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eCommerce Financial Statements

How To Use eCommerce Financial Statements For Your Business?

The eCommerce financial statements are documents that provide a summary of the financial performance and position of your eCommerce business over a specific period. These statements offer insights into the revenue, expenses, assets, liabilities, and equity of your business.

They form the fundamental source of information that helps you analyze the profitability, operating performance, financial position, and financial health of your business concern.

Now, eCommerce financial statements vary from traditional financial statements regarding income, expenses, timing of cash flows, revenue and expense recognition, inventory management, payment processing, investments, and more. As an eCommerce seller, you need to understand the accounting aspects where eCommerce business varies from traditional businesses for financial reporting and analysis.

Let’s consider revenue recognition. The accounting challenge for an eCommerce business is mainly about when to recognize revenue and how to present the recognized revenue in the financial statements, that is, whether in gross or net terms.

Relative to traditional businesses, revenue recognition can be more complex in eCommerce due to factors like subscription services, digital products, and different payment models.

Consequently, it becomes important for an eCommerce business to determine when the risks and benefits are transferred to the client to recognize revenues appropriately. If the risk of delivery and loss remains with the eCommerce company, it may be appropriate to recognize revenues only after the products have been delivered.

However, in cases where buyers have the right to return the products or there is uncertainty about the possibility of return, then it may be appropriate to not recognize revenue until the shipment has either been accepted by the customer or the period of rejection has expired. But, if an eCommerce business can make a reliable estimate of the amount of goods that will be returned, it becomes appropriate to recognize the revenue for those amounts, assuming that other conditions for recognizing revenues are met.

Thus, financial reporting in eCommerce financial statements is separate from that for traditional businesses. As an eCommerce seller, you must be aware of the various eCommerce financial statements, what are the e-commerce incomes and expenses related to your eCommerce business, and how these are presented and recognized in the financial statements.

In this guide, we will walk you through all the important eCommerce financial statements that you must prepare as an eCommerce seller to know your financial position and analyze profitability. We will also chart out the guidelines for recognizing incomes and expenses in these financial statements.

What Are The Basic eCommerce Financial Statements?

eCommerce financial statements are the principal accounting statements that reflect a combination of recorded facts, accounting principles, basic accounting assumptions, and personal judgments. These basic accounting statements provide a comprehensive overview of your eCommerce business’s financial performance, position, and cash flows. They are crucial for assessing your business’s profitability, liquidity, and overall financial health.

The key reasons why you need to create these financial statements as an eCommerce business include:

  • To gain information about the economic resources and obligations of your eCommerce business
  • To access information about the earning capacity of your business
  • To gain information about the potential cash flows of your business including the amount, timing, and related uncertainties
  • To access information that helps in judging the effectiveness of your eCommerce business in utilizing its resources
  • To exhibit accounting policies, concepts, and the changes undertaken during the year

So, the three basic financial statements that you must prepare as an eCommerce business include the income statement, the balance sheet, and the cash flow statement.

Let’s discuss what are each of these eCommerce financial statements and how to analyze them.

Alan Chen Freecashflow.io

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Profit And Loss Statement eCommerce

What Is The Income Statement Of eCommerce?

eCommerce Profit And Loss Statement, also called eCommerce income statement, is one of the three basic financial statements that you must prepare to represent all the income and expense items, including other comprehensive income of your eCommerce business. In this single statement of profit and loss, you must recognize all income and expense items whenever you earn and incur such items.

Thus, the income statement of your eCommerce business represents its earning activities. It describes your online business’ outcome of all revenue-generating activities.

Now, an eCommerce income statement comprises two segments. One of the segments represents the inflow of funds that result from the goods and services you sell to your online customers. The inflows refer to the assets that your business creates by generating revenues. Such assets may include cash or accounts receivable.

Say, for instance, you manufacture and sell coffee mugs on your eCommerce store. The payment that you receive on making sales on your eCommerce store is an asset for your business.

The other segment of the eCommerce income and expense statement represents the outflow of funds or resources. These are the resources that you utilize to generate sales for your online business and are called expenses.

Considering the example of coffee mugs, the cost that you incur to manufacture coffee mugs including the cost of raw material, labor, storage, transportation, and overheads are the expenses that you incur to generate sales. Likewise, to boost online sales of your coffee mugs, spending money on PPC ads is an expense that you incur to generate online sales

Now, if the inflows exceed the outflows of your eCommerce business, it means it has generated net income during an accounting period. However, if outflows exceed inflows, it means your eCommerce business has incurred a net loss during a given accounting period.

Furthermore, you need to present different income and expense items of your eCommerce business in different ways in the profit and loss statement.

Accordingly, you must show income and expense items that arise in the normal course of your business separately as operating incomes and operating expenses.

For instance, the income generated from the sale of coffee mugs on your online store is the operating income of your eCommerce business. The cost of fulfillment, sales, marketing, and technology for selling the coffee mugs online are operating expenses of your e-commerce business.

Likewise, you must showcase expense and income items that arise from sources other than the normal course of your business separately as non-operating expenses and non-operating incomes. For instance, the interest expense that you pay on bank loans is non-operating, whereas the interest income that you receive on investments is non-operating.

Read: How To Read An Income Statement For E-Commerce Business?

Creating A Profit And Loss Statement For E-Commerce Business

To understand how you need to prepare an income statement for an eCommerce business, let’s consider an income statement example of Amazon, one of the most successful eCommerce businesses across the world.

The following is Amazon’s Income Statement for the year ending December 31, 2020. The figures are represented in millions of US$. This will act as the perfect eCommerce P&L example for you to create a Profit And Loss statement for your online business.

