Follow us on social media and share your feedback

Download our app‍s‍:

Download on the App StoreGet it on Google Play
Singapore
  • Hong Kong
  • UK
  1. Osome Blog Singapore
  2. Is E-commerce Accounting Different From Other Types of Accounting?

Is E-commerce Accounting Different From Other Types of Accounting?

Is E-commerce Accounting Different From Other Types of Accounting?

If you have set up an E-commerce business in Singapore, there is a crucial aspect of running the business that you cannot ignore. As with any other businesses, your online business's success or failure is largely dependent on your understanding of e-commerce accounting.

Having the fundamental knowledge enables you to properly manage your business finances and stay operational. E-commerce accounting also allows you to scrutinise and evaluate the financial health of your business by delving into the important figures such as costs, earnings, liabilities and more.

Unsure of how to get started, or confused by how e-commerce accounting differs from other types of accounting? Fret not, read on to dive deeper and learn about everything you need to know about e-commerce accounting.

Difference Between E-Commerce Accounting vs Bookkeeping

While accounting and bookkeeping may sound like synonymous terms, these two functions are not interchangeable.

Bookkeeping is the baseline accounting practice of recording the day-to-work details, transactions and financial documents. This process helps you to describe and organise the state of your business finances.

On the other hand, accounting involves in-depth analysis of all your financial records provided by the bookkeeper. This information is used to produce financial reports, models and forecasts to allow you to better understand your finances and plan for your business’s future growth.

For e-commerce accounting, there are two methods which you could consider.

The 2 Basic Types of Accounting

NOTE

Bear in mind that there is no one way that works better than the others. Instead, you should take the time to understand the advantages of each method so you can figure out which works best for your business.

Cash accounting

Cash accounting refers to the way maintenance of records when cash is paid or received, regardless of when the purchase or sale was made.

For instance, when you receive payment from the sale of a product or service, this amount is considered income. When money flows out, it is an expense. This practice enables you to easily comprehend your cash flow processes and record them when the money reaches or leaves your business bank account.

Here’s an example of cash basis accounting record:

Period Sales Payment Expense Deduction
Week 1 +$400 (sale of mugs) Received -$60 (cost of shipping) Deducted
Week 2 +$322 (sale of stationery) Received -$40 (packaging fees) Deducted
Total $722 N.A. -$100 N.A.

Bi-weekly income: $622

In general, this method of accounting is typically used by government agencies, community associations, non-profit organizations and small service businesses. The cash accounting basis is most ideal for businesses that do not sell on credit and pay bills when they incur.

Accrual accounting

If your business is of a bigger scale and requires you to deal with inventory, you may wish to opt for this method. This is a more complex process that requires you to maintain records of sales revenue or expenses once they take place at point of sale, regardless of whether that account reaches or leaves your business bank account at the time of record.

Here’s an example of accrual accounting:

Period Sales Payment Expense Deduction
Week 1 +$2,400 (sale of art pieces) Immediate -$800 (artists’ commission) Pending
Week 2 +$3,000 (sale of furniture) Pending -$1,000 (cost of shipping) Immediate
Total $5,400 N.A. -$1,800 N.A.

Bi-weekly income: $3,600

Sales

In week 1, the company generated $2,400 from the online sale of art pieces. That amount has already been transferred to the company’s bank account. However, week 2’s bigger $3,000 cheque has yet to gain clearance from the bank and will likely be received only in week 3.

Expenses

Similarly for the expenses, while the $100 shipping costs were immediately deducted from the company’s bank account, the $800 artists’ commission will not be due until the following month, which means that the $800 will remain in the company’s bank account for the time being.

Although the accrual method may be more complicated compared to cash basis accounting, it provides more realistic and authentic information about your business’s financial position.

You have to consider the money that you have yet to earn (account receivables) and deduct the costs that you have yet to incur (account payables).

However, once you get past this stage, the later accounting process will make a lot more sense with more accurate financial projections. As a result, most accounting firms in Singapore prefer to use the accrual basis so that the experts can glean more insightful financial statements.

