORTING

7. CLASSIFICATION OF E-COMMERCE WEBSITES


Business originating from….

Business Consumer
Business
B2B C2B
B2C C2C

Consumer

Various categories of e-commerce websites are as follows:


7.1 Business to Business (B2B) E-commerce sites
B2B sites link different businesses or different parts of a business. Transactions on these sites
take place between industrial manufacturers, wholesalers or retailers. Special features of these
transactions are high volumes per customer, lesser number of customers, secured payment
systems, privacy of information, etc.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.11

Example:
This includes purchasing and procurement, supplier management, inventory, etc. like
indiaconstruction.com, clickforsteel.com and seekandsource.com

7.2 Business- to- Consumer (B2C) E-commerce sites


B2C sites sell products or services directly to consumers. A large number of e-commerce
companies fall in this category. Transactions on these websites are characterised by low volumes
per consumer and a large number of consumers.

Example:
Those managed by on-line bookshops, e-mail and information websites like rediff.com, jaldi.com,
indiatimes.com, zipahead.com, and fabmart.com.

7.3 Consumer - to- Consumer (C2C) E-commerce sites


C2C sites enable consumers to buy and sell from each other through auction or other similar sites.
Exchanges involve transactions between and among consumers. These exchanges can include
third-party involvement.

Example:
Auction websites and Job search websites like bazee.com and bidorbuy.com.

7.4 Consumer- to- Business (C2B) E-commerce sites


C2B sites enable consumers to set prices and business enterprises bid to offer products and
services. Consumers can band together to present themselves as a buyer group in a consumer-
to-business (C2B) relationship. These groups may be economically motivated, as with demand
aggregators, or socially oriented, as with cause related advocacy groups.

Example:
razorfinish.com and priceline.com.

8. TERMS OF AGREEMENT BETWEEN THE VENDORS AND


THE E-COMMERCE OPERATORS
1. That 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

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20.12 FINANCIAL REPORTING

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.

9. REVENUE RECOGNITION FOR E COMMERCE


COMPANIES
The main sources of revenue of e-commerce companies presently include:
• Membership and subscription;
• Merchandising activities;
• Advertising services; and
• Other services like web-hosting, content selling, etc.
The basic principles of revenue recognition as set out in AS 9, ‘Revenue Recognition’, apply to
recognition of revenue for the e commerce companies.
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the
ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the
use by others of enterprise resources yielding interest, royalties and dividends.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.13

9.1 Transaction involving Sale of Goods


Revenue is recognised when performance is achieved ie. when the following conditions have been
fulfilled:
• the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
• No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
9.2 Transaction involving Provision of Services
Revenue is recognised and measured
• either under the completed service contract method or under the proportionate completion
method, whichever relates the revenue to the work accomplished.
• Such performance should be regarded as being achieved when no significant uncertainty
exists regarding the amount of the consideration that will be derived from rendering the
services.
9.3 When does the ‘risk and rewards’ get transferred to the customer?
E-Commerce companies often are valued based on revenue multiples and hence, it is one of their
most important metrics. The accounting issue involved here is primarily to determine timing of
revenue recognition and presentation (gross vs. net). Most of the e-commerce companies either
accept payments online through credit cards, internet banking, debit cards or cash on delivery.
Additionally, in most of these companies, delivery is the responsibility of the company and hence,
it becomes important to determine on when does the ‘risk and rewards’ get transferred to the
customer.
Note: This issue is relevant for both B2C (Business to Consumer) and B2B (Business to
Business) models.
• Issue 1 : Who bears the insurance cost/ risk?
One of the indicators to determine the timing of revenue recognition is to know who bears
the insurance cost/ risk.
(i) In practice, many of the large e-retail companies enter into agreements with logistic
providers who are willing to bear insurance cost and risk of delivery.

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20.14 FINANCIAL REPORTING

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

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.15

3. direct pricing discretion


4. discretion in selecting the supplier/ wholesaler
Therefore, in this case, the e-commerce company should reflect gross billing to its customers as
its revenue.
Illustration 2
An e-commerce company is a travel agent that sell travel tickets through an e-commerce platform.
Travel agents sell airline tickets to the public, generally at a price determined with reference to
the market rate, but often pay the airline a discounted amount. The travel agent does not bear
any general inventory risk because it does not carry tickets as its inventory and buys tickets only
when it receives orders or bookings from customers.
What should be the revenue of the e-commerce company acting as a travel agent? Will your
answer get change if the e-commerce company bears the credit risk say when corporate
customers have an account with the travel agent and settle the account only after the travel agent
has paid the airline for the ticket?
Solution
In the given case, the travel agent does not bear any inventory risk, nor is it responsible for
carrying out the services related to the ticket itself, because this is the responsibility of the airlines.
The travel agent provides a service on behalf of various airlines and other suppliers and earns a
fee. The travel agent’s revenue should reflect only the fee and not the gross amount billed to the
customer.
The fact that the agency sometimes bears credit risk is not a determining factor and does not
compel the agency to reflect the gross billing as revenue.

