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Subscription eCommerce in India : Introduction and Accounting

Subscription eCommerce is a business model that is gaining wide acceptance as the third wave of eCommerce rolls out.

As many eCommerce start ups and investors have noted, to their dismay, conversion rates and more importantly retention rates are abysmally low. When the cost per customer acquisition is so high, it makes sense to retain the customer and form a long term relationship. Evidence to this effect suggests that the lifetime value of repeat customers is over 6 times that of one time buyers, therefore it is but obvious that businesses would try to convert all one time customers into repeat customers.

[su_pullquote align=”left”]”The lifetime value of repeat customers is over 6 times that of one time buyers”[/su_pullquote]This is where subscription eCommerce steps in, allowing eCommerce companies to engage customers with a model that provides them monthly gratification for a fee.  Most users would be aware of subscription models in the offline space. Newspaper and Magazine subscriptions come foremost to the mind.

If reports are to be believed, subscription eCommerce might just be the next big thing after sliced bread. Prominent players in the global market include:

  • Shoedazzle.com
  • BirchBox.com
  • Craftcoffee.com
  • Dollarshaveclub.com

The subscription ecommerce space in India has been largely unexplored.  One of the recent entrants and pioneers in this field is Bakebox.in, there is ample evidence to suggest that other companies would also look to replicate western models in India.

Meanwhile, in this article we shall try to examine subscription eCommerce and its treatment from an accounting perspective.

The key issue with respect to subscription based eCommerce is the recognition of revenue. Assuming you signed a contract with a customer for an entire year, do you recognize the revenue up-front in one shot? Doing so can lead to top loading of revenue in certain months. Gym memberships for example would see a sharp upward spike in the month of January and then peter off for the rest of the year.

To prevent abuse of such conditions and to enable the correct statement of financial figures in cases of subscription based businesses, Accounting standard 9 governing Revenue Recognition, hereinafter known as AS9, has been effected. We shall now discuss the same

AS9 Describes a subscription as :

[su_quote]A purchase made by signed order, as for a periodical for a specified period of time or for a series of performances. or An agreement to pay an amount of money so that you will receive something such as a magazine or a service.[/su_quote]

As per AS-9 revenue from sale of goods is recognized when the seller has transferred the property in goods to the buyer. Which implies that the following two conditions should be fulfilled in order to recognize a completed sale :

  1. The seller of goods should have transferred to the buyer the property in the  goods  for  a  price  or  all  significant  risks  and  rewards  of ownership  have  been  transferred  to  the  buyer  and  the  seller retains no effective control of the goods transferred to a degree usually  associated  with  ownership;  and
  2. No significant uncertainty exists regarding the amount  of the consideration that will be   derived from the sale of the goods.

Therefore where accrual basis of accounting is being followed income that pertains to those goods and services which have been delivered or provided during the accounting period should be recognized as incomes in the income statement. The remaining part of advances received for period for which no goods have been delivered or no services have been rendered should be treated in the form of a current liability in the guise of unearned revenue, prepaid revenue, deferred revenue etc.

The periodic recognition of such future incomes also depends on the items to be delivered on such periodic basis. Where the goods are of standard value, say magazines or a “mystery box” having a set value, revenue should be recognized on the straight line basis of the period of time during which such deliveries are to be executed. In other cases, where the value of items to be delivered varies from period to period the business should recognize revenues from such sales on a period to period basis, keeping in mind the value of goods or services delivered in the period.

Therefore for example : if the business secured a contract to dispatch one magazine every month for the a year and where the value of each monthly issue of the magazine is same. In cases where the business has received the entire subscription for the year in advance, the business should recognize income related to the 12 issues over the course of the year on a straight line basis.

For any company maintaining its books of accounts using the cash based system of accounting , however, the book keeping practice is much simpler given the inherent simplicity of the system. Using the cash base system of accounting, revenues are recognized as and when cash is received. Therefore in all situations revenue would be recognized whenever the actual consideration is received regardless of the actual performance of the service or delivery of the product.

[su_note color=”#7a7eeb”]Journal entries

At the time of receipt of advance

Cash A/c Dr.

                To Unearned revenue.

(Being advance payment received for the subscription of magazines)

At the time of delivery

Unearned revenue A/c Dr.

                               To Product Sales revenue

(Being revenue recognized in relation to magazines delivered) [/su_note]

Saruchi Bhatia, ACA, Contributed to this post.

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