Accounting for E-Commerce and Cloud Computing Companies


  • E-commerce (electronic commerce) is the activity of electronically buying or selling of products or online services over the Internet. Those company which has principal business as ecommerce is said to be e commerce company. Examples flipkart amazon, netlflix. 
  • Electronic commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated datacollection systems. 
  •  E-commerce operates in all four of the following major market segments: 
    • Business to business (B2B) India mart, alibaba, go daddy, amazon business 
    • Business to consumer(B2C) amazon, flipkart, irctc 
    • Consumer to consumer(C2C) quirr olx 
    • Consumer to business(C2B) commerce between customer and organisation 

For example: customer posts his project for buiding house within a budget in online and companies review customers requirements and bid on the project. Consumers reviews the bid and selects a company that will complete the project under his budget.

  • Primary Income source is through the sales of their product to consumers or businesses. However, both B2C and B2B companies could earn revenue by selling their services through a subscription-based model such as Netflix, Amazon Prime, which charges a monthly fee for access to media content. Revenue can also be earned through online advertising. For example, Facebook earns revenue from ads placed on its website by companies looking to sell to Facebook users. 

Cloud Service companies 

  • Cloud computing is the delivery of computing services—servers, storage, databases, networking, software, analytics, intelligence and more—over the Internet, in technical jargon (“the cloud”) to offer faster innovation, flexible resources and economies of scale. Example onedrive, googledrive. 
  • Cloud services entities in addition to the cloud service also frequently offer professional services, such as implementation, data migration, business process mapping, training and project management services,. These professional services may be required for a customer to begin using the cloud services in the manner described in the contract. 


  • E-commerce and cloud service companies are engaged in transactions that are similar to transactions entered into by other businesses, so they should follow generally accepted accounting principles for recording those transactions. 
  • These Companies prepare their financial statements under Companies (Accounting Standards) Rules, 2006 under Section 133 of Companies Act, 2013 as well as those companies applying preparing their financial statements under Companies (Indian Accounting Standards) Rules, 2015 under section 133. 

Sources of Revenue 

  • The main sources of revenue of e-commerce companies presently include: 
  • Membership and subscription; 
  • Merchandising activities; 
  • Advertising services; and 
  • Other services like web-hosting, content selling, etc. 


Revenue Recognition 

AS 9 (Revenue Recognition) 

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities from the sales of goods, rendering of services and from the use by others of enterprises resources yielding interest, royalties and dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.

Revenue Recognition: 

On sale of goods, revenue should be recognize when 

  1. all significant risk and reward has been transferred, measured reliably and ultimate collection is certain.

On rendering services, 1) revenue from service transaction is recognized as the service is performed either by proportionate completion method or completed service contract and significant uncertainty exist regarding consideration .

Ind AS 18(Revenue): It does not recognize completed service contract. Revenue is to be recognized at the fair value of the consideration received or receivable (Variable Consideration) taking into account the amount of any trade discount or volume rebates.  

Ind AS 115 (Revenue from contracts with customers)  

It is a comprehensive standard with 5 steps for revenue recognition are:-  

1) Identify the contract with customer  

       An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met: 

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; 

(b) the entity can identify each party’s rights regarding the goods or services to be transferred; 

(c) the entity can identify the payment terms for the goods or services to be transferred; 

(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and 

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession  

2) Identify the performance obligation  

Performance obligation is a promise to deliver a good or provide a service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. 

For example 

 An ecomm dealer sells a washing machine to a customer for an all inclusive price that includes the washing machine and three years of free service. This contract would include two performance obligations. The 1st performance obligation would be sale of washing machine and the second performance obligation would be for the service.  

           At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: 

(a) a good or service (or a bundle of goods or services) that is distinct; or 

(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. 

3) Determine the transaction price  

             An company shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some GST). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or 

     4)   Allocate the transaction price to performance obligation. 

     5)   Recognize revenue when entity satisfies performance obligation 

When a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price that is allocated to that performance obligation. 

Multiple element contracts prescribes that the transaction price in such arrangements must be allocated to each separate performance obligation on the basis of fair value, so that revenue is recorded at the right time and at right amount. 

The washing machine performance obligation revenue would be recognized upon delivery to the customer. The service performance obligation would be recognized over the three year service obligation  

Main source of revenue  

Membership and Subscription 

In order to avail of the services provided by websites, consumers are usually required to pay an amount as membership fees or subscription. Such membership fee or subscription may also be collected in the form of registration fee. While some services are available to members free of cost after registration, other services may be made available only on payment of additional fees. Revenue earning process is completed by performance of specified actions as per the terms of arrangement, not simply by originating a revenue generating arrangement.  