10. ACCOUNTING PRINCIPLES APPLICABLE TO SPECIFIC


SOURCES OF REVENUE OF E-COMMERCE COMPANIES
10.1 Accounting for Membership and Subscription Fee
There are three ways in which membership or subscription fee may be collected
1. Non-refundable fee
(a) Non-refundable fee for use of the services of the website for all services separately;
(b) Non-refundable fee (one-time payment) for indefinite use of the services of the website;
(c) Non-refundable fee to use the services of the website for a specified period of time;

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20.16 FINANCIAL REPORTING

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.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.17

♦ However, keeping in view the uncertain nature of business of an e-commerce company,


non-refundable fee that entitle a member to use the services of the website indefinitely
should be recognised as revenue over a period of not less than five years, on a
systematic and rational basis, i.e., on time proportion basis or any other basis, e.g.,
usage basis, whichever is more representative of the services rendered.
♦ Also in case the specified period is less than five years, the fee should be recognised
as revenue on a systematic and rational basis usually on a time proportion basis over
the specified period unless another systematic and rational basis is more representative
of the services rendered, e.g., the usage basis.

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’.

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20.18 FINANCIAL REPORTING

(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

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.19

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.

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20.20 FINANCIAL REPORTING

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

` `

Bank A/c Dr. 300

To Revenue A/c 300

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.21

10.2.2 Shipping and Handling


E-commerce companies selling products on-line often charge customers for shipping and handling
activities. Such charges may or may not be a direct reimbursement of the costs incurred by e-
commerce companies. Some companies display the charges separately whereas some do not.
(a) The products sold on-line are invoiced to the customers at a composite rate including
shipping and handling charges
Treatment:
It may be appropriate to include such charges as a component of sales revenue provided a
clear distinction cannot be made between the product value and the shipping and handling
charge component.
(b) Shipping and handling charges are recovered separately as an absolute amount or as a
percentage of the sale value
Treatment:
These should not be included in sales revenue but should be recorded separately. Thus,
such charges should not be included in computing the value of turnover to be disclosed in
the statement of profit and loss.
10.2.3 Multiple Elements Arrangements
A multiple element arrangement generally exists where an e-commerce company agrees to deliver
more than one product/ service concurrently and deliver certain additional products/services in future.
These additional products/services may include upgrades, enhancements or maintenance services. It
is sometimes customary to bundle such products and services for a consolidated price.
For accounting purposes, it is appropriate to ‘unbundle’ the separate elements of the arrangement
or contract. For this purpose, company-specific fair values in respect of which objective evidence
is available should be used, i.e., what the company would have received had it sold each item/
service separately. Company-specific objective evidence of fair value is determined in respect of
transactions with unrelated parties.

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.

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20.22 FINANCIAL REPORTING

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.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.23

The advertisement consideration is based on the number of click throughs as follows:


No of clicks (monthly) Revenue (` )
Less than 100 0
100 to 1,000 10,000
1,000 to 2,000 20,000
2,000 and above 20,000+ ` 100 per click in excess of 2,000 clicks
In the month of January 20X1, the advertisement of PQR Ltd on ABC website is viewed by
89 customers. So no revenue to be recognised in the month of January, 20X1
In the next month i.e. February 20X1, the advertisement is viewed by 20X4 customers. So
the revenue to be recognised is ` 20,000 + 20 x 100= ` 22,000

10.3.2 Advertisements agreements for customers, without any minimum guaranteed


impressions
• An e-commerce company may enter into an agreement with another company to host a
banner advertisement containing details of products/services offered by that company.
• In this case, it is appropriate to recognise advertising revenue on straight-line basis over the
period for which the banner is to be hosted unless another systematic and rational basis of
revenue recognition is more representative of the services rendered.

