How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook

How to Perform Revenue Recognition
The Complete Guide for

E-Commerce Accountants
Introduction
E-commerce leveled the playing field for companies
big and small to sell their goods and services on the
internet. But with the industry’s rapid growth over the
past few years, 77% in 2020 (according to Forbes), and the
introduction of ASC 606, even well-established players
find themselves struggling to understand how to best
build GAAP-compliant financials. Coupled with the rise
of point-of-sale financing and the use of 3rd party
shipping vendors, many accountants have questions
around how to ensure that they are performing revenue
recognition accurately.
If you are grappling with these questions, you’ve come to

the right place. In our guide, we detail how e-commerce
teams can properly apply ASC 606 to meet their specific
business model and use revenue recognition as a way
to inform their companies’ long-term and short-term
strategy. For companies bringing on point-of-sale fi-
nancing, we will also walk through revenue recognition
in accordance with GAAP.
Revenue recognition is more than just a process to close

the books. It can provide insight that leads to long-term
and strategic growth for e-commerce companies.
Copyright © 2021 Leapfin Technologies All Rights Reserved. How to Perform Revenue Recognition 2
Getting Revenue Suppose a customer placed an order
for $1,000 plus 7% sales tax. The customer
Recognition Right
pays a total of $1,070: $1,000 for products
plus $70 for sales tax.
The seller would record the following

journal entry to account for the payment
Running an internet-based business adds complexity to received from the customer:
e-commerce companies’ accounting processes. In particular,
Example 1:
adopting the new revenue recognition principle, ASC 606,
has increased complexity for an e-commerce team’s reporting Account DR CR
process because it requires additional disclosures and
transparency around the nature, timing, and amount of revenue Accounts Receivable $1,070
from contracts with customers.
Deferred Revenue $1,000
Most retailers recognize revenue when a product reaches a
customer’s door. But under ASC 606, management will have to Sales Tax Payable $70
reconsider this one-size-fits-all approach to recognizing revenue.
For example, ASC 606 involves recording entries for cash receipts
and deferred revenue.
The 5-step revenue recognition model
E-commerce companies that sell physical products must directs companies to recognize revenue
perform additional accounting tasks to fully capture the when earned; in e-commerce, the point
transactions. Entries to record inventory, sales tax, and cost of of recognition is when the product is
goods sold must also be recorded. shipped. At this point the company
records the following journal entries:
In a typical e-commerce transaction, sellers receive online
payments from customers who place orders for goods. The seller Example 2:
either ships goods from their warehouses to customers or
partners with a third-party supplier to deliver products to Account DR CR
customers. Unlike service companies, e-commerce companies

Deferred Revenue $1,000
that sell physical products must collect sales tax from customers.
Sales tax is calculated during the checkout process and added
Revenue $1,000
to the order total.
Some companies currently recognize
revenue when a product is shipped,
but there are still companies that follow
the old accounting standard (ASC 605)
and recognize revenue at delivery.
The same journal entry applies when a
company recognizes revenue at delivery,
but it would be recorded later since
delivery would occur after shipping.
Visibility Into Your Supply Chain
Because physical products are sold,

the company must also record an entry
Knowing when to record revenue
for the cost of (1) manufacturing the means companies must have
product shipped to the customer or (2) a supply chain function that
purchasing products from vendors for provides real-time data to track
resale - also called Cost of Goods Sold.
Continuing with the previous example,
orders. Supply chain visibility
assuming the cost of the product is $600, is essential in monitoring the
the journal entry would be as follows: steps in the fulfillment process:
Example 3: receipt of the customer’s order,
payment, and shipping.
Account DR CR
Cost of Goods Sold $600
Inventory $600
If a customer returns an order,
Third-Party Suppliers the following journal entries are recorded:
If the seller ships using a third-party supplier, the timing of Example 4:

revenue recognition depends on the supplier’s shipping process. Account DR CR
E-commerce companies must communicate with suppliers
to know when orders are shipped since revenue cannot be Revenue $1,000
recognized until then. In many cases, this communication is
electronic and part of a larger workflow in the revenue cycle. Sales Tax Payable $70
For example, a company may integrate its sales order system