Particulars 2018 2019 2020
Net product sales 141,915  160,408  215,915 
Net service sales 90,972  120,114  170,149 
Total net sales 232,887  280,522  386,064 
Operating expenses:      
Cost of sales 139,156  165,536  233,307 
Fulfillment 34,027  40,232  58,517 
Technology and content 28,837  35,931  42,740 
Marketing 13,814  18,878  22,008 
General and administrative 4,336  5,203  6,668 
Other operating expenses (income), net 296  201  (75)
Total operating expenses 220,466  265,981  363,165 
Operating income 12,421  14,541  22,899 
Interest income 440  832  555 
Interest expense (1,417) (1,600) (1,647)
Other income (expense), net (183) 203  2,371 
Total non-operating income (expense) (1,160) (565) 1,279 
Income before income taxes 11,261  13,976  24,178 
Provision for income taxes (1,197) (2,374) (2,863)
Equity-method investment activity, net of tax (14) 16 
Net income 10,073  11,588  21,331 
Basic earnings per share 20.68  23.46  42.64 
Diluted earnings per share 20.14  23.01  41.83 
Weighted-average shares used in the computation of earnings per share:      
Basic 487  494  500 
Diluted 500  504  510 

Let’s understand the list of income and expense items presented in Amazon’s income statement for the given accounting period. This can act as a great income statement template for your eCommerce business.

1. Revenues

Revenue in the income statement refers to your business’ top line or sales. Sales refer to the invoice value of goods and services that you deliver to customers through your online store during an accounting period. It represents the total amount of income that you earn from the online sale of products or services.

Furthermore, the value of invoices that your eCommerce business issues to customers is not the same as the total cash received from customers. To understand this, let’s consider the coffee mug example again.

Say, a few of your customers purchased coffee mugs from your online store via cash on delivery and others made purchases through a debit card. When customer invoices were raised on your online store, your income statement reflected sales. The amount of sales reflected in the income statement does not imply that an equivalent amount of cash was received at the time sales were made. That’s because in cases where customers purchased coffee mugs through cash on delivery, cash was not received at the time of sale. Rather it was received at a future date when goods were delivered to customers.

However, such an entry did not represent the receipt of cash from your customer at the time of sale. You received cash from your customer at a future date when the order was delivered to your customer. As a result, the value of the invoice was not the same as the cash received.

Then, the Gross Sales showcased in your eCommerce income statement does not include any taxes such as sales tax and excise tax or freight and postage. Typically, sales represent the first and usually the largest line of the income statement.

See the Amazon Income Statement for 2020. The total net sales represents the revenue that the firm has generated through the sale of products and services. Note that Amazon earns revenue through product sales on its online stores, sells content like music, movies, etc., and sells technology services to developers. Besides this, it also provides services like advertising to sellers, vendors, publishers, authors, and others through its sponsored advertisement programs.

Amazon generates revenue from retail sales, third-party seller services, subscription services, AWS, and other services.

As of December 2020, the total net sales (revenue) of Amazon Inc. was US$ 386,064 million.

Read: E-Commerce Accounting For Business Owners: 2024 Guide

2. Cost Of Sales or Cost of Goods Sold

The next item in your eCommerce income statement is the Cost of Goods Sold (COGS). COGS in eCommerce represents the costs that you directly incur to produce or purchase goods or render services to be sold to the ultimate consumers. These are the costs that are directly associated with either manufacturing the products or purchasing the products from manufacturers or wholesalers.

The COGS in the eCommerce income statement may include the cost of materials and contract labor, packaging, etc. In case you are an online seller selling products sourced from manufacturers or wholesalers, then the Cost of Goods Sold in your eCommerce business represents the cost of the goods you purchased for reselling in the market.

Note that the COGS is typically variable. This means that it fluctuates with the change in the sales volume of your business. Accordingly, an increase in sales would lead to an increased cost of sales. Likewise, a decrease in sales leads to a decreased cost of sales.

Thus, the formula for the Cost Of Goods Sold is as follows:

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

To understand this, let’s consider the coffee mug example again.

Since you manufacture your coffee mugs, the COGS of your eCommerce business will include the cost of raw material purchased including porcelain clay, labor, paints and glaze, etc., the cost of labor, storage cost, and heating and lighting costs. These are the direct costs of manufacturing coffee mugs in your workshop. In addition to the purchases and the direct expenses, the COGS also includes the opening stock and the closing stock of coffee mugs.

Let’s see the Amazon Income Statement for 2020 to understand how is COGS or Cost of Sales calculated. Its annual report of Amazon describes that the Cost of Sales includes the purchase price of consumer products, inbound and outbound shipping costs including costs related to sortation and delivery centers where Amazon is the transportation service provider, and digital media content costs where Amazon records revenue gross, including video and music. The Amazon’s Cost Of Sales for the year ended 2020 stood at US$ 233,307 million.

Read: What Is Cost Of Goods Sold COGS?

3. Operating Expenses

After COGS, the next item on your eCommerce income statement is Operating Expenses. Operating Expenses refer to the costs that you incur to run the day-to-day operations of your eCommerce business. Such expenses may include office rent, salaries, cost advertising, warehousing costs, telephone charges, etc.

In addition to these expenses, the operating expenses of your business also include depreciation. Depreciation represents the wear and tear of assets like machinery, vehicles, office equipment, and furniture over time. It is an expense that spreads the cost of an asset over its useful life.

Remember that, unlike the cost of sales, the operating expenses of your business are not the ones that can be directly linked to the production of goods or rendering the services being sold. These are the costs that you incur as part of the regular activities necessary to generate revenue and maintain your eCommerce business. That is, the operating expenses of your eCommerce business are distinct from the cost of goods sold (COGS), which includes the direct costs associated with producing or acquiring the goods or services that you sell as a business.

Let’s see the Amazon Income Statement for 2020 to understand what are operating expenses and how are they represented in the income statement. As per Amazon’s 2020 annual report, the operating expenses for the year ended December 2020 included:

  • Fulfillment costs incurred in fulfillment stores, physical stores, and customer service centers. These costs also included buying, receiving, inspecting, and warehousing inventories. Besides this, it also includes costs of picking, packaging, payment processing, etc.
  • Technology and contempt costs like payroll and related expenses for employees involved in researching and developing new and existing products. It also includes costs for maintaining online stores and infrastructure like servers, networking equipment, depreciation for data centers, etc.
  • Marketing costs like advertising and payroll for employees engaged in marketing activities. It also includes sales commissions related to AWS and commissions to third parties.
  • General and Administrative expenses like payroll, depreciation, rent, professional fees, and litigation costs.
  • Stock-based compensation
  • Other operating expenses

All these put together, Amazon’s operating for the year ended 2020 stood at US$ 363,165 million.

Read: 16 Ecommerce Expenses And How To Reduce Them

4. Finance Costs

The next item on the eCommerce income statement is Finance costs. Finance costs include the interest expense. The interest expense refers to the income that you allocate towards the funds your eCommerce business borrows. Such funds are typically borrowed from banks.

