ACCOUNTING FOR E-COMMERCE BUSINESS - ca-final.in · ACCOUNTING FOR E-COMMERCE BUSINESS 20.3 1. INTRODUCTION Electronic commerce (e-commerce) has become a buzzword for businesses over

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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

© The Institute of Chartered Accountants of India

20.2 FINANCIAL REPORTING

Accounting for E-commerce Companies

E-commerce business Various models Accounting

Advantages of e-commerce business

Definition Aggregator Principal to

Principal (P2P)

Principal to Agent (P2A)

Revenue Cost

Sale of Goods Rendering of Services

Elements of e-commerce business

Challenges in e-commerce business

Business to Business

(B2B)

Consumer to Consumer (C2C)

Business to Consumer

(B2C)

Managed Market Place

Model

Open Market Place Model (OMP)

Inventory Led Model

(ILM)

Consumer to Business (C2B)

Cost of setting the business or website

Operational cost

CHAPTER OVERVIEW


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



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



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



(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



(ii) Principal to Agents [P2A]

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.

Vendor Site Owner Customer

Group

Commission charges



(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



(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



7. CLASSIFICATION OF E-COMMERCE WEBSITES Business originating from….

Business Consumer

B2B C2B

B2C

C2C

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.

Business

Consumer



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



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.



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.



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



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;



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.



♦ 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’.



(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



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.



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



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.



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.



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



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).



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.



• 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.



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.



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.



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%



INR INR

For inter-state purchase

Purchase A/c Dr. 1,50,000

IGST Receivable A/c Dr. 27,000


For inter-state sale

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


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



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



CGST Receivable A/c Dr. 18,000

SGST Receivable A/c Dr. 18,000


For inter-state sale




Cash IGST Ledger A/c Dr. 9,000

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






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





Intra-state Sale





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




Inter-state Sales

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




Commission to e-commerce operator



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


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



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





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


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



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



To H 1,18,000

Inter-state Sales by Vendor

P Dr. 1,77,000





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


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



For payment received and remitted

Bank A/c Dr. 1,77,000

To P 1,77,000

S (1,77,000 – 3,540) Dr. 1,73,460

To Bank 1,73,460

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.



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



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



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.



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)



(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


Purchases A/c Dr. 68,000



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



For set-off








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ACCOUNTING FOR E-COMMERCE BUSINESS - ca-final.in · ACCOUNTING FOR E-COMMERCE BUSINESS 20.3 1. INTRODUCTION Electronic commerce (e-commerce) has become a buzzword for businesses over