Accounting for e-commerce businesses is not like accounting for any other business. In a traditional business you will make a sale, the customer will pay you and that payment will represent the value of that sale. Or, for a B2B sale you will raise an invoice, the customer will pay the amount invoiced and you will allocate that payment against that sale. In an e-commerce the amount you receive will rarely equal the value of that sale. This is because, no matter what payment service provider amongst the ever growing list of options, the payment service provider will almost certainly deduct their fees before paying you. In addition you may have selling fees from your platform or marketplace, and if, for instance, you use Amazon’s fulfilment services (“FBA”), FBA charges. You cannot simply account for the amount of cash you receive as your sale.
VAT/GST
The complexities of accounting for income are even greater if you are VAT registered and/or have to account for Goods and Services Tax (“GST”) outside the EU. The VAT treatment of a sale will vary depending upon whether you are selling to a customer in the UK, the EU, whether the customer is a VAT registered EU business, or located outside the EU, and the location you fulfil from. You can read more about the implications of VAT for e-commerce businesses here. When VAT registered the timing of the sale is also relevant in terms of when the VAT on that transaction should be accounted for. The VAT tax point will be when the customer pays, not when the payment lands in your bank account (which can be days, sometimes weeks later, depending on payment method and circumstances).
In addition the various charges deducted from your sale will potentially have different VAT implications. For instance Amazon fees are subject to VAT, but, if you are VAT registered and you provide Amazon with your VAT number then they will not charge you VAT. But it’s not quite that simple, because the transaction will have to be accounted for under the reverse charge mechanism. This means that you must account for the VAT that Amazon would have charged you, had they charged you UK VAT, as if you made the sale, and then reclaim that VAT along with all the other VAT you are reclaiming on your purchases. In most cases these two entries on your VAT return will cancel themselves out. Ebay however charge UK VAT at 20%, so there will always be VAT on their charges. Paypal fees are not subject to VAT since the service they are providing is that of a payment service provider. These differences ae caused by the nature of the different services you are paying for and the location of the service provider.
So, how do you cope with all these differences and account for your e-commerce transactions correctly? The good news is that there are solutions available. The bad news is that all of these solutions have their flaws, but Elver Consultancy can work with you to create an effective solution for your business. Which one is right for you will depend upon the platforms you use and the marketplaces you sell in and whether you use an order management solution like Expandly, Linnworks, or Brightpearl to name but three. You will also need to choose the right accounting software for your business.
Omnichannel businesses
If you are an omnichannel business the chances are you will be using an order management solution. At the “simple” end of the scale, for a business that sells on Amazon or utilises Shopify as its website platform (or indeed does both) a great time saving solution is A2X. This will integrate Amazon or Shopify with Xero, our recommended accounting software solution (included in all of our e commerce packages). It will ensure you account for all the various charges and deductions from your income and create the relevant transactions in Xero for you.
If you use an order management solution these will all integrate in different ways and with varying success. For instance Expandly integrates seamlessly with Xero, as does Brightpearl. But the integration doesn’t work in the same way as A2X with, for instance Amazon sales. The issue here, as with many of the marketplaces and platforms, is that you don’t receive payment into your bank account for a single sale. Multiple sales over a day, sometimes up to two weeks, are bundled together into one payment to you. A2X actually handles that bundling process more efficiently. But it only works with Amazon and Shopify! In addition Expandly is far more than a system for simplifying your accounting, it is an order and product management system that also integrates with your accounting system. Linnworks, on the other hand, doesn’t integrate with Xero itself, but there is another third party app that can be used to achieve this, provided by eBusinessGuru.
The above is far from exhaustive when you consider the multitude of platforms, payment providers, and order management solutions that are available. Which is why, of course, you need an e-commerce specialist accountant like Elver Consultancy.