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

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20.24 FINANCIAL REPORTING

10.4 Measurement of Consideration in Advertising Barter Transactions


• E-commerce companies sometimes enter into advertising barter transactions each other, in
which they exchange rights to place advertisements on each others’ on-line properties, i.e.
websites or web pages. A barter transaction may involve exchange of advertising time for
products or services.
Revenue from advertising barter transactions should be recognised only when the fair values
of similar transactions are readily determinable from the entity’s history.
• For determining the fair value of advertising space surrendered for cash to be considered
‘similar’ to the advertising space being surrendered in the barter transaction, the advertising
space surrendered must have been in the same media and within the same advertising
vehicle (for example, same publication, same website, or same broadcast channel) as the
advertising in the barter transaction.
• It would be appropriate to consider fair values of transactions that have occurred not later
than six months preceding the sale of similar advertising to unrelated buyers. This will ensure
that the comparable values are current and reflect the best estimate of a price at which a
willing buyer and a willing seller would be willing to exchange an item or service in a situation
other than a distress sale.
• If economic circumstances have changed such that prior (but not more than six months old)
transactions are not representative of current fair value for the advertising surrendered, then
a shorter, more representative period should be used.
• It is inappropriate to consider cash transactions subsequent to the barter transaction to
determine fair value.
In addition, the characteristics of the advertising space surrendered for cash must be reasonably
similar to that being surrendered in the barter transaction with respect to:
(a) Circulation, exposure, or saturation within an intended market;
(b) Timing (time of day, day of week, daily/weekly, 24 hours a day/ 7 days a week, and season
of the year);
(c) Prominence (page on website, section of periodical, location on page, and size of
advertisement);
(d) Demographics of readers, viewers, or customers;
(e) Duration (length of time for which the advertisement will be displayed).

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.25

10.5 Other Services


10.5.1 Revenue from maintenance of websites including web hosting
E-commerce companies may also earn revenue from hosting websites for their customers,
maintenance of the customers’ websites or providing such other services.
Revenue from these services should be recognised over the period for which the website is to be
hosted or maintained provided such services are rendered over the period of the contract on
continuous basis unless another systematic and rational basis of revenue recognition is more
representative of the services rendered.
10.5.2 Content Selling
Some e-commerce companies maintain websites which contain text or other material which can
be sold as content for a price. Generally, a downloading facility of such content is available to the
purchaser. In such a case, a question arises as to the timing of the recognition of revenue from
the sale of the content downloaded by the customer. Applying the general principle of revenue
recognition, the content should generally be considered to be sold when it is delivered to the
purchaser.

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.

11. 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.

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20.26 FINANCIAL REPORTING

• 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.

12. 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 sales incentives 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.

13. 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.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.27

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.

14. 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.

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20.28 FINANCIAL REPORTING

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.

15. 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 services. A person supplying
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 Collection 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.
15.1 Accounting under Three Models of E-Commerce Business
(1) 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.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.29

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

For intra-state purchase

Purchases A/c Dr. 1,00,000

CGST Receivable (for input service) A/c Dr. 9,000

SGST Receivable (for input service) A/c Dr. 9,000

To Vendor A/c 1,18,000

For intra-state sale

Debtors (Customer) A/c Dr. 1,41,600

To Sales A/c 1,20,000

To CGST Payable (for output service) A/c 10,800

To SGST Payable (for output service) A/c 10,800

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%

© The Institute of Chartered Accountants of India


20.30 FINANCIAL REPORTING

INR INR

For inter-state purchase

Purchase A/c Dr. 1,50,000

IGST Receivable A/c Dr. 27,000

To Vendor A/c 1,77,000

For inter-state sale

Debtors (customer) A/c Dr. 1,18,000

To Sales A/c 1,00,000

To IGST Payable A/c 18,000

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:

