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
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 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:
|Week 1||+$400 (sale of mugs)||Received||-$60 (cost of shipping)||Deducted|
|Week 2||+$322 (sale of stationery)||Received||-$40 (packaging fees)||Deducted|
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.
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:
|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|
Bi-weekly income: $3,600
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.
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:
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.
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!