Accounts Receivable $1,070
with a supplier’s inventory system at the warehouse. Once a
customer places an order, this notifies the warehouse to fulfill it.
Example 5:
Once the order is packaged and ready for shipment, the
warehouse system automatically updates the company’s records Account DR CR
to show the item is en-route to the customer. The e-commerce
company then updates its records with the completed order and Inventory $600
recognizes revenue in its financial statements.
Cost of Goods Sold $600
The journal entries are the same as in Example 1. The exception
is timing since the e-commerce company has no control over
shipping times. These journal entries are reversals of the
original entries. Since the product was
returned, it’s as if a sale never occurred.
Sales Returns These entries will adjust the financials to

remove all transactions related to the sale.
It’s inevitable that customers will return products. E-commerce This sequence of entries speaks to the
companies will record a returns reserve as a “cushion” to not importance of e-commerce companies
overstate revenue. The reserve is based on historical return trends understanding the revenue cycle and
and reviewed to determine if the reserve accurately reflects points at which to record revenue. In the
return activity. next section, we’ll discuss how to manage
and properly implement ASC 606
when you have the added complexity of
point-of-sale transactions.
Revenue Recognition for
Point-of-Sale Financing
What is Point-of-Sale Financing?
Many items from Peloton bikes to appliances can now be With point-of-sale loans, retailers can
purchased with point-of-sale financing from FinTech companies recognize revenue immediately. Once
such as Affirm and Afterpay. Point-of-sale (POS) financing, POS financing applications are approved
also known as “buy now, pay later”, enables consumers to make and the product is shipped, the retailer’s
low or no-interest installment payments for purchases.. performance obligations are fulfilled.
FinTech companies provide point-of-sale loans to consumers who Suppose a customer purchases a
are either instantly approved or denied to finance a purchase. dress from a favorite retailer for $300.
Consumers can select a payment schedule for monthly At checkout, the customer is approved
installments or pay in full on a future date. For consumers with for POS financing, payable in 4 monthly
either good credit or short cash flow, these POS loans provide installments of $75. The retailer records
payment options that tend to be more favorable than the following journal entries:
high-interest credit cards.
Example 6:
Aside from helping consumers, POS financing is beneficial to
retailers by creating more sales volume with less risk. Only a few Account DR CR
e-commerce companies offer private label credit cards which
Accounts Receivable $300
provide rewards and loyalty for repeat customers. Point-of-sale
financing fills this gap while expanding consumers’ buying power.
Revenue $300
Point-of-sale financing is a win-win for the customer and retailer.
The customer gets immediate satisfaction from the purchase and
the retailer makes a sale while passing risk to the FinTech company.
Following the matching principle, the Suppose the retailer has agreed to pay
company must also record the costs the financing company 5% of the sale,
associated with the transaction. the following journal entry is recorded:
Example 7: Example 8:
Account DR CR Account DR CR
Cost of Goods Sold $100 Sales Commission $15

While the increased
Inventory $100 Commission Payable $15 transparency is
designed to make
Even though the customer will pay for When the transaction is settled, the reporting simpler,
the dress from the retailer in 4 equal retailer receives $300 from the FinTech the steps to get
installments, those payments will be made company as follows: there will require
directly to the FinTech company providing companies to
the point-of-sale loan. When the FinTech Example 9: evaluate and
company approves a transaction, enhance their
Account DR CR finance operations
they also assume the risk of the
transaction - if customers default on processes and
Cash $300
their repayment schedules, the FinTech systems to
company must attempt to collect the accommodate
Accounts Receivable $300
unpaid balance. the requirements
of ASC 606.
The retailer will receive a lump sum Though this new payment option benefits
payment from the FinTech company a consumers, online retailers, and FinTech
few days after the sale, net of any companies, POS financing can be a
commissions or fees related to completing headache for finance teams as it adds
the sale. FinTech companies earn revenue another layer of complexity on top of
through interest and fees charged to the existing manual processes. With POS
customer. They also earn a commission financing accelerating at a rapid pace
from the retailer for completing and more companies adopting the new
the transaction and assuming the method, finance faces an uphill battle.
additional risk.
Opportunities for E-Commerce
Companies Implementing ASC 606
While challenging, ASC 606 has provided many opportunities for e-commerce companies to assess operations and
make improvements to bring added transparency and efficiency to their businesses. In the next section, we will outline
some of these opportunities and considerations.
Add Strategic Value to