` `

Cash CGST ledger A/c (10,800-9,000) Dr. 1,800

Cash SGST Ledger A/c (10,800-9,000) Dr. 1,800

To Bank (to the Government) 3,600


D. For set-off
For closing of receivable and payable account, following entries are passed:

` `

CGST Payable A/c Dr. 10,800

To CGST Receivable A/c 9,000

To Cash CGST ledger A/c 1,800

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.31

SGST Payable A/c Dr. 10,800

To SGST Receivable A/c 9,000

To Cash SGST ledger A/c 1,800

IGST Payable A/c Dr. 18,000

To IGST Receivable A/c 18,000

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

For intra-state purchase

Purchases A/c Dr. 2,00,000

CGST Receivable A/c Dr. 18,000

SGST Receivable A/c Dr. 18,000

To Vendor A/c 2,36,000

For inter-state sale

Debtors (Customer) A/c Dr. 2,95,000

To Sales A/c 2,50,000

To IGST Payable A/c 45,000

Cash IGST Ledger A/c Dr. 9,000

To Bank (to the Government) A/c 9,000

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20.32 FINANCIAL REPORTING

IGST Payable A/c Dr. 45,000

To CGST Receivable A/c 18,000

To SGST Receivable A/c 18,000

To Cash IGST Ledger A/c 9,000

(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

INR INR

Intra-state Purchase

Purchases A/c Dr. 1,00,000

CGST Receivable A/c Dr. 9,000

SGST Receivable A/c Dr. 9,000

To Vendor A/c 1,18,000

Intra-state Sale

Debtors (Customer) A/c Dr. 1,41,600

To Sales A/c 1,20,000

© The Institute of Chartered Accountants of India


ACCOUNTING FOR E-COMMERCE BUSINESS 20.33

To CGST Payable A/c 10,800

To SGST Payable A/c 10,800

Commission to e-commerce operator

Commission A/c Dr. 2,400

CGST Receivable A/c Dr. 216

SGST Receivable A/c Dr. 216

To E-commerce Operator 2,832

(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.

INR INR

Inter-state Purchases

Purchases A/c Dr. 1,00,000

IGST Receivable A/c Dr. 18,000

To Vendor A/c 1,18,000

Inter-state Sales

Suppose the Vendor sells the goods to a customer in Rajasthan at ` 2,00,000, then

Debtors (Customer) A/c Dr. 2,36,000

To Sales A/c 2,00,000

To IGST Payable A/c 36,000

Commission to e-commerce operator

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20.34 FINANCIAL REPORTING

Commission Dr. 4,000

IGST Receivable A/c Dr. 720

To E-commerce Operator 4,720

(iii) For cash payment to the government after adjusting the credit available

Cash IGST ledger A/c (36,000-18,000-720) Dr. 17,280

Cash CGST ledger A/c (10,800-9,000-216) Dr. 1,584

Cash SGST ledger A/c (10,800-9,000-216) Dr. 1,584

To Bank A/c 20,448

(iv) For payment received from the e-commerce operator

Bank A/c (balancing figure) Dr. 3,70,048

E-commerce Operator (2,832 + 4,720) Dr. 7552

To Debtors (1,41,600 + 2,36,000) 3,77,600

(v) For set off

CGST Payable A/c Dr. 10,800

To CGST Receivable A/c (9,000 + 216) 9,216

To Cash CGST ledger A/c 1,584

SGST Payable A/c Dr. 10,800

To SGST Receivable A/c (9,000 + 216) 9,216

To Cash SGST ledger A/c 1,584

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.35

IGST Payable A/c Dr. 36,000

To IGST Receivable A/c (18,000 + 720) 18,720

To Cash IGST ledger A/c 17,280

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.

INR INR

For amount due

Customer A/c (1,41,600 + 2,36,000) Dr. 3,77,600

To Vendor A/c 3,77,600

With respect to intra-state transactions

Vendor Dr. 2,832

To Commission 2,400

To CGST Payable A/c 216

To SGST Payable A/c 216

With respect to inter-state transactions

Vendor Dr. 4,720

To Commission 4,000

To IGST Payable A/c 720

For payment received and remitted

Bank A/c Dr. 3,77,600

To Customer A/c 3,77,600

Vendor A/c (3,77,600 - 2,832 - 4,720) Dr. 3,70,048

To Bank 3,70,048

© The Institute of Chartered Accountants of India


20.36 FINANCIAL REPORTING

Cash Payment to the Government

Cash IGST Ledger A/c Dr. 720

Cash CGST ledger A/c Dr. 216

Cash SGST ledger A/c Dr. 216

To Bank A/c 1,152

For set-off

IGST Payable A/c Dr. 720

CGST Payable A/c Dr. 216

SGST Payable A/c Dr. 216

To Cash IGST Ledger A/c 1,152


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.
Solution

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

© The Institute of Chartered Accountants of India


ACCOUNTING FOR E-COMMERCE BUSINESS 20.37

For commission to e-commerce operator


Commission A/c Dr. 3,000
Input IGST A/c Dr. 540
To B 3,540
For receipt of payment from e-commerce operator
Bank A/c (balancing figure) Dr. 1,73,460
B Dr. 3,540
To P 1,77,000
For depositing GST to Government
Cash IGST ledger A/c (27,000-18,000-540) Dr. 8,460
To Bank A/c 8,460
For set-off
IGST Payable A/c Dr. 27,000
To IGST Receivable A/c (18,000 + 540) 18,540
To Cash IGST ledger A/c 8,460