Say, you already have a bank loan on the balance sheet of your eCommerce business. This is the loan that you had availed from a bank to start your coffee mug business. Now, you want to increase the sale volume of your coffee mug business. As a result, you need more labor, more raw materials, more storage space, and more tools and equipment. To incur all these costs, you need more capital. To put more capital into your eCommerce business, you take another bank loan on which you have to pay monthly interest. The interest expense that you are incurring on the initial loan and the current loan is the finance cost of your business.

Let’s have a look at the Amazon Income Statement for the year 2020 to understand what are the finance costs and how they are represented in an eCommerce income statement. As per Amazon’s annual report, the interest expense in the income statement of Amazon Inc. includes interest on notes payable paid semi-annually. Besides this, the interest expense also includes interest at LIBOR for the secured revolving credit facility that the company secured from a lender. Further, the company also has a current portion of long-term debt carrying interest.

All this put together, the finance costs for Amazon Inc. for the year ended 2020 were US$ 1,647 million.

Read: How To Finance Your E-Commerce Like A Pro?

5. Taxes

After finance costs, the next item in the income statement for eCommerce business is taxes. Taxes in the income statement represent the corporation tax or income tax and other taxes. The income statement never showcases sales tax. Sales tax is always showcased as a liability on the balance sheet. This sales tax liability increases or decreases as you collect or remit sales tax to the concerned sales tax authority.

Let’s look at Amazon Inc’s 2020 income statement to understand what are the taxes that Amazon pays. As per Amazon’s annual report, the income statement of Amazon Inc. as of December 31, 2020, showcased income taxes, including federal taxes and foreign income taxes. Further, the tax balance also includes Deferred Income Tax balances.

All of these put together, Amazon’s taxes for the year ended December 31, 2020 were US$ 2,863 million.

Read: Ecommerce Taxation: How To Be On Top Of Taxes in 2024

6. Net Profit After Taxes

The next important item in the eCommerce income statement is the Net Profit. The Net Profit in the income statement represents the difference between total revenues or incomes earned and total expenses that your eCommerce business incurs during an accounting period.

It tells you and all the other stakeholders how much income your eCommerce business earned or lost during a given accounting period.

Note that your income statement showcases Operating Profit and Gross Profit. The operating profit of your business how efficient you are in controlling the production and operating costs of your eCommerce business. The gross profit of your business represents how profitable your business is in selling its products or services. It tells whether the production and pricing of your eCommerce business are efficient enough to meet its revenue goals. Finally, the Net Profit of your eCommerce business showcases the amount of total profit that you have earned after incurring all expenses.

Let’s see Amazon’s 2020 income statement to understand net profit after taxes. As per Amazon’s 2020 annual report, the operating income of Amazon Inc. represents the operating income from North America, AWS, and international operations. The operating income of North American and international operations increased relative to the previous year due to increased unit sales. These sales included sales by third-party sellers and advertising sales.

Likewise, the operating income from AWS operations increased relative to the previous year. This was on account of the increased customer usage and cost structure productivity.

Thus, the total net income of Amazon Inc as of December 31, 2020 was US$ 21,331 million.

eCommerce Balance Sheet

The Balance sheet is the statement of the financial position of your eCommerce business. This is one of the three basic financial statements that you must prepare. It showcases the elements that directly relate to the measurement of the financial position of your business.

The elements that directly relate to the financial position of your eCommerce business include assets, liabilities, and equity. All these elements depict what you own and what you owe (economic resources) to the third parties on a specified date. In addition to this, the balance sheet showcases your business’ liquidity position and capitalization.

Remember that the information about your business’ economic resources and capacity to modify them helps determine its ability to generate Cash and cash equivalents. Likewise, information about your entity’s liquidity and solvency helps determine its ability to meet financial commitments as they fall due.

Read: How To Analyse Balance Sheet For E-Commerce Business?

Balance Sheet Equation

Now, to understand how to create a balance sheet for an eCommerce business, you first need to understand the accounting equation basis on which the balance sheet is prepared. The fundamental accounting equation is as follows:

Assets = Liabilities + Owner’s Equity

As you can observe in the equation above, assets, liabilities, and owner’s equity are the elements that help you measure the financial position of your business. This equation represents that every dollar your e-commerce business invests toward its assets is either provided by its owners or creditors.

The assets of an e-commerce business are the economic resources that provide benefits in the future. These indicate the funds your business utilizes to acquire resources to earn profits.

Liabilities and owner’s equity are the claims against the assets of your business. The liabilities refer to the amounts that your business owes to outside parties such as banks, creditors, vendors, etc. Whereas, owner’s equity refers to the claims that you receive from outside parties. Thus, the liabilities and owner’s equity of an e-commerce business represent the sources through which funds are raised.

What Are The Components Of Balance Sheet For eCommerce Business?

To analyze the balance sheet of your eCommerce business, it is important that you understand its components.

Let’s have a look at the balance of Amazon Inc. for the year ended December 31, 2020, to understand how every component of the balance sheet is presented.

Consolidated Balance Sheet of Amazon Inc As Of December 31, 2020 (in Million US$)

Assets Amt  Liabilities Amt
Current Assets   Current Liabilities  
Cash and Cash Equivalents 42,122 Accounts Payable 72,539
Marketable Securities 42,274 Accrued Liabilities 44,138
Inventories 23,795 Unearned Revenue 9,708
Accounts Receivable 24,542    
Total Current Assets 132,733 Total Current Liabilities 126,385
Non-Current Assets   Non-Current Liabilities  
Property, Plant, Equipment Net 113,114 Long-Term Lease Liabilities 52,573
Operating Leases 37,553 Long Term Debt 31,816
Goodwill 15,017 Other Long-Term Liabilities 17,017
Other Assets 22,778 Commitments & Contingencies
    Total Liabilities  
    Owner’s Equity  
    Preferred Stock  
    Common Stock 5
    Treasury Stock at Cost (1,837)
    Additional Paid-In Capital 42,865
    Accumulated Other Comprehensive Income (Loss) (180)
    Retained Earnings 52,551
    Total Owner’s Equity 93,404
Total Assets 321,195 Total Liabilities and Owner’s Equity 321,195

The following are the various balance sheet items that help represent your business’s financial position.