Unique Nuances of E-Commerce Accounting

E-commerce activities occur on a 24-hour basis, seven days a week. As such, e-commerce accounting is more complex compared to traditional accounting, as it encompasses nuances unique to the online business sphere.

Understanding these aspects can help you to better navigate your business and allow you to evaluate your profitability and cash flow situation. Here are the three main aspects of e-commerce accounting that will result in the accuracy of your numbers:

  1. Analysing transactional data

Unlike traditional businesses, the transactional data for your e-commerce store is primarily found on your selling channels and not within your bank accounts or credit cards.

For e-commerce businesses there are some additional fees incurred on your sales depending on the different platforms for example, Lazada charges transaction fee, commission fee and shipping fee. These items do not exist in non-ecommerce accounting. We would categorise these under merchant fee.

If your bookkeeper does not have enough knowledge about e-commerce accounting, he may treat the bank transactions in a similar manner as he would for other industries. For instance, if he comes across a payment in the business's bank account from Shopee or Lazada, he would simply jot this down as an "income" on the date of deposit.

However, this would result in inaccuracy in the following:

  • Income and other numbers

Some bookkeepers may not realise that the deposit reflected in your bank account is not reflective of your income number. Think of these deposits as "net deposits'' coming from your selling channels, involving other transactions apart from sales. In fact, every "net deposit" reflected in your bank account is likely inclusive of 20 to 30 transactions including sales, returns, chargebacks, sales tax and even shipping paid by your customers.

Instead, the correct way to go about recording this would be to delve into the backend of your sales channels, which provide a thorough breakdown of all your sales and other activities.

Stephanie has received $5,000 in her bank account in the month of January. Instead of recording this number, her skilled bookkeeper dives deeper into the backend of her selling channels to uncover every transaction and found that her total gross sales for the month was $4,284, after deducting merchant fees.

  • Timing of transactions

If your bookkeeper records your bank account's "net deposit", this record will miss out on the correct timing of transactions.

Elizabeth sold her PlayStation 5 on 25 January, but Shopee only processed the payment in February. As a result, Elizabeth’s bank account reflects the deposit on 8 February and her bookkeeper records this information accordingly which leads to inaccurate date of sales transactions. Over time, Elizabeth’s business grows but the lack of accurate transaction timing becomes more and more impactful on her sales, expenses and liabilities.

  1. Understanding your inventory and COGs

Running an e-commerce business means your inventory and Cost of Goods Sold (COGS) would be two key numbers you should take note of. COGS will be the acquisition cost of the items that you have sold.

This area of accounting will require you or your bookkeeper to have an in-depth understanding of how it works, more so than for a typical business. In a nutshell, these are the salient points to focus on:

  • Management of inventory and the controls around your most important assets
  • Accounting for your business’s flow of inventory
  • Calculating advanced COGS number for each product SKU
  • Bookkeeping principles for management of inventory and COGS (which many bookkeepers are prone to getting wrong)
  • Calculating merchant fees as expenses instead of COGS

Challenges of E-Commerce Accounting

Complex inventory management

As a business owner, it can be challenging for you to determine how much stock is in production, en route to you, in a customer’s shopping cart or awaiting returns. Nonetheless, it is your responsibility to correctly identify your inventory value from the production process to the sale stage. With an increase in transactions, number of SKUs, countries and marketplace, things are bound to get even more confusing.

Sales tax liability can be confusing

Online sales tax rules are complicated and constantly changing, so it would be a safe bet to keep up-to-date with the information on the Inland Revenue Authority of Singapore. When you sell goods via your e-commerce platforms and deliver the goods locally within Singapore, you should standard-rate your supply and charge Goods and Services Tax (GST).

Transaction volume can affect your accounting system

As your business grows, one challenge that you might face would be the volume of transactions that is accompanied by lots of data points. An intelligent way to tackle this would be to batch your transactions on a daily, weekly, bi-weekly or monthly basis. This helps to provide you with the much-needed financial visibility without overwhelming your accounting system.

A Solution to Your Paperwork Headache

Seems overwhelming? If your e-commerce business is your bread and butter, why not consider investing in accounting software sooner rather than later?

