E-Commerce has become a locomotive for changes in the global business environment, which has sparked responses from various supporting infrastructures, including the accounting profession. The e-commerce business has several challenges and accounting considerations that many business people and their accountants are not aware of when they are still in their initial stage. Bookkeeping and accounting errors can lead to serious financial and legal implications, which threaten business continuity while their e-commerce business is growing, or even when it is at the peak of success.
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The challenge of accounting practice in e-commerce companies is that the number of transactions is very large in an electronic system. That is constantly changing because it is required to keep up with very fast technological developments. E-commerce transactions often confuse the tax authorities and the inherent legal aspects. Management of business processes, logistics, inventories, product returns, entries, authority over data access and analysis are among challenge for accounting practices in the e-commerce business.
Prudent Accounting for E-Commerce Practices
Prudent consideration of accounting practices related to the selection of accounting policies, systematic estimation, and response to sources of uncertainty will safeguard against adverse financial and legal implications in the future. Incorrect consideration such as choosing the wrong methodology, ignoring cash flow information, underestimating inventory counts, applying high overhead structures, forgetting costs incurred in the sales funnel, guessing with excessive optimism, and managing data manually.
Strengthening the Accounting Profession
E-commerce growth will not eliminate the role of the accounting profession. Otherwise, e-commerce strengthens the accounting profession as a producer of financial information, because it can accurately represent business conditions in a digital environment. The management accountant in the e-commerce business must have a comprehensive understanding of the e-commerce business processes in his company.
Auditing Financial Reports for E-Commerce Businesses
In addition, the financial reports produced by the management accountant must be audited by an independent auditor who also understands e-commerce business processes in general. The goal is to successfully issuing quality audited financial reports that users can rely on. The main users of audited financial reports are e-commerce business owners, who generally have an optimistic, aggressive and innovative characteristics of entrepreneurial mindset. This constructive character must be protected by realistic, conservative and an obedient accountant.
Common Business Processes in E-Commerce
E-commerce has business processes that are common in non e-commerce business environments. Business processes such as product marketing/promotions, negotiations and clarifications, data exchange, buying and selling transactions and payments to after sales services. What is different in e-commerce is that the entire process is carried out online through electronic media or internet. The use of electronic media makes it easy for sellers and buyers to make transactions anytime and anywhere, without having to meet in person.
Revenue Recognition in E-Commerce
Overview of Revenue Recognition Standards
One of the accounting issues in e-commerce business entities is revenue recognition. Financial Accounting Standards (SAK) in Indonesia regulate the accounting treatment for revenue recognition not based on industry classification and certain business models, but based on principles and substance that transcend form. Revenue recognition is regulated in the Statement of Financial Accounting Standards (PSAK 72).
Five Stages of Revenue Recognition Process
PSAK 72 regulates the accounting treatment for revenue from contract with customers, which was originally ruled based then becomes principle based. PSAK 72 highlights its principle-based nature by stating that revenue is recognized when the seller has fulfilled his promise or obligation to do something. The objective of PSAK 72 is to establish the principles that entities apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from contract with customers.
Stage 1 : Identify contracts with customers;
Stage 2 : Identify obligations to transfer goods or services;
Stage 3 : Determine the transaction price;
Stage 4 : Allocating the transaction price to performance obligations; and
Stage 5 : Recognizing revenue when each performance obligation has been met.
Recognition and Measurement
In revenue recognition, the entity must identify contracts with customers of the rights of each party regarding the goods or services to be transferred, the terms of payment, the commercial substance (the risk, timing or amount of the entity’s future cash flows expected to change as a result of the contract), the probability of the entity to claim the reward as its right in the exchange for goods or services, which will be transferred and the contract has been agreed by the parties.
If these conditions are not met and the entity receives a reward from the customer, the entity recognizes the reward received as revenue only when one of the following events occurs: the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all the rewards the customer promised has been received by the entity and cannot be returned; or the contract has been terminated and the consideration received from the customer is non-refundable.
The entity can combine two or more agreed contracts or modify the contracts as a result of changes in the scope or price of the contracts which are then agreed upon by the parties to the contracts. At the beginning of the contract, the entity must value the goods or services promised in the contract with the customer and identify as an obligation to do each promise to transfer to the customer. General contracts explicitly state the goods or services promised to be transferred to the customer.
In determining the transaction price, the entity considers the impact of all of the following: variable fees, variable fee threshold estimates, the existence of a significant financing component in the contract, non-cash consideration and fees payable to customers. The entity allocates the transaction price to each obligation identified in the contract based of a relative stand-alone selling price in accordance with paragraphs 76-80 of PSAK-72, unless specifically provided in paragraphs 81-83 (for allocation discounts). and paragraphs 84-86 (for allocation of benefits that include a variable amount).
The entity recognizes revenue when (or during) it satisfies an obligation by transferring the promised goods or services to the customer. Assets are transferred when (or during) the customer obtains control of the assets. If at the beginning of the contract the entity determines to settle performance obligations over time, one of the following criteria must be met:
a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance when the entity performs its performance obligations;
b) The entity’s performance of creating or enhancing assets (for example, work in progress) that the customer controls as the assets created or enhanced; and
c) The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed by a specified date.
If at the beginning of the contract the entity determines the performance obligation to be completed at a certain time (Performance Obligation at a Point in Time), then the entity will complete the performance obligation at a certain time. To determine the specific time at which the customer obtains control of the promised asset and the entity satisfies the performance obligation, the entity needs to consider the control requirements.
Presentation and Disclosure Requirements
An entity presents contracts in its statement of financial position as contract assets or contract liabilities, depending on the relationship between the entity’s performance and customer payments, when one of the parties to the contract has performed the obligation. The entity presents an unconditional right to consideration separately as a receivable.
The entity shall disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all the following: contracts with customers, significant judgments and changes in judgments made in applying these standards to those contracts and assets recognized for the cost of obtaining or fulfilling contracts with customers.
Ensuring Reliable Accounting and Bookkeeping
Reliable accounting and bookkeeping practices are needed by stakeholders in the e-commerce business environment, especially for e-commerce business owners. Reliable and accurate accounting information represents the entity’s business conditions, enabling owners to manage and predict cash flows. This means that reliable accounting and bookkeeping practices enable e-commerce business owners to plan the future, maximize profit potential and secure business growth.
Reliable accounting practices can also help business owners and management to manage e-commerce business with highly compliance in tax. Like most business entities, e-commerce companies are subject to a specific (often complex) set of tax guidelines, and no one wants to be surprised by a tax bill or end up with a fine. As the business grows, the e-commerce company’s financial statements will become more complicated. Without reliable accounting and bookkeeping practices, growing an e-commerce company can become a nightmare from miscategorized transactions, lost funds and unreconcilable accounts.
Looking for expert assistance with accounting in e-commerce? SW Indonesia is here to help! With our team of experienced professionals, we specialize in providing comprehensive accounting and bookkeeping services tailored specifically for e-commerce businesses. Whether you need guidance in revenue recognition, managing complex transactions, or ensuring compliance with tax regulations, we’ve got you covered. Contact us today at +62 2993 2132 to learn more about how SW Indonesia can support your accounting needs and drive the success of your e-commerce venture.