1. Assets

Assets refer to the resources that you control as an e-commerce business due to the events that occurred in the past. As an eCommerce business, you invest in assets because these resources have the potential to generate economic benefits for your business shortly. That is, they have the potential to contribute to the flow of cash and cash equivalents of your business either directly or indirectly.

There are three ways in which assets can generate economic benefits for your eCommerce business.

  • Assets help you in running the operating activities of your business which ultimately earn profits for your business.
  • They help reduce production costs as they bring an alternative and efficient manufacturing process in place, thus adding to the profits of your business.
  • Assets add to the liquidity of your business when they contribute towards building sufficient liquid assets, that is, assets that can be converted into cash and cash equivalents.

Thus, there are two types of assets on your balance sheet. One is the current assets and the other is the fixed assets. Assets, as a whole, are showcased on the left-hand side of the balance sheet. Furthermore, the asset side of the balance sheet begins with the most liquid assets of your business, that is, the current assets, and is then followed by non-current assets.

Let’s discuss each of these assets to understand what are these assets, how are they represented in your balance sheet, and how such assets impact your balance sheet.

(a) Current Assets

Current Assets are the assets that can be consumed or converted into cash within the normal operating cycle of your business or one year, whichever is longer. The operating cycle of your business refers to the amount of time it takes to buy or produce inventory, sell the finished products, and collect cash for the same.

The operating cycle of an e-commerce business is typically low as it takes fewer days to make a sale. For certain manufacturing businesses, the operating cycle may be one year or more than a year.

The current assets of your business may include cash, marketable securities, accounts receivable, inventories, and prepaid expenses are all current assets of your business.

Read: Understanding E-Commerce Cash Conversion Cycle

(i) Cash

Cash is the most liquid of all current assets. To maintain the short-term solvency of your eCommerce business, you must maintain cash. That’s because cash balance is readily available. As a result, you can use the available cash instantaneously and meet the day-to-day expenses of your business.

Since cash is the most liquid of all current assets, it forms the first item under the head current assets in your eCommerce balance sheet. Cash typically includes coins, currencies, funds on deposit with a bank, cheques, and money orders.

Looking at Amazon Inc.’s balance sheet, the Cash and Cash Equivalents for the year ended December 31, 2020 stood at US$ 42,122 million. As per the annual report, Amazon classifies all highly liquid instruments with an original maturity of 3 months or less as cash equivalents.

Read: How to Understand And Manage the Cash Flow Cycle For eCommerce Business?

(ii) Marketable Securities

After cash, the most liquid of all current assets is Marketable Securities. Marketable Securities refer to investments in short-term equity or debt instruments that are expected to be converted into cash within a year. Since such investments are highly liquid, they can be easily bought or sold in the open market without significantly impacting their market value.

As an e-commerce business, you may invest in marketable securities like treasury bills, notes, bonds, and equity securities.

Remember investments in marketable securities are external investments. You may invest in marketable securities when you have excess cash. These investments serve as a way for your business to earn a return on temporarily idle funds while maintaining liquidity.

Considering Amazon In’c’s balance sheet for the year ended December 31, 2020, the Marketable Securities were US$ 42,274 million.

(iii) Accounts Receivable

Next most liquid current asset is Accounts Receivables. Accounts Receivables refers to the outstanding amounts your customers owe for the goods and services you supply on credit to them as an eCommerce business. These are represented at the net realizable value in your business’ balance sheet.

The net realizable value of the accounts receivable is the amount that you get after deducting the bad debt expense from the total outstanding accounts receivable.

In the case of an e-commerce business, the accounts receivable include the net amount related to customers, vendors, and sellers.

Considering Amazon’s balance sheet for the year ended December 31, 2020, the Accounts Receivable were US$ 24,542 million.

(iv) Inventories

The next current asset is inventories. Inventories refer to the stocks of goods that your eCommerce business owns and controls. Now, certain businesses have adopted the dropshipping model.

Dropshipping is a retail fulfillment method where you as an eCommerce store don’t have to keep the products that you sell in stock. Instead, when you sell a product using the dropshipping model, you purchase the item from a third party (usually a wholesaler or manufacturer) and have it shipped directly to your customer.

This means as an eCommerce seller, when you receive orders on your eCommerce store, you send those orders to the supplier who manages the stock and handles the order delivery. Thus it is the supplier who decides the quantities to be manufactured. Further, it is his responsibility always to maintain a stock of goods.

Remember that items that form a part of the inventory are the goods that you will sell in the normal course of your business. In case you are a merchandising company, the goods that are available for resale will form a part of the inventory. Whereas, if you are a manufacturing firm, goods available as raw materials, work-in-process, and finished goods will form a part of the inventory.

Considering Amazon Inc.’s balance sheet for the year ended December 31, 2020, the Inventories stood at US$ 23,795 million.

As per the annual report, Amazon’s inventories consist of the products that are available for sale and are primarily accounted for using the first-in, first-out inventory valuation method. Furthermore, the inventories are valued at lower of cost and net realizable value.

Then, Amazon provides FBA services in connection with certain seller’s programs. As a part of the FBA services, the third-party sellers maintain ownership of the inventory, regardless of whether the fulfillment is provided by Amazon or the third-party sellers.

Read: Inventory Management Accounting: Ultimate Guide for eCommerce

(v) Prepaid expenses

The next item under current assets is Prepaid Expenses. Prepaid Expenses refer to the operating costs of the business that you have paid in advance. Since you pay such expenses in advance without receiving any goods or services, they act as assets for your business. That’s because your business is yet to receive the economic benefits from such assets.

When you pay expenses in advance, that is, at the beginning of the accounting period, at such a time, the cash in your balance sheet decreases and simultaneously, a current asset of the same amount is created in your balance sheet by prepaid expenses.

Thus, cash and cash equivalents, marketable securities, accounts receivables, inventories, and prepaid expenses are some of the common examples of current assets. After current assets, you need to showcase the non-current assets, also called fixed assets, in the balance sheet of your eCommerce business.

(b) Fixed Assets

Fixed assets are the long-term assets that you acquire as an eCommerce business in past transactions to produce goods or provide services. They are not the assets that you acquire for reselling and earning profit out of them.