In the books of E-Commerce Operator

INR INR

For amount due

P Dr. 1,77,000

To S 1,77,000

For Commission

S Dr. 3,540

To IGST Payable A/c 540

To Commission A/c 3,000

© The Institute of Chartered Accountants of India


20.38 FINANCIAL REPORTING

For payment received and remitted

Bank A/c Dr. 1,77,000

To P 1,77,000

S (1,77,000 – 8,460) Dr. 1,68,540

To Bank 1,68,540

Cash Payment to the Government

Cash IGST Ledger A/c Dr. 540

To Bank A/c 540

For set-off

IGST Payable A/c Dr. 540

To Cash IGST Ledger A/c 540

(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.

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.39

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

Bank Dr. 3,294

To Drivers 2,400

To CGST Payable (RC) 243

To SGST Payable (RC) 243

To Commission (inclusive of GST) 300

To CGST Payable (FC) 54

To SGST Payable (FC) 54

© The Institute of Chartered Accountants of India


20.40 FINANCIAL REPORTING

Tax payable on reverse charge and forward charge

CGST Payable A/c (RC) Dr. 243

SGST Payable A/c (RC) Dr. 243

CGST Payable A/c (FC) Dr. 54

SGST Payable A/c (FC) Dr. 54

To Cash CGST ledger A/c (243 + 54) 297

To Cash CGST ledger A/c (243 + 54) 297

15.2 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
Vendor Dr.
To Purchases returns A/c
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
Vendor A/c Dr.
To Purchases A/c
To Indirect Expenses like Transportation
In the books of the Vendor
Sales A/c Dr.
To E-commerce company A/c

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.41

16. 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, multiple 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.

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20.42 FINANCIAL REPORTING

TEST YOUR KNOWLEDGE


Questions
1. When the following companies would recognise revenue:
(a) Amazon sells mobile to customer with no return policy:
(b) Amazon sells mobile to customer with no return policy. It enters into logistic with DHL
to insure the logistics and risks during delivery.
(c) Amazon sells mobile to customer with return policy of 15 days.
2. How will you recognise revenue in case of Linkedin:
(a) Non-refundable fee
(b) Premium Membership Annual fee
3. A Ltd. an E-commerce dealer purchases the goods from the vendor worth ` 68,000 from
Pune and sells the same in Mumbai at ` 80,000. It follows ILM of e-commerce business.
Taking GST into consideration pass necessary Journal Entries.
Answers
1. (a) As the mobile is sold with no return policy, no risk remains with Amazon, all the risk and
rewards are transferred. Thus revenue should be recognised when the mobile is
delivered to the customer.
(b) Here also the mobile is sold with no return policy, but here the risk and rewards are
transferred as soon as the possession of the mobile is transferred from Amazon to DHL.
As the shipping and handling is borne by DHL. Thus here revenue should be recognised
when mobile is delivered to DHL for delivery to the customer.
(c) Revenue should be recognised when the mobile is delivered to the customer, assuming
that all the risks and rewards in the mobile are transferred.
Also a provision should be made for the expenses to be incurred if the customers return
the mobile within 15 days.
This provision is an estimate which will be based on the historical data of the company.
2. (a) Non-refundable fee which is in the nature of one-time fee and not refundable to the
members, should be capitalised by Linkedin as follows
Bank A/c Dr.
To Lifetime membership fees (Equity and Reserves)

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ACCOUNTING FOR E-COMMERCE BUSINESS 20.43

(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 intra-state purchase

Purchases A/c Dr. 68,000

CGST Receivable A/c Dr. 6,120

SGST Receivable A/c Dr. 6,120

To Vendor A/c 80,240

For intra-state sale

Debtors A/c Dr. 94,400

To Sales A/c 80,000

To CGST payable A/c 7,200

To SGST payable A/c 7,200

For depositing GST to the Government

Cash CGST ledger A/c (7,200-6120) Dr. 1,080

Cash SGST Ledger A/c (7,200-6120) Dr. 1,080

To Bank (to the Government) 2,160

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20.44 FINANCIAL REPORTING

For set-off

CGST Payable A/c Dr. 7,200

To CGST Receivable A/c 6,120

To Cash CGST ledger A/c 1,080

SGST Payable A/c Dr. 7,200

To SGST Receivable A/c 6,120

To Cash SGST ledger A/c 1,080

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