e-Commerce Accounting Systems

In the securities industry, the bookkeeping and accounting operations are referred to as the "back office" because the brokerage firms always put the sales people in the front of the office -- closest to the door. Thus the phrase has evolved to mean any kind of accounting operation or function.

An essential element of a truly automated order and fulfillment system also includes an automated "back office". When the customer's credit card is approved, his account is charged and the vendor's account is credited at the bank. At some point in time that transaction needs to be reflected in the accounting records with an addition to the bank balance and to the sales account. When a physical product is automatically shipped (or an order is sent to the fulfillment service), either the inventory needs to be reduced or there is an addition to the amount owed to the fulfillment service. In an automated system, when the inventory of a particular product falls below a pre-determined level, an order is generated to a supplier to ship added inventory. That transaction would require an entry into the liability account for the vendor and the inventory account or an on-order temporary account. A corresponding entry needs to be made in the cost of sales account. Various other kinds of expenses may arise in the process of an automated system for selling products and those transactions also need to be entered into the accounting records in the appropriate account category. If you carry this to an extreme, even the payments to certain vendors can be automated with wire transfers being made by computer at prescribed intervals.

Most of these automated accounting systems have been customized for each company and (because of the huge cost) have only been adopted by very large companies. However, I read recently that Intuit is working on an accounting package that will integrate with an e-commerce system. If any reader is aware of any other systems that are now available for small to mid-size businesses, I'd appreciate the lead and will contact the vendor for more information. I'll share what I discover in future issues of this newsletter.

Meanwhile, consider the implications of the development of the XML data transmission system for transmitting accounting information automatically from one computer application to another? The current programs that provide integrated accounting for e-commerce will soon be replaced with totally different kinds of systems. There will be a lot of changes taking place in the next few years. When the accounting systems in various countries and languages are adapted to XML, it will make it possible for a manufacturer in Japan to automate their orders for supplies from various vendors in the U.S., Mexico, Germany and any other country. The cost savings for industry as a whole will be enormous. And, with the rapid decrease in the cost of various e-commerce systems and components, this cost savings will become available to many more companies in every country. It won't be limited to the international behemoths of industry.