Furthermore, fixed assets are assets that are not readily convertible into cash in normal operations. This means they have more than a year of useful life.

Now, there can be two types of fixed assets: tangible and intangible fixed assets.

(i) Tangible Fixed Assets

Tangible Fixed Assets are the physical assets that you can measure. These are the assets that you use as an eCommerce business to conduct operations like manufacturing goods or providing services.

Accordingly, the Tangible Fixed Assets include Property, Plant and Equipment, and Long Term Investments.

Remember, that the first head under Tangible Fixed Assets is Property, Plant, and Equipment, the long-term tangible assets that your business acquires to carry out business operations. As an eCommerce business, your business’s Property may include land and buildings that you own. It may also include property acquired under build-to-suit lease arrangements that you control during the construction period and finance lease agreements.

In addition to the above, as an eCommerce business, your equipment may include servers, networking equipment, heavy equipment, and other fulfillment equipment.

Remember, you must showcase the amount of fixed assets after considering the accumulated depreciation and amortization amount in the balance sheet.

Apart from the fixed assets, the Tangible Fixed Assets of your eCommerce business may also take the form of long-term investments. These investments typically refer to internal investments in debt securities or equity. Such investments may be in subsidiaries, associates, and joint ventures. Besides this, as a business, you may also invest in real estate and cash. Thus, such investments are long-term in nature that you hold as a business for more than one year.

Let’s take a look at Amazon Inc.’s balance sheet for the year ended December 31, 2020, to understand how tangible fixed assets are showcased. As per the annual report, Amazon’s Property, Plant, and Equipment Net, at cost less accumulated depreciation and amortization, stood at US$ 113,114 million. Then, the firm had operating leases worth US$ 37,553 million. Note that Amazon records the assets acquired under financial lease in “Property and Equipment Net”. Rest all the other leases are categorized as operating leases.

(ii) Intangible Fixed Assets

After tangible assets, the next item on the asset side of the balance sheet is intangible fixed assets. The intangible fixed assets are the non-physical assets that you utilize as an eCommerce business over a long period. These assets may include Patents, Copyright, and Goodwill.

Patents refer to the statutory rights for inventions granted to you as an investee for a limited period. Such rights are given to you by the government in exchange for full disclosure of the inventions by you as a patentee. Thus, a Patent excludes others from using your product or invention as a patentee in any form without your consent. Since a patent has a limited useful life as an intangible asset, it is recorded at cost in the balance sheet.

Copyright refers to the exclusive right that you have as the owner of the work. Such a right stops any competitor from copying or imitating your original work as an owner. Since it is an intangible asset, it is amortized over some time.

Likewise, goodwill is an intangible asset that arises when the purchasing company pays more for the acquired company than the fair value of its net assets. The difference between the purchase price and the fair value of the net assets is recorded as an asset of the acquiring company.

Let’s take a look at Amazon Inc.’s balance sheet for the year ended December 31, 2020, to understand how intangible fixed assets are represented. Amazon’s Goodwill stood at US$ 15,017 million and the other assets were US$ 22,778 million. The other assets included amounts related to video and music content, net of accumulated amortization; acquired intangible assets, net of accumulated amortization; certain equity investments; equity warrant assets; long-term deferred tax assets; and lease payments made before lease commencement.

This completes the list of assets. Let’s discuss what are liabilities and how are they represented on the eCommerce balance sheet.

2. Liabilities

Liabilities are the present obligations of your eCommerce business. An obligation refers to the duty or responsibility of the business entity to act or perform in a certain way. Such obligations may be legally enforceable due to a binding contract or statutory requirement. For instance, a contract with trade creditors, lenders, and equity owners against the entity’s assets is an obligation for your business.

Remember that an obligation occurs only when an asset is delivered to you or you as a business enters into an irrevocable agreement to acquire the asset. A decision to acquire assets in the future does not give rise to a present obligation.

Further, you as an eCommerce business can settle these present obligations in different forms, depending upon the contract terms you enter into. The various ways in which you can settle the present obligations of your business include cash payment, transfer of assets, service provisions, replacement with another obligation, or conversion of an obligation into equity.

Now, the liabilities of your eCommerce business can be further grouped into current liabilities and Other Liabilities.

(a) Current Liabilities

The eCommerce current liabilities are obligations that you as a business expect to settle within one year or its normal operating cycle, whichever is longer. These liabilities represent your business’ short-term financial obligations that need to be paid off within a relatively short time frame.

Remember, the current liabilities are listed on the right-hand side in case of a horizontal balance sheet. Such liabilities provide insights into your company’s short-term financial obligations and its ability to meet them.

Note that current liabilities are expected to be met or satisfied within the normal operating cycle of your business or one year, whichever is longer. Here, the operating cycle refers to the period between goods purchased for manufacturing and the receipt of cash from selling the final goods.

You as an eCommerce business may have current liabilities in bills payable, accrued expenses, and deferred revenues.

(i) Accounts Payable

Accounts payable are the amounts that you owe to the suppliers for goods or services purchased on credit. These amounts occur between receipt of services or acquisition to the title of goods and payment for such supplies. Credit on accounts payable can be extended typically for 30 days or 60 days.

Read: Accounts Payable For Online Businesses (Deep Dive)

(ii) Accrued Expenses

Another current liability that you can incur as an eCommerce business is accrued expenses. These are the expenses that are not contractually due. But as an eCommerce business, you may incur or recognize such expenses in the income statement. This means as an e-commerce business, you are yet to pay cash for such expenses. However, you may recognize such expenses in the income statement as you have already received the benefit against them.

(iii) Unearned Revenues

Unearned revenues also form a part of the current liabilities of an eCommerce business. These revenues are the amounts that you collect in advance to provide goods or services to your customers. In other words, as an eCommerce business, you receive the payment in advance. But you are yet to deliver the goods or services to your customers.

Such an advance payment means that as an e-commerce seller, you have a liability equal to the amount of revenue that you generate in advance until you make actual deliveries to your customers.

(b) Other Liabilities

Other liabilities do not fall under the current liabilities. Such non-current liabilities are the financial obligations of your eCommerce business that remain outstanding for more than a year. For instance, long-term debt, deferred tax liabilities, and long-term provisions all fall under Other Liabilities.

