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Accounting

E Commerce Accounting 1.0- A must read

by Sanjeev Archak Sanjeev Archak No Comments

The internet is fueling the world economy. India is no exception. An enormous population, increasing smart phone penetration and cheap data rates make India a prime market for any  e-commerce business.  A report by Business Today states that Indian e-commerce business has reached $38.5 billion. But before you start up you need to figure out a business model,buy a software platform, have a logistics partner,  have a sales & marketing plan. However, do not forget to have an accounting plan in place. A online venture is a challenge to an accountant and the founder.  E-Commerce Accounting 1.0 is the prep lesson before you hit the ground running.

Choose an E-Commerce Platform

It all starts from having a tool for handling your entire online business. A e-commerce platform will enable you to:

  1. build your website
  2. catalog your products
  3. handle orders/invoicing
  4. connect with payment gateways
  5. manage your inventory

Some of the  popular tools are Shopify, Magneto & Zoho Commerce. These tools will help you set up an online store quickly with least effort.These tools have to integrate with books of accounts for recording sales, purchase transactions. We recommend Zoho Commerce for the automatic integration with Zoho Books. This integration will save critical man hours.

Payment Gateways

A majority of your customers will pay you online. Your customers will  make payments for purchases via a payment gateway. Your bank accounts will have to be integrated with payment gateways. There are multiple payment gateways to choose from like Razor Pay, PayU & PayPal. These gateways charge anywhere between 1.5% to 5% of the payment received as gateway charges. Further, they do not transfer amounts received instantly to the bank account. There is lag of 2-3 days before amounts are credited.

Moreover, a reconciliation has  to be done between the invoices raised and cash received  from the payment gateway. Your books of accounts must automate, partly if not fully, this process.

Manage Inventory

If you hold inventory, then opt for an inventory management tool. Always remember that unsold inventory blocks cash. Therefore, an inventory tool will give you an insight into fast,slow and non moving items. It makes sense to sell only fast moving items and stock slow moving only when there is a demand.For instance, offering discounts on slow moving items can unblock cash.  Zoho Inventory allows you manage the entire process from procurement to sale seamlessly. Re-order level can be set for all items of inventory. This will prevent you from selling items that you don’t have.

Handling Product Returns, Credits & Discounts

E-commerce business thrives on discounts, cash backs & other credits. All of these have a financial impact.  Seamless integration between the e-commerce store and accounts will help. As the number of transactions rise, discounts and returns are bound to increase. An accountant must be fed this information for tracking numbers. Financial insights from books of accounts can be used to calibrate business strategies. You can read our post on retail metrics here

Managing Logistics

This is the “last mile” for an online business. The most critical part of the business is on time delivery.  Delivery deadlines have to be met and measured as a KPI. Indians still prefer Cash on Delivery, which means the delivery  partners  have to collect cash as well. Secondly, the cash has to be deposited into your bank account. Typically, there is a 2 week gap between collection & deposit of cash. In other words, your logistics partner becomes your debtor as well.

An accounting software must support integrations with logistics partners. This is a must as cash is involved.

Comply with GST Rules

In addition to the above, you must abide by GST regulations. GST in India is complicated. Different rates of taxes apply to:

  1. sales between the states
  2. sales within  the state
  3. export sales
  4. warranties
  5. additional services tied to product sales

Therefore, all the tools of your business must combine to meet this regulation. For example Shopify or Zoho Commerce must apply GST rates based on the customer location. Further, inventory tool must apply GST on warehouse transfers. Similarly,materials sent out for job work must also be addressed. As transactions increase GST filing must get automated as well.

Final Thoughts

This post is the result of handling clients in the e-commerce space. Integra Books uses and implements all the Zoho products mentioned in this post.  The benefits of technology and automation can transform your business. Let Integra Books assist your online business. Get in touch!

Cash Basis Accounting vs. Accrual Accounting

by Sanjeev Archak Sanjeev Archak No Comments

In our previous post we have touched upon how to make your accounting effective. In this post we will explore ” Cash Basis Accounting vs Accrual Accounting” in detail.

The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts.Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid).

Cash Basis of Accounting

Cash basis is simplest method of accounting.Revenues and expenses are accounted when they are paid.Consequently, this method does not recognize accounts receivable or payable.

This method is best suited for small businesses as it is easy to determine when the transaction has occurred.Moreover, there is no need to track receivables or payables. One has to look at the bank balances to understand the money available. 

Accrual basis accounting

Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. Revenue is recorded when the delivery of the product or service is complete, rather than waiting for payment.

Accrual method is an improvement over the cash method of accounting. This provides a realistic, long term view of the business finances. A possible downside is is that accrual accounting doesn’t provide any awareness of cash flow; a business can appear to be very profitable while in reality it has empty bank accounts.Accrual basis accounting without careful monitoring of cash flow can have potentially devastating consequences. 

The effect on cash flow

The method of accounting has an impact on the cash flow. Let’s look at an example of how cash and accrual accounting affect the bottom line differently.

