What are E-Commerce Accounting System Limitations?

Vince Iannello

August 4, 2022

Vince Iannello

Whether your business is a start-up or established, there are a number of challenges you will face as you establish your financial reporting. Here are some of the major issues you will face: Recognizing revenue incorrectly, managing returns, and cash basis accounting. In addition, you must invest in a robust system to manage your online accounting. Read on to learn how to overcome these challenges. What are the major limitations of e-commerce accounting system?

Cash basis accounting.

Cash basis accounting is advantageous for businesses without inventory because the business owner can focus on managing cash flow. Since cash flow is essential to maintaining a healthy business, avoiding problems with cash flow is critical for the long-term success of any company. However, cash basis accounting has several drawbacks. It is restricted to certain businesses, such as personal service businesses that do not fall under a specified service trade or business.

A company can use cash basis accounting when its revenues and expenses are recorded in cash. In cash basis accounting, revenue is recorded when it is received and expenses are recorded when they are paid. For example, if a company charges a customer for a $5,000 project, it records the invoice as cash when it is paid. An example of this would be a company that bills a customer for $1,000 in September and $5,000 in October, and receives the balance of the $2,500 in November.

Recognizing revenue incorrectly

In the U.S., revenue recognition is tricky, particularly in the subscription model. There are many different payment methods, and the rules for recognizing revenue differ by industry. The FASB released ASC 606 to provide guidance on this critical issue. This standard sets forth a five-step framework for recognizing revenue. To determine whether a transaction should be accounted for as revenue, an entity must identify the specific contractual obligations and associated pricing.

Another common mistake made by many e-commerce businesses is incorrectly recognizing revenue. Many e-commerce companies keep records on the date of the sale, rather than when the customer actually paid for it. To make things compliant with GAAP, online sales should be recorded in the month that they occur. This principle is especially important when year-end promotions are involved. It is also critical to determine the proper timeframe in which revenue should be recognized.

Managing returns

Managing returns in e-commerce accounting is a critical task for e-commerce retailers. In an Amazon survey, nearly a quarter of consumers bought something with the intention of returning it later. The holiday season is also a prime time for returns, with e-commerce brands experiencing the highest return rates during December, January, and February. Ecommerce companies also see similar trends in the amount of time it takes to process returns, as COVID has sped up the processing process.

Online retailers can avoid these problems by creating an effective returns process. They should also inform customers of the return process, if possible, and offer store credit instead of a cash refund. Some retailers are even thinking about outsourcing reverse logistics. In any case, remember to keep accurate records of returns and manage them properly. However, if you lack the time or resources to handle returns in-house, outsourcing reverse logistics is a wise decision.