(i) Long-term Debt

Long-term debt refers to the loans that you as an eCommerce business avail of from a bank, financial institution, or indigenous lenders. Such loans are payable after 12 months with interest. For instance, bonds, debentures, and long-term borrowings come under long-term debt.

As an eCommerce business, you may take such a debt to meet your capital needs and to ensure the proper functioning of your business operations.

(c) Deferred Tax Liabilities

As an eCommerce business, you pay tax as per the profits that you earn in a particular financial year. However, there can be situations when you pay taxes less than what you are liable to pay.

Thus, as a business, you must pay unpaid taxes for a given year in the next financial year. Such a tax shortfall is the deferred tax liability in the given financial year. This becomes payable in the next financial year and year’s tax.

(d) Long-Term Provision

Long Term Provisions refer to the amount that you keep aside to cover a future liability or decrease in the value of an asset. Such a provision is not a saving. Rather, it is an acknowledgment in advance of a liability that may arise in the future.

3. Owner’s Equity

The owner’s equity is the third head in the balance sheet. It is the amount that the investors invest in your e-commerce business. The owner’s equity is further divided into paid-in capital and retained earnings.

Owner’s Equity = Paid-In Capital + Retained Earnings

According to the above equation, an increase in the income or earnings of your business increases the owner’s equity. At the same time, a decrease in the earnings of your business decreases the owner’s equity.

eCommerce Cash Flow Statement

Besides the balance sheet and profit and loss statement, the statement of cash flows is another basic financial statement that you must prepare as an eCommerce business.

What Is A Cash Flow Statement?

A Cash Flow Statement is a financial statement that presents the cash inflows and outflows of your e-commerce business for a specified period. Such a statement also showcases your business’s noncash investing and financing activities for the same period.

Cash flow means the movement of cash in and out of your e-commerce business during a specified period. As a business, you may generate cash flows from operating, investing, and financing activities.

For instance, cash flows from the operating activities may include cash from customers, third-party sellers, advertisers, content creators, and developers. Further, the net cash inflows from investing activities may include incentives received from property and equipment vendors and proceeds from asset sales. It may also include sales and maturities of marketable securities.

On the other hand, cash outflows arise from the payments that you make toward your business’ operating, investing, and financing activities. For instance, the cost of goods sold, interest and principal payments, and capital expenditures on technology are examples of cash outflows.

Read: Understanding Your E-Commerce Cash Flow Statement

Why You Must Create A Cash Flow Statement As An eCommerce Business?

The purpose behind preparing a cash flow statement is simple. The revenues and expenses of your eCommerce business are recorded in the books of accounts irrespective of whether cash was paid or received at that time or a later date. This happens because an income statement is prepared on the accrual basis of accounting.

The accrual basis of accounting requires you as a business to record the revenues in the books of accounts when you earn them rather than when you receive them in cash. Likewise, the recognition of related expenses on the income statement does not necessarily coincide with when such expenses are paid in cash. You may recognize expenses before, at the same time, or after they are paid for.

However, you account for revenue and expense cash flows when cash is exchanged. As a result, profit and cash flow differ in the timing of recognition of revenues and expenses. This means that the income that you generate as an eCommerce business during a period has no direct relationship with the cash flows you generate from your business operations. Thus, it becomes important for you as a business to prepare cash flow statements separately.

Besides this, the reason why you must prepare a cash flow statement for your eCommerce business is that a cash flow statement provides information about the cash flows associated with your business’s operating, investing, and financing activities during an accounting period. Such information is important for you and other stakeholders like the shareholders, lenders, employees, suppliers, and the local communities that levy taxes.

That’s because, using such information, they evaluate your business’s ability to generate and utilize cash to meet its financial obligations.

For instance, a portion of shareholders’ return on investment in the form of dividends is dependent on your business’s cash flows. Likewise, interest payments and principal repayment to lenders require cash. Also, other stakeholders, like employees, suppliers, and the local communities, depend on your business’s ability to generate adequate cash flows.

Another important reason why you must prepare a cash flow statement is that a cash flow statement showcases inflows and outflows of cash from different activities of your business during a specified period. These activities may include operating, investing, and financing activities. It’s important for you as a business to have access to such information because it helps you to assess your business’s ability to generate cash and cash equivalents and the timing and certainty of such cash flows. Additionally, it demonstrates your enterprise’s requirement to utilize those cash flows. Thus, based on such information, the stakeholders can make economic decisions.

Classification Of Activities In Cash Flow Statement

A cash flow statement may represent cash flows as operating, investing, and financial cash flows. Such classification makes it easy for you as an eCommerce seller and the other stakeholders to assess the impact of all these activities on your business’s financial position and cash and cash equivalents.

To understand each of these categories of cash flows, let’s consider the following cash flow statement example.

Consolidated Cash Flow Statement ( In Million US$)
In millions Fiscal Year Ended Dec. 31, 2006 (52 weeks) Fiscal Year Ended Jan. 1, 2005 (52 weeks) Fiscal Year Ended Jan. 3, 2004 (53 weeks)
Cash flows from operating activities:
Cash receipts from sales $ 36,923.1 $ 30,545.8 $ 26,276.9
Cash paid for inventory (26,403.9) (22,469.2) (19,262.9)
Cash paid to other suppliers and employees (8,186.7) (6,528.5) (5,475.5)
Interest and dividends received 6.5 5.7 5.7
Interest paid (135.9) (70.4) (64.9)
Income taxes paid (591.0) (569.2) (510.4)
Net cash provided by operating activities 1,612.1 914.2 968.9
Cash flows from investing activities:
Additions to property and equipment (1,495.4) (1,347.7) (1,121.7)
Proceeds from sale-leaseback transactions 539.9 496.6 487.8
Acquisitions, net of cash and investments 12.1 (2,293.7) (133.1)
Cash outflow from hedging activities (32.8)
Proceeds from the sale or disposal of assets 31.8 14.3 13.4
Net cash used in investing activities (911.6) (3,163.3) (753.6)
Cash flows from financing activities:
Reductions in long-term debt (10.5) (301.5) (0.8)
Additions to long-term debt 16.5 1,204.1
Proceeds from the exercise of stock options 178.4 129.8 38.3
Dividends paid (131.6) (119.8) (105.2)
Additions to/(reductions in) short-term debt (632.2) 885.6 (4.8)
Net cash (used in) provided by financing activities (579.4) 1,798.2 (72.5)
Net increase (decrease) in cash and cash equivalents 121.1 (450.9) 142.8
Cash and cash equivalents at the beginning of the year 392.3 843.2 700.4
Cash and cash equivalents at the end of the year $ 513.4 $ 392.3 $ 843.2
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 1,224.7 $ 918.8 $ 847.3
Adjustments required to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 589.1 496.8 341.7
Deferred income taxes and other noncash items 13.5 (23.6) 41.1
Change in operating assets and liabilities providing/(requiring) cash, net of effects from acquisitions:
Accounts receivable, net (83.1) (48.4) (311.1)
Inventories (265.2) (509.8) 2.1
Other current assets (13.2) 35.7 (3.0)
Other assets (0.1) 8.5 (0.4)
Accounts payable 192.2 109.4 (41.5)
Accrued expenses (43.8) (144.2) 116.5
Other long-term liabilities (2.0) 71.0 (23.8)
Net cash provided by operating activities $ 1,612.1 $ 914.2 $ 968.9