Imagine you perform the following transactions in a month of business:

  1. Sent out an invoice  for Rs 5,000 for service completed this month
  2. Received a bill for Rs 1,000  in developer fees for work done this month
  3. Paid Rs 75 for a bill received last month
  4. Received Rs 1,000 from a client for a project that was invoiced last month

The effect on cash flow

  1. Using the cash basis method, the profit for this month would be Rs 925 (Rs 1,000 minus Rs 25)
  2. Using the accrual method, the profit for this month would be Rs 4,000 (Rs 5,000 minus Rs 1,000)

Which method to Choose?

The Income Tax Act in India allows non corporate entities to maintain books of accounts under cash basis. Non corporate entities in India may include an individual, a proprietary concern, a Hindu Undivided Family (HUF), a partnership firm, a LLP, a trust, etc.A corporate entity viz public & private limited companies, LLP’s are required to maintain the books of accounts only under accrual basis. 

A change in the method of accounting has to be stated in the income tax returns filed every year.

 

 

 

 

 

 

 

Key fundamentals to Effective Accounting

by Sanjeev Archak Sanjeev Archak No Comments

Accounting can be tedious work,however it helps you get more organized,brings more clarity and allows you to work more efficiently. In a day and age where business is cut throat competition,financial insights could be the game changer for your business. In many instances it could even be your competitive advantage.Without accounting, you’re driving blind like a car without knowing how much fuel is left in the tank. Proper book keeping gives you sight of what’s happening both internally and externally.

In this guide, we’ll break down the basics of accounting, we’ll show you why it is critical and the seven key steps to setting up and optimizing your own accounting process to help you get on the fast lane past your competition.

What is accounting?

In simple words, accounting is the process of tracking of all your company’s financial transactions, so you can see clearly where your business is spending money,where your revenue is coming from and which tax deductions you’ll be able to claim.

Why does accounting matter?

Accounting provides answers to critical questions viz

1.Is my business profitable?

Profit matters.Profit is the most critical measure of a business.It keeps your business ticking.Well kept books of accounts will always provide the correct answer to this critical question.

2.Are my operations cost effective?

You may be able to see your bottom line by glancing at your bank balance, but ups and downs in your account are also telling a story.Are sales up? Are my operations costs too high? Who knows? Paying attention to your financial statements is a great way to get to know the story of your business

3.Are my operations cost effective?

Taxes. There is no escaping from taxes. Well kept books of accounts will help you legitimately claim deductions. The more information & supporting documents your CA has, the better tax return will be.

4.Will I get loans?

If you need financing of any kind, having well-kept books gives lenders or investors a clear idea of your business’s current financial state and allows them to make financial projections about your company’s ability to pay off loan in the future.

Where to Start?

You probably are thinking that these tasks are easy and doable.However, from our experience working with multiple business, unpreparedness is precisely the problem that gets them drowned when everything seems to be fine and running smoothly. It then suddenly hits you like a Tsunami out of
nowhere.Here’s a few steps you can follow to help ensure you have the basics sealed tight and functioning for your advantage.

Step 1: Separate your business and personal expenses

It is critical to separate business finances effectively. In fact, we would suggest to permanently separate them from your personal finances.

If you are running a limited company (Pvt Ltd or LLP or Public Ltd) there must be distance between your personal and business finance.A corporate company is distinct legal entity different from the promoters.The law requires that finances of company be tracked separately. 

Plus, you’ll want to pull your hair out when it’s time to reconcile bank statements, you have to hunt down the receipt for lunch to remember if it was a personal expense or a client meeting.

Step 2: Choose a bookkeeping system

There are two main accounting methods: single entry and double entry.It is a matter of picking the system that’s right for your business and applying it consistently.

Single-entry is a simple system that might work for you if your accounting is straightforward. Entries are recorded one time, as either an input or output If you are doing your own accounting, this is the approach you are likely to take.

Double entry is much more complex, but also more detailed and effective. At first, all transactions are entered into a journal and then each of them entered into the ledger twice, as a debit and credit. If you are a corporate entity in India, you will be required to maintain your books under the double entry system mandatorily.

Step 3:Choose an accounting method: cash or accrual

If you are using cash accounting, you only record transactions when money has exchanged hands. So if you billed a customer you will not enter it till your customer has paid you.

Under the accrual method, you will record the income when you bill the customer,rather than waiting for them to pay you.

If you are a corporate entity in India, you will be required to maintain your books under the accrual system of accounting.

Step 4: Organise and store your documents

At tax assessment time, the burden on you to show validity of all of your expenses, so keeping supporting documents like receipts and records is crucial. Income tax law in India requires you to maintain the documents for a minimum of 8 years. It is smart to use cloud based software like Zoho Books or other such software to store receipts so you don’t have to deal with smudged receipts.

Step 5:Make it a habit

It’s easy to fall behind on your accounting when you’ve got other things happening. To stay on track, try setting a finance date with yourself once a month to get it done. If you do happen to fall behind, Integra Books can help you get caught up in no time.

There you have it, basic steps to make the foundation of your accounting processes strong and effective for your business’s advantage. Accounting is complex but with a strong foundation, you’ll be equipped to race past competition and ensure you are always on track to profitability.

In this new age of technology why should accounting be cumbersome and boring? Let the experts at Integrabooks help you.