With several cloud accounting software options available in the market, keep a lookout for those that consist of both a balance sheet and profit and loss functionality.

Alternatively, save yourself from all that headache and leave it to our e-commerce accounting experts. We show profitability of every line & channel by consolidating numbers for each SKU, product group, and market, and show you where your money comes from. Furthermore, we know how to read documents from any platform including Amazon, Stripe, Lazada and any other statements, automatically convert them into books, and produce reports and tax returns.

We know you can do it all on your own, but do know that you don’t have to!

Share this post:

Tips to run your business smarter.
Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

You might like it

Q&A on Paying Taxes as International Seller on Amazon.sg
E-commerce

Q&A on Paying Taxes as International Seller on Amazon.sg

Planning to sell your products to Singapore on Amazon.sg as an international seller? Many sellers are often confused about the tax liability on their sales online. Every country has its own set of tax regulations and tax rules are always changing.

How To Avoid Double Taxation in Singapore
Tax

How To Avoid Double Taxation in Singapore

If you are a tax resident of Singapore, have set up businesses beyond Singapore and have paid taxes in other countries, how would your income be taxed? Double check if your income is double taxed.

How To Set Up a Singapore Holding Company From Indonesia for Fundraising
Incorporation

How To Set Up a Singapore Holding Company From Indonesia for Fundraising

One of the most common fundraising strategies for startups, especially in Indonesia, is to set up a Singapore holding company. But how exactly do you set up a holding company abroad?

Going Beyond The Borders Digitally: From Setting Up To Selling Out
Incorporation

Going Beyond The Borders Digitally: From Setting Up To Selling Out

We had three experts in tax, sales, and law present the webinar on how small business owners in Singapore and Indonesia can set up companies, digitize their business processes, and reach out to new customers.

Cofounders for Your Business: 4 Ways To Find Them
Entrepreneur's Bootcamp

Cofounders for Your Business: 4 Ways To Find Them

Sometimes you need someone to either help you improve and execute your great idea or to help you raise the capital you need before setting up a company. That is where the need for a cofounder arises. Here are 4 tips to find the right one.

3 Ways the Pandemic Affected Southeast Asia’s Online Shopping Behaviour in 2020
E-commerce

3 Ways the Pandemic Affected Southeast Asia’s Online Shopping Behaviour in 2020

Digitalisation evolved rapidly in Southeast Asia with a global pandemic turbocharging it to a massive step forward in the e-commerce industry.

5 Tips from Entrepreneurs on Scaling Your Business Across Closed Borders
Running My Business

5 Tips from Entrepreneurs on Scaling Your Business Across Closed Borders

In times of this unprecedented economic situation, how can SMEs adjust to become a global player? Several Singapore-based entrepreneurs will discuss the major points of scaling up their companies, and how to survive and thrive today.

A Survival Guide to Bookkeeping When You Have No Idea How To Do It
Entrepreneur's Bootcamp

A Survival Guide to Bookkeeping When You Have No Idea How To Do It

In short, bookkeeping is the process of recording, classifying, and organizing all financial transactions that happen within your business.

Growing Your Online Store with 5 Basic Accounting Tips
Entrepreneur's Bootcamp

Growing Your Online Store with 5 Basic Accounting Tips

Accurate accounting will boost profits for your online store. Here are five accounting basics to bolster your finances and grow your online store

E-commerce Store Bookkeeping Tips
E-commerce

E-commerce Store Bookkeeping Tips

Essentially, bookkeeping helps you balance your accounts so you can improve business cash flow.

Penalties for Not Filing These 5 Documents on Time
Compliance

Penalties for Not Filing These 5 Documents on Time

There are penalties that a company must pay if any of the information or documents are not given to ACRA or IRAS as a company.

Starting an E-commerce Business From Home: What You Need
E-commerce

Starting an E-commerce Business From Home: What You Need

How can I start a business from the comfort of my home? In this article, we explore how to take the digital and e-commerce route.

Tips to run your business smarter. Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

We’re using cookies! What does it mean?