I. Cash Flows From Operating Activities

The principal sources through which you generate cash flows as a business are the ones that arise due to the operating activities of your business. The operating activities of your business refer to the primary or principal revenue-generating activities. These are the main activities of your business including selling consumer goods and services and engaging with third-party sellers, content creators, advertisers, and developers receiving technology services.

Let’s consider the example of Amazon Inc. to understand what are its operating activities and distinguish it from other activities like investing and financing activities.

Amazon sells goods to consumers through its online and physical stores. Plus, it sells electronic devices like Kindle, Fire tablet, Fire TV, Echo, Ring, and other devices. Besides this, Amazon also provides advertising to sellers, vendors, publishers, authors, and others through sponsored ads, display, and video advertising. It even serves developers and enterprises of all sizes with on-demand technology services. All these put together are the operating activities of Amazon.

Now, the cash that you generate as a business from operating activities helps you and the other stakeholders of your business to assess its solvency level. Besides this, it indicates the ability of the operations of your e-commerce business to generate cash. Remember that sufficient cash from operations helps your business maintain its operating capability and meet its financial obligations. These obligations may include making new investments and repayment of loans.

Following are the examples of eCommerce cash flows from operating activities:

A. Cash Inflows From Operating Activities
  • Cash receipts from sales of goods and services through online and offline stores
  • Cash receipts from developers for selling on-demand technology services, including computing, storage, database, analytics, machine learning, and other services.
  • Cash receipts from third-party sellers selling their products through the online store
  • Cash receipts from content authors and publishers selling content online
B. Cash Outflows From Operating Activities
  • Cash payments to employees
  • Cash payments toward leases
  • Cash payments of income taxes

II. Cash Flows From Investing Activities

Investing activities are activities that involve acquiring and disposing of long-term assets and investments not considered cash equivalents. Such cash outlays are necessary as these expenditures help your business maintain its operating capacity.

For instance, as an e-commerce store, you may incur software development costs. These costs relate to products sold, leased, or marketed to external users, internal-use software, and websites. Such costs relate to acquiring a long-term asset, that is, software. As a result, the acquisition of software is an investing activity.

Then, capital expenditures on equipment for your e-commerce business may include purchasing assets such as servers and networking equipment, heavy equipment, and other fulfillment equipment. Again, such expenditures are done to acquire long-term assets. Hence, the acquisition of long-term assets forms a part of the investment activities of your eCommerce business.

Besides purchasing and selling long-term fixed assets, cash flows from investing activities also include cash flows from long-term investment securities. It may also include investments in joint ventures or affiliates.

Thus, the following are examples of cash flows from investing activities for an e-commerce business:

A. Cash Inflows From Investing Activities
  • Cash receipts from sales of fixed assets
  • Cash proceeds from sales and maturities of marketable securities
  • Cash received as interest from loans and advances made to third parties
  • Cash received as dividends from investment in other businesses
  • Cash received by selling shares, warrants, or debt instruments of other enterprises
B. Cash Outflows From Investing Activities
  • Cash payments made to acquire fixed assets
  • Cash payments for the purchase of marketable securities
  • Cash payments made to acquire shares, warrants, or debt instruments of other enterprises

III. Cash Flows From Financing Activities

Financing activities typically refer to the capital or long-term funds that your business has access to. The cash inflows and outflows resulting from financing activities result in changes in the proportion and structure of the owner’s capital and borrowings of your business.

For instance, as an e-commerce business, you may take borrowings to meet the operating cash needs, capital expenditures, meet financial obligations, and strengthen the financial position of your business. Besides borrowings, you can sell additional equity or debt securities, obtain credit facilities, obtain finance, and operate lease arrangements. You may also enter into financing obligations, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure debt for strategic reasons.

Thus, cash flows from financing activities of your e-commerce business include inflows from additional borrowing or equity financing and outflows due to debt repayments. The cash outflows may also include dividend payments and equity repurchases.

The following are examples of cash flows from financing activities for an e-commerce business:

A. Cash Inflows From Financing Activities
  • Cash proceeds from issuing shares
  • Cash proceeds from issuing debentures, loans, etc
  • Cash proceeds of short-term debt and other and long-term-debt
B. Cash Outflows From Financing Activities
  • Cash repayments of the amounts borrowed
  • Dividends paid on equity
  • Interest paid on debt
  • Cash payments toward finance leases and financing obligations

How To Prepare eCommerce Cash Flow Statement?

Preparing a cash flow statement involves summarizing the cash inflows and outflows from a company’s operating, investing, and financing activities during a specific period.

There are two main methods for preparing the cash flow statement: the direct method and the indirect method. Both methods aim to report the same information but differ in their approach to presenting the cash flows from operating activities.

Here’s an overview of both methods:

I. Direct Method

The direct method of preparing a cash flow statement involves reporting actual cash inflows and outflows from the operating activities of your eCommerce business. It provides a clear and transparent presentation of the cash inflows and outflows associated with the core operating activities of your business. This is unlike the indirect method, which starts with net income and adjusts for non-cash items and changes in working capital.

While the direct method of a cash flow statement offers a more intuitive understanding of cash flows, it is less commonly used than the indirect method in practice.

