Clearing the air, the Institute of Chartered Accountants of India (ICAI) has issued a guidance note for e-commerce businesses named ‘Accounting for E-Commerce entities’ over recognising the expenses and revenues in the financial statements.
E-commerce is simply buying and selling goods and services over the internet. The industry is taking over; stats suggest that in 2020, the global e-retail sales surpassed 2.8 trillion US Dollars. The revenues and sales are not just by traditionally selling products and services but mainly through subscription, loyalty programmes, advertising, other services like content selling, etc.
Also, in such transactions, the responsibility to deliver goods and services falls on the e-commerce entity. Thus, it is crucial to determine when the risk and rewards of ownership get transferred.
The ‘Guidance Note on Accounting for Dot Com Companies’ has been revised, and the new ‘Guidance Note on Accounting for E-commerce entities’ provide clarity on accounting issues arising on various accounts like membership and subscription fees, revenue from auctions, multiple element arrangements and advertising, and treatment of costs of point and loyalty programmes, etc.
The note applies to companies that prepare financial statements under Companies (Accounting Standard) Rules 2006, amended under Section 133 of Companies Act, 2013. The guidance note also applies to LLPs and Partnership firms.
The guidance note also clarifies the ‘Right to Return’ against goods or services or coupons. It gives customers the right to exchange goods or services sold against other goods or services. It also deals with the revenue recognition perspective of web hosting services, advertising services, etc.
Another aspect of e-commerce, resellers and consignment agents, are also covered under this note. It elaborates that the risk and reward risk and reward in the case of consignment agents do not get transferred. Hence, the buyer, i.e. the dealer or agent, gets physical possession of the goods but does not assume all the risks and rewards.