The membership/registration or subscription  fees received by ecommerce or cloud computing organization may fall in the following categories and accounting treatment of the same: 

  1. Non-refundable fees that entitle a member to use the service of the website by making payment for all services separately; zomato gold, amazon kindle 

 It is an initial membership fee in nature of entrance should be capitalized and payment for service be recognize as per AS 9 or Ind AS 18/115. 

i. Non-refundable fees that entitle a member to use the services of the website indefinitely without making any further payment for use of services; (sun next),  

ii. It is in nature of upfront fee and continuing performance obligation so its recognition should be deferred and same should be recognize systematically over the period(s) during which fees are earned. For indefinitely providing service allocation of fees not less than 5 years (time basis) or any other basis usage basis which ever is more representative of the service render.  

iii. Non-refundable fees that entitle a member to use the services of the website for specified period of time;ex; subscription to taxmann and tax sutra. Fees should be recognize on time basis over the specified period unless another systematic and rational basis is more representative for users. 

iv. Fees that are refundable subject to fulfillment of certain conditions stipulated in subscription agreement. Usually contractual stipulations require such conditions to be fulfilled with a specified time period; Revenue should be recognized when it becomes reasonably certain that conditions would be fulfilled. Amount should be credited and retained in liability account as ‘customer refundable fees account’.

v. Periodic membership/subscription fees on monthly, quarterly, annually or such other basis. Recognize as per accrual accounting.

Example: Recognition of Upfront fee by cloud service company 

A Ltd, a cloud service company, enters into a contract with a customer for a licence of its software and a non-cancellable one-year subscription to access the licensed application (the cloud services). The contract amount for the software licence is an upfront, non-refundable fee of Rs.10 Lakhs. The fee for the cloud services is Rs. 500,000 for one year. Therefore, the total fees paid by the customer for the first year’s subscription is Rs. 15,00,000. The customer has the right to renew the cloud services each year for Rs.500,000. 

Assume that A Ltd. determines the software licence and cloud services are a single performance obligation that is licence of its software. There are no other promised goods and services in the contract. Therefore, the upfront fee is not associated with the transfer of any other good or service to the customer. However, A Ltd. determines there is an implied performance obligation. That is, the right to renew the cloud services each year for Rs.500,000 is a material right to the customer because that renewal rate is significantly below the rate the customer paid for the first year of service (Rs.15 Lakhs in total). Non-refundable upfront fee that provides a material right to the customers, the amount of the fee allocated to the material right would be recognised over the period of benefit of the fee, which may or may not be the estimated customer life. 

Based on its experience, A determines that its average customer relationship is three years. As a result, A determines that the performance obligations in the contract include the right to a discounted annual contract renewal and that the customer is likely to exercise twice. Therefore, A defers the non-refundable upfront fee of Rs.10,00,000 and recognises the same over the three years on a straight-line basis. 

Merchandise Activity 

It consist of two model are first Market place model(zero inventory) which is an online platform which acts a as middle men between product or sevice supplier and will reach to wider audicence attention. e.g. Naptol, ebay and Shopclues record revenue on net basis(ie commission) and second is Inventory model e.g. Jabong, recognize revenue gross basis (ie revenue and cost).  

  1. i. Auction: C2C model, e.g. Ebay which host auction sites where users can purchase or sale goods or services. Auction revenues are from two sources they  are upfront (listing) fee (charge to seller for listing to be maintained over a specified period of time) and transaction fees (facilitating transaction usually based on percentage of revenue earned by seller). Recognize as time basis but check whether no significant vendor obligation to be fulfilled and collection to related receivable is certain.
  2. Shipping and Handling charges: if this charges are invoice to consumer at composite rate(then it should be part of turnover) or recovered separately as absolute amount or percentage of sale value (it should be recorded separately not include in sales revenue)

 iii. Multiple Element Arrangement:- Its talk about multiple product or service sold at consolidated price. So consolidate price should unbundled in company specific fair value (consider transaction with unrelated party). Example an organization may agree to host another organization website and also provide web maintenance service. 

Advertising Services 

One of the principal sources of revenue is from: 

i. Banner Advertisements: Usually hosted for short duration. Organization may enter into agreements whereby they agree to host advertisements for customers, without any minimum guarantee impressions. It is appropriate to recognize advertisement revenue on straight line basis over the period for which the banner is hosted unless another systematic and rational basis of revenue recognition is more representative of the service rendered

ii. Sponsorship Advertisement: For longer term and involve more service integration. Contract includes minimum number of impressions or click through. Advertisement agency normally recognized when the related advertisement or commercial appears before the public and the necessary intimation received by the agency and collection of the resulting receivable is reasonably certain

iii. Measurement of Consideration in advertising Barter transactions:- Sometime organization enters into advertising barter transactions with each other, in which they exchange rights to place advertisements on each others’ online properties. Barter transaction should be recognized at fair value of similar transaction are readily determinable with unrelated party occurred not later than six month. 