Let’s consider example above Direct Method Cash Flow Statement example to understand how you must prepare an eCommerce cash flow statement using direct method.

Consolidated Cash Flow Statement ( In Million US$)
In millions Fiscal Year Ended Dec. 31, 2006 (52 weeks) Fiscal Year Ended Jan. 1, 2005 (52 weeks) Fiscal Year Ended Jan. 3, 2004 (53 weeks)
Cash flows from operating activities:
Cash receipts from sales $ 36,923.1 $ 30,545.8 $ 26,276.9
Cash paid for inventory (26,403.9) (22,469.2) (19,262.9)
Cash paid to other suppliers and employees (8,186.7) (6,528.5) (5,475.5)
Interest and dividends received 6.5 5.7 5.7
Interest paid (135.9) (70.4) (64.9)
Income taxes paid (591.0) (569.2) (510.4)
Net cash provided by operating activities 1,612.1 914.2 968.9
Cash flows from investing activities:
Additions to property and equipment (1,495.4) (1,347.7) (1,121.7)
Proceeds from sale-leaseback transactions 539.9 496.6 487.8
Acquisitions, net of cash and investments 12.1 (2,293.7) (133.1)
Cash outflow from hedging activities (32.8)
Proceeds from the sale or disposal of assets 31.8 14.3 13.4
Net cash used in investing activities (911.6) (3,163.3) (753.6)
Cash flows from financing activities:
Reductions in long-term debt (10.5) (301.5) (0.8)
Additions to long-term debt 16.5 1,204.1
Proceeds from the exercise of stock options 178.4 129.8 38.3
Dividends paid (131.6) (119.8) (105.2)
Additions to/(reductions in) short-term debt (632.2) 885.6 (4.8)
Net cash (used in) provided by financing activities (579.4) 1,798.2 (72.5)
Net increase (decrease) in cash and cash equivalents 121.1 (450.9) 142.8
Cash and cash equivalents at the beginning of the year 392.3 843.2 700.4
Cash and cash equivalents at the end of the year $ 513.4 $ 392.3 $ 843.2
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 1,224.7 $ 918.8 $ 847.3
Adjustments required to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 589.1 496.8 341.7
Deferred income taxes and other noncash items 13.5 (23.6) 41.1
Change in operating assets and liabilities providing/(requiring) cash, net of effects from acquisitions:
Accounts receivable, net (83.1) (48.4) (311.1)
Inventories (265.2) (509.8) 2.1
Other current assets (13.2) 35.7 (3.0)
Other assets (0.1) 8.5 (0.4)
Accounts payable 192.2 109.4 (41.5)
Accrued expenses (43.8) (144.2) 116.5
Other long-term liabilities (2.0) 71.0 (23.8)
Net cash provided by operating activities $ 1,612.1 $ 914.2 $ 968.9

As we can see, the cash flows from operating activities clearly lays out all the operating activities of the business. The operating activities for the year ended December 31,2006 include:

Cash Flows From Operating Activities (in Million US$) Fiscal Year Ended Dec. 31, 2006 (52 weeks) Fiscal Year Ended Jan. 1, 2005 (52 weeks) Fiscal Year Ended Jan. 3, 2004 (53 weeks)
Cash receipts from sales $ 36,923.1 $ 30,545.8 $ 26,276.9
Cash paid for inventory $ (26,403.9) (22,469.2) (19,262.9)
Cash paid to other suppliers and employees $ (8,186.7) (6,528.5) (5,475.5)
Interest and dividends received $ 6.5 5.7 5.7
Interest paid $ (135.9) (70.4) (64.9)
Income taxes paid $ (591.0) (569.2) (510.4)
Net cash provided by operating activities $ 1,612.1 914.2 968.9

II. Indirect Method

The indirect method of preparing a cash flow statement starts with the net income reported on the income statement and adjusts for non-cash items and changes in working capital to derive the net cash from operating activities. It is called the “indirect method” because it indirectly calculates cash flows from operating activities by making adjustments to the net income.

The indirect method is more commonly used in practice for several reasons. It aligns with the format of the income statement, making it easier to reconcile with financial statements.

The following is the Indirect Method Cash Flow Statement example.

Period Ending: 12/31/2020 12/31/2019 12/31/2018 12/31/2017
Net Income $21,331,000 $11,588,000 $10,073,000 $3,033,000
Cash Flows-Operating Activities
Depreciation $25,251,000 $21,789,000 $15,341,000 $11,478,000
Net Income Adjustments $6,001,000 $7,575,000 $6,352,000 $4,096,000
Changes in Operating Activities
Accounts Receivable -$8,169,000 -$7,681,000 -$4,615,000 -$4,780,000
Changes in Inventories -$2,849,000 -$3,278,000 -$1,314,000 -$3,583,000
Other Operating Activities
Liabilities $24,499,000 $8,521,000 $4,886,000 $8,121,000
Net Cash Flow-Operating $66,064,000 $38,514,000 $30,723,000 $18,365,000
Cash Flows-Investing Activities
Capital Expenditures -$40,140,000 -$16,861,000 -$13,427,000 -$11,955,000
Investments -$22,242,000 -$9,131,000 $1,140,000 -$3,054,000
Other Investing Activities $2,771,000 $1,711,000 -$82,000 -$12,075,000
Net Cash Flows-Investing -$59,611,000 -$24,281,000 -$12,369,000 -$27,084,000
Cash Flows-Financing Activities
Sale and Purchase of Stock
Net Borrowings -$1,104,000 -$10,066,000 -$7,686,000 $9,928,000
Other Financing Activities
Net Cash Flows-Financing -$1,104,000 -$10,066,000 -$7,686,000 $9,928,000
Effect of Exchange Rate $618,000 $70,000 -$351,000 $713,000
Net Cash Flow $5,967,000 $4,237,000 $10,317,000 $1,922,000

Chart Of Accounts For eCommerce Business

A chart of accounts is a list in your business’s general ledger that indexes and keeps track of all monetary transactions.

The chart of accounts is organized with a numbering system to help keep recordkeeping more organized. It includes categories such as assets, liabilities, and equity on the balance sheet and revenue and expenses on the income statement.

The number of accounts listed reflects the size of the company; larger businesses typically have more categories than smaller ones do.

Read: List Of Chart Of Accounts For Small Business

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