the Business
Having an inventory of contracts to review provides An added area of scrutiny is revenue recognition at
useful information for management. It gives insight into year-end. Orders that are placed before the end of the
the most sought-after products and services from year but shipped at the beginning of a new year would
clients and helps drive future growth strategies. If a be recognized in the new year. Companies have tried to
company’s data shows that its customers are most manipulate these numbers to maximize revenue in one
interested in 12-month instead of 24-month contracts year or defer revenue to another. There’s a fine line
(example: purchasing an iPhone 12 from Verizon between revenue planning and intentional manipulation
on a 24-month service contract), this is helpful for so supporting documents are essential for internal staff
salespeople looking to offer services most demanded and external auditors.
by customers.
Supplier & Customer
Relationships
The holiday peak season is when suppliers tighten their
guidelines. Several suppliers and shippers have been
known to withhold shipments if companies fail to make
timely invoice payments. This is another opportunity to
improve processes and ensure you’ve established trust
with vendors so they won’t put your orders on the shelf.
Collaboration With
Cross-Functional Teams
Identifying contracts and performance obligations
per the new revenue recognition standard requires
collaboration amongst multiple functions within an
organization. As the accountants figure out what journal
entries to record, ambiguity in contract terms requires
discussion with the sales team to clarify what’s been
promised to customers. The legal team must review
contracts with customers for clarity and negotiate terms
as needed. Marketing plays a role too since they must
figure out how to best articulate the products and
services the company offers to customers.
Build Scalable Systems
& Processes
E-commerce companies must find ways to manage the

issues that arise during the holiday rush. For companies
operating on a fiscal year, the last quarter of the
year is when revenues and volumes soar starting with
Black Friday.
With the number of transactions skyrocketing with

no end in sight, finance teams cannot rely on legacy
financial systems and Excel since they are not built
for scale. Legacy financial systems were designed
decades ago and cannot show the transaction-level
detail required for intensive accounting processes such
as revenue recognition, order-to-cash reconciliation,
and transaction matching.. As a result, many finance
teams resort to performing manual reconciliations
in Excel. However, when transaction volumes and
complexity reaches a certain threshold, Excel files
become too large and impossible to work with.
E-commerce finance teams must address these

challenges before it is too late. Ensuring that your team
is proactive - instead of reactive - to these systems
issues can help set your team up for success and avoid
late nights come the holiday season.
To Wrap It Up
Overall, the sentiment of ASC 606 revenue recognition

has been a burdensome one, but it doesn’t have to be.
As companies set goals for future growth, ASC 606
implementation requires steps to support the company’s
goals. If you want to overhaul your billing system or
update your process documentation, ASC 606
implementation provides many opportunities to do so.
Accounting teams are typically siloed yet touch every

function of a business. Conversations amongst teams
who may not regularly talk - accounting and sales,
for example, must happen. Working together to solve
problems around data integrity or existing issues in
the order-to-cash cycle creates a more collaborative
environment. The cross-functional collaboration
amongst the teams is key to a successful
implementation as most, if not all have a significant
role to play as the company transforms.
About the Author
Leapfin is the #1 finance operations automation platform.
For finance teams facing external pressure from new product
launches, new financing, M&A, IPO preparation, SOX compliance,
and GAAP compliance, Leapfin automates manual processes
and ensures accurate and real-time financial insights.
With its proprietary Financial Data Bus technology, Leapfin

streamlines business processes including revenue recognition,
order-to-cash reconciliation, and transaction matching.
Leapfin helps companies such as Canva, Flexport, Patreon and
many others manage high transaction volume, data silos,
and process complexity.
Leapfin has helped e-commerce customers solve their revenue recognition

challenges and use revenue recognition to inform future strategy.
If you’d like a free consultation, please email us at sales@leapfin.com

How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

How To Perform Revenue Recognition The Complete Guide For E Commerce Accountants Ebook

Uploaded by

Copyright:

Available Formats

How to Perform Revenue Recognition

The Complete Guide for

If you are grappling with these questions, you’ve come to

Revenue recognition is more than just a process to close

The seller would record the following

customers. Unlike service companies, e-commerce companies

Visibility Into Your Supply Chain

Because physical products are sold,

Cost of Goods Sold $600

If the seller ships using a third-party supplier, the timing of Example 4:

For example, a company may integrate its sales order system

Sales Returns These entries will adjust the financials to

What is Point-of-Sale Financing?

Cost of Goods Sold $100 Sales Commission $15

Add Strategic Value to

E-commerce companies must find ways to manage the

With the number of transactions skyrocketing with

E-commerce finance teams must address these

Overall, the sentiment of ASC 606 revenue recognition

Accounting teams are typically siloed yet touch every

With its proprietary Financial Data Bus technology, Leapfin

Leapfin has helped e-commerce customers solve their revenue recognition

You might also like