Other Services 

i. Revenue from maintenance of websites including web hosting( creation of websites)

 Revenue should be recognized over the period for which website is hosted or maintained provided such services are rendered over the period of contract on continuous basis unless another systematic and rational basis of revenue recognition is more representative of the service rendered.  

ii. Content Selling 

Some organization maintains websites which contain text or other material which can be sold as content for a price. Generally a downloading facility is available to purchaser. Organization should determine the time at which delivery of the content to be complete and recognize the corresponding revenue. 


 Rebates, discounts and others sales incentives 

i. Organisation offers rebates or introductory offers at heavily reduced prices in order to stimulate sales and generate new customers; the value of such rebates should be reduced from turnover;  like zomato ola uber

ii. Offer specific in relation to a particular customer, these should be shown by way of deduction from the value of turnover in statement of profit and loss account; 

iii. General rebate should be treated as a selling and marketing expenses;  

iv. Rebate in kind, an appropriate estimate of cost be made.

Point and Loyalty Programmes 

In some cases, an e-commerce company may sell points to its business partners, who then issue the same to their customers based on purchases or other actions. For example, an e-commerce company may arrange with a bookstore to issue reward points to the customers of the book store based on the minimum volume of purchases made by the customers. The customers can exchange these points with the dot-com company for use of the e-commerce company’s website for a specified period of time (taxmann). In some cases, the e-commerce company may itself award the points in order to encourage its members to take actions that will generate payments from business partners to the company. 

 AS 29(Provisions, Contingent Liabilities and Contingent Assets) 


 1) An enterprise has a present obligation as a result of past event;  

2) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and  

3) A reliable estimate can be made of the amount and obligation.  

Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets)  

Provision Recognition: In addition to AS 29 it is also recognized on constructive obligation. When the effect of time value is material the amount of provision is the present vale of expenditure expected to be require to settle, discount at pre tax rate.  

Following accounting treatment is:  

i. When incentive are specific in relation to customer shown by way deduction from turnover. Incentive are general in nature then general provision be made on statement of profit and loss based on appropriate estimate of cost itself.


A retailer has a loyalty program that rewards customers one point per Rs.10 spent. Points are redeemable for Re.1 off future purchases (but not redeemable for cash). A customer purchases Rs.1,000 of product at the normal selling price and earns 100 points redeemable for Rs.100 off future purchases of goods or services. The retailer expects redemption of 95 points (that is, 5% of points will expire unredeemed). The retailer, therefore, estimates a standalone selling price for the incentive of Rs.95 based on the likelihood of redemption. 

The retailer would allocate the transaction price of Rs.1,000 between the product and points based on the relative standalone selling prices of Rs.1,000 for the product and Rs.95 for the loyalty reward as follows: 

Product Rs.913 Rs.1,000 x Rs.1,000/Rs.1,095) 

Points Rs.87 (Rs.1,000 x Rs.95/Rs.1,095) 

The revenue allocated to the product is recognized upon transfer of control of the product and the revenue allocated to the points is recognized upon the earlier of the redemption or expiration of the points. 

The estimate of the number of awards that will expire unredeemed is updated at each period end.

Asset (Intangible Asset) 

 Applicability of AS-26 or Ind-As-38 

 AS 26 (Intangible Assets) 

Identifiable non monetary assets without physical substance, used for production of goods, rendering of services or administrative purpose;  

Amortized: Over useful life not exceeding 10 years in ratio of future economic benefit, if pattern cannot determine reliably, the straight line method used;  

Recognize: Future economic benefit ensured and cost measured reliably. 

 Ind AS 38 (Intangible Assets) 

Intangible assets can have indefinite useful lives to be tested for impairment and not amortized. Allows Revaluation Model if active market exist. 

Website Development Cost  

Significant cost of organization in developing and maintaining internet websites to promote or advertise their products or services;  

Cost incurred in planning stage shall be expensed  

Cost incurred in website application and infrastructure development stage shall be capitalized 

Cost incurred to develop graphics should be capitalized 

Cost incurred to develop content be expensed  

Cost incurred in operating stage be expensed First website should amortize in two years from site open to customer and new site developed expense in same year.

*Prepared based on ICAI Guidance Note on Accounting by E-Commerce entity




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