Digital Marketplaces: Accounting In The World Of E-Commerce Is Not As Simple As It Seems

If there were one word that has become more and more prevalent within the world of businesses, both large and small, over the past decade or so, it would have to be ‘diversification’. The rise of the Internet and the subsequent migration of consumers from traditional brick and mortar stores to web-based purchases has certainly sparked many debates, and inherently resulted in organizations making enormous structural changes. This transformation has been a two way street in terms of benefiting customers as well as suppliers- the former gets to indulge in the luxury and convenience of buying what they desire from the comfort of their own home or while on the go, and the latter has been increasingly enabled to take advantage of consumer bases and supply chains that were previously inaccessible.

Accounting Solutions Ltd. has borne witness to this change, and has responded accordingly in ways that have assisted our clients both large and small. Physical retail locations are certainly not going to be disappearing in the near future, but, at the same time, they are not predicted to continue on the upward trend that was witnessed in the pre-web era. To combat this, many companies have made the jump to e-commerce sites, either as a way of complimenting, or in some cases completely replacing, their tangible counterparts.
 
For those who don’t know, or have had difficulty deducing this information from the prior statements, e-commerce essentially refers to the activities revolving around the buying and selling of products or services over the Internet. On paper, they do bear resemblance in many ways to traditional businesses. On the accounting side of things, however, they do provide a multitude of challenges that anyone attempting to establish an e-commerce enterprise should certainly be made aware of.
 
One of the most fundamental components of effectively performing accounting duties for an e-commerce site is to first understand the sales process behind it. Before we dive into that, there is some important terminology that any digitally savvy accountant should be aware of:
 
• Shopping Cart: This refers to any software program that tracks consumer purchases and also interacts with your inventory. This allows the customer to know what they are considering to buy, and also helps you keep track of your stocks in the back-end.
• Invoice: This is Accounting 101, the fundamentals, at its finest, but, for those novice accountants out there –an ‘invoice’ is a record of a sale or transaction.
• B2C: Abbreviation that alludes to transactions that occur between a business and a consumer.
• B2B: Abbreviation that alludes to transactions that occur between two businesses.
• Purchase Orders: The orders that you place with your suppliers in order to supplement your inventory are referred to as ‘purchase orders’.
• Sales Orders: When consumers make arrangements to purchase something through your business, this is referred to as a ‘sales order’.
• The Cost of Goods Sold: Any expenses that your business must incur as a result of producing a product or offering a service. This is an umbrella term that generally encompasses costs associated with manufacturing, distributing, or sourcing materials.
• Payment Gateway: This refers to a software program that allows customers to provide payment. Most e-commerce platforms have these as an integrated feature, sometimes as an additional cost.
 
Now that those are covered, let’s take a look at the sales cycle itself.
 
1. Acquisition Of Goods: For companies that offer products rather than services, the sales cycle begins in a similar fashion to any traditional business, where the owner purchases goods from suppliers, typically on a frequent basis. These are either paid for upon delivery or payments correspond with invoices being delivered by suppliers. For companies that make regular purchases on set cycles, these invoices are generally billed on a set cycle, potentially negotiated through a contractual agreement between parties.
 
2. Customers Step In: This is the a part of the cycle that most readers will be intimately familiar with – customers will enter the e-commerce ‘store’, and make a purchase, typically through some type of shopping cart application. Most e-commerce platforms allow their users to connect purchases directly to inventory counts, an invaluable base-level accounting feature to say the least. Not only do these extensions make your accounting work easier, it also keeps the customer immediately informed as to whether their item is in stock. Once they are ready to finalize the transaction, customers will ‘check out’, filling out any required information through an online form. Payment is generally offered at this point as well.
 
3. Fulfillment: The stage where the order is packaged and prepared for shipment. Business owners new to the concept of E-commerce should be aware of any costs associated with this so as to tie them into their budgets. As a general recommendation, we encourage our clients to look into acquiring a SMS text marketing extension for their e-commerce platform. This automatically informs the client that their order is ready to ship and is designed to enhance consumer confidence.
 
4. Shipping: The shipping process is generally instigated through an agreement between the business owner and the shipping company, and many of the latter receive payments on a by-shipment basis, sometimes in real time. It is important to practice caution by ensuring that payment is collected prior to shipping.
 
As you can tell, e-commerce enterprises bear many similarities to traditional businesses, but also possess a number of key characteristics that are sure to throw curve balls at conventional accounting practices. Having an understanding that the online business cycle works on different terms than the ways of old is just one step that one should take when embarking into the digital marketplace. For more information on how your company can evolve in such a manner, our doors are always open.

Chris Amundson is President of Accounting Solutions Ltd. located in Chicago, Illinois

Chicago Accounting Firm & Tax Solutions for Small Businesses

Last updated on February 20, 2019
This entry was posted in E-Commerce Accounting. Bookmark the permalink.