Accounting is essential for running your e-commerce business. It monitors and records financial activity to ensure compliance with regulations and tax obligations. It helps you manage cash flow, determine profitability, and set business goals.

Content:

1. E-Commerce Accounting Challenges
2. E-Commerce and Tax Standards in Singapore
3. Tips for Effective E-Commerce Accounting

Business owners who lack professional accountancy training may need help in accounting and bookkeeping. E-commerce accounting poses unique challenges due to high-volume transactions, multiple payment gateways and international sales and tax regulations. It is complex and requires special software and trained professionals. A third-party accounting service like CorrectCounts provides online accounting services for small businesses to save time. This blog explains challenges and provides tips for effective e-commerce accounting.

E-Commerce Accounting Challenges

1. High Transaction Volumes

Your e-commerce business likely has high volumes of daily transactions from 24/7 online operations across different platforms. E-commerce platforms like Amazon impose variable fees for collecting customer data. Your accounting system must manage and categorise these differences. 

However, automated accounting software has limitations. High transaction volumes may overwhelm the system. For instance, Xero lags when monthly transaction volumes exceed 10,000. We recommend processing sales data in batches, e.g., daily, monthly, or weekly. A trained accountant can help decide which batching system fits your business scale best. 

2. Managing Multiple Payment Gateways and Currencies

E-commerce businesses operate in different regions and countries. You must manage multiple payment gateways and currencies during account reconciliation. 

• Different payment modes: Customers pay by debit or credit cards, ‘buy now pay later’ schemes, vouchers, cash on delivery, and other methods. 
• Discounts: Some payment gateways offer discounts and automated currency conversion. 
• Subscription Fees: Third-party e-commerce platforms like Shopify and eBay may issue monthly subscription fees.
• Transaction Fees: Payment gateways or banking systems may charge transaction fees for securely routing payment to your business account. 

A proper accounting process records financial data from all these channels.

3. Inventory Management 

You must keep accurate and timely inventory records to set profitable product prices and update stock levels in real time.  Your inventory value determines profitable product prices. The inventory value includes all direct costs, such as storage, manufacturing, warehouse management and transport fees. Your suppliers will issue purchase orders documenting these costs. Keep track of purchase orders with an accounting system to calculate your inventory value automatically.

Most e-commerce platforms automatically update stock and inventory numbers after each sale, but you must also update the corresponding sales record in your balance sheet for reconciliation. Updating, collecting and coordinating sales records and inventory numbers across different platforms is complex and time-consuming.  An experienced and trained accountant can use accounting software for timely inventory management.

4. Returns and Refunds

Depending on the nature of your business, you may have policies against returns and refunds. No-return policies usually apply to food, hygiene, or beauty products. 

E-commerce businesses must coordinate inventory and cash flow data from returns and refunds across different platforms and countries. Your refund and return process must ensure the refund is issued and the product returned, as any discrepancy, e.g., refund issued but product missing, affects transaction and inventory records. 

Best practices include issuing trackable return labels to automatically record operational costs (i.e. shipping, handling, packaging materials) and track the frequency of refunds and returns.

5. Sales Tax and GST Compliance for Online Sales 

Sales tax is the additional tax levied on product costs during a sale. You must collect and pay this tax to the local revenue authority or government. Accounting software such as Xero and TaxJar can calculate and apply sales tax for you.

Filing sales tax is challenging for many businesses as they must understand the different tax rates in each state or country. Research tax laws in each area to ensure your company follows regulatory standards when declaring and paying tax.

6. Digital Marketing and IT Security Expenses 

Digital marketing is essential for e-commerce businesses with no physical stores. Most SMEs hire third-party digital marketing providers instead of in-house teams. You must account for third-party digital marketing expenses on social media or offline channels to calculate your ROAS (return on ad spend). 

Online transactions also face more security threats than physical stores. You must consider expenses for IT security measures like firewall installation, antivirus protection, and data encryption.

E-Commerce and Tax Standards in Singapore

1. Compliance with Singapore Financial Reporting Standards (SFRS)

E-commerce businesses in Singapore with a financial period starting from or after 1 January 2003 must comply with the Singapore Financial Reporting Standards (SFRS) when preparing financial statements. E-commerce sellers must record all transactions in Singapore dollars (SGD) and levy sales tax on all sales. Following SFRS prevents penalties and ensures your financial records are reliable and accurate.

2. Compliance with Inland Revenue Authority of Singapore (IRAS) Regulations

All businesses must pay corporate income tax and collect GST (Goods and Services Tax). The current corporate income tax rate is 17%. GST will increase to 9% from 1 January 2024 onwards. IRAS requires businesses to keep records, bank statements and source documents of financial transactions for at least five years from the relevant Year of Assessment (YA). 

Tips for Effective E-Commerce Accounting

1. Choose the Right Accounting Software

Most accounting software covers basic functions like tax filing, invoicing, multi-currency handling and file storage. Some offer special features like automated payment reminders or e-commerce platform integration. List your needs and choose one that fits your business scale and requirements. In this blog, read in detail about top accounting software for Singaporean startups and SMEs 

2. Segregate Business and Personal Finances

Combining business and personal accounts is a mistake commonly made by new SME owners who are unaware of best e-commerce accounting practices. It’s good practice to separate them for easier accounting and auditing. 

3. Conduct Regular Financial Reconciliation

Regular financial reconciliation prevents fraud and protects your company by compiling and tracking financial records for review. Accounting software imports transaction records from business bank accounts. It categorises or reconciles these records for report generation and analysis. You can regularly review business cash flow for financial insights and fraud.

4. Automate Data Entry and Reconciliation Processes

Automation saves time and simplifies complex processes, preventing errors and reducing fraud. Nearly all accounting software automates data entry, reconciliation and report generation. Automation helps organise and manage inventory, cash flow, and returns. Professional accountants use accounting software to manage and resolve most e-commerce accounting challenges effectively, including:

• Automatic consolidation and conversion of payment from multiple payment gateways
• Daily recording and processing of high transaction volumes
• Real-time inventory updates
• Automatic calculation of inventory value (including purchase orders and related costs)
• Tracking returns/refunds
• Tax calculation and consolidation
• Recording and compiling marketing and IT expenses

Conclusion

Proactive accounting for small businesses enhances e-commerce SMEs’ growth and sustainability. It monitors the business’s financial health and increases credibility for investors. CorrectCounts’s professional accountants and bookkeepers apply accounting best practices and standards to ensure your e-commerce business maintains good financial health.