Accounting for online marketplace fees when using Cash Basis

[zorillo]

Hi. I'm in a Partnership and we sell on online marketplaces and use cash basis accounting. I was just looking for an opinion on whether the way I am accounting for income from these sites is acceptable.

So, for example, probably the most complicated marketplace is Etsy. When someone buys something we do not get paid immediately. Instead the sale price minus a transaction fee gets added to our Etsy 'balance'. This balance is then paid out to our bank account once a week. Every month Etsy also generates a 'bill' which covers their sales fees for the preceeding month. We most often pay this bill from the balance.

I assume, even though we are using cash basis, that it is not correct to simply record our income as the balance payments that hit our bank account? While profit is unaffected this would lower our income as the two types of fees are already taken off the balance payments. The fees would simply not appear in our accounts.

Therefore I am instead recording an income entry every time we're paid (which does not reflect the amount we actually received but instead the amount we would have received if there were zero fees) along with one or two expenses entries for the fees we've paid in the time period the payment relates to.

So, for example, week 1st Jan to 7th Jan we make sales of £1000. Transaction fees are 5% on every sale so our Etsy balance would be £950. However we also pay a £200 December sales fees bill on 3rd Jan from our Etsy balance. The amount that actually hits our account on 10th Jan is therefore £750. I record an income entry on 10th Jan for £1000. I also record two expenses entries on the 10th Jan, one for £50, the other for £200.

Does that sound reasonable? Essentially I'm rolling up both the sales and the fees and only accounting for them on the day we actually receive the balance payments as that would seem to be in the spirit of cash basis.

Thanks!

 

[Scalloway]

I assume, even though we are using cash basis, that it is not correct to simply record our income as the balance payments that hit our bank account? While profit is unaffected this would lower our income as the two types of fees are already taken off the balance payments. The fees would simply not appear in our accounts.

You must show your income gross of fees and show the fees separately. Particularly if you are approaching the VAT registration limit.

 

[zorillo]

Thanks, that's what I assumed would be the case and for that very reason (VAT registration) as we'd be artificially lowering our turnover otherwise.

So does rolling up the sales and fees separately and only accounting for them on the day we actually receive the balance payments into our bank account sound like a sensible way to achieve this for cash basis?

 

[Scalloway]

It only really matters the on the final days at the end of the financial year. You should include sales received by Etsy but not paid over, then deduct this sum from sales the following year.

 

[zorillo]

Thanks for your response, though I don't understand why an adjustment like you describe is necessary if I'm using cash basis? My understanding is that when using cash basis I should just be recording income when we actually receive it not when it's earned. So even if say a customer purchases an item on 3rd April 2018, because we wouldn't actually receive payment for this sale until 11th April I record that income in 18/19, rather than 17/18.

 

[Scalloway]

I guess it depends how HMRC view the money being received in your Etsy account.

 

[zorillo]

Yeah, I thought that might be an issue. However if it's open to interpretation then I guess for now I'll stick with recording the income as being received when it enters our bank account. My reasoning being that the Etsy account balance isn't cash because we can't actually purchase anything with it. It only becomes cash when we receive the payment of the balance's value. This also maintains consistency with how I record expenses, i.e. when they leave the bank account.