Accounting for Amazon Sellers

By December 27, 2018 February 6th, 2019 Ecommerce Accounting

Accounting for Amazon SellersAccounting is key for successful Amazon sellers

We know that accounting for a typical business is quite boring. But accounting for Amazon sellers is generally more challenging, which makes it fun! (at least for us gurus). If you are just starting your Amazon business, setting up a solid accounting foundation is more important than you probably think. Too many Amazon sellers let it fall through the cracks for too long. If you are well on your way to making millions with your Amazon business, it’s crucial that you have accurate accounting in place.

Poor accounting will give you inaccurate financial data that leads to poor decision-making. Not only will it affect your decision-making, but others will have a false sense of how your business is performing. This makes it incredibly difficult to get loans, investors, and in selling your business. Down the road you will also run the risk of getting in big compliance trouble in areas such as sales tax. Trouble in sales tax compliance is often the fire that burns down successful ecommerce businesses!

Three keys to accounting for Amazon sellers

We have found three areas in which Amazon sellers often have trouble with their accounting. You will be well on your way to success if you can address these three key areas: (1) accurate sales data, (2) accurate recording of inventory and COGS, and (3) sales tax compliance.

Accurate Sales Data

Problem:

Amazon will hit your bank account with a deposit every two weeks. Small business owners and even hired bookkeepers, will often record those deposits as sales. Unfortunately, this is a big error that leads to poor sales data.

Your deposit includes not only your sales but also all other activity that happens on your Amazon seller account such as FBA fees, shipping fees, warehouse fees, sales tax, returns, and charge backs. Yeah, thanks for making this so difficult Amazon! If you are using Amazon for shipping and warehousing, there can be 30+ activities going on. In addition, the deposit that hits your bank account does not account for when all the separate activity took place. You will only see the net deposit on the date that you receive that deposit.

Solution:

Solving this issue can be complex if you decide to do it manually. It requires going into the back end of you Amazon seller account, pulling all the data into a spreadsheet, sifting through the data, and accurately accounting for the data in your accounting software.

A great tool for automating this process is A2X. A2X connects your Amazon seller account with your accounting software (Xero and QuickBooks). It will automatically update your books with all the correct data from the back end of Amazon, and you won’t have to worry about a thing – yes, you should currently be clapping your hands for A2X’s technology and be getting teary eyed…it’s normal.

Accurate Recording of Inventory and COGS

Problem:

Inventory and COGS errors are the most common problems we see in accounting for amazon sellers. The errors usually occur when businesses purchase new inventory. When inventory is purchased, bookkeepers or small business owners will sometimes immediately enter the cost of purchasing that inventory as COGS. For example, let’s say your business purchases $80K worth of inventory in January. The following is what we commonly see, which is inaccurate:

Profit & Loss Statement
  January February March
Sales $30,000 $40,000 $30,000
COGS $80,000

Gross Profit $(50,000) $40,000 $30,000

 

Balance Sheet (as of each date)
  January 31 February 28 March 31
Assets
Inventory

 

Recording COGS like this shows a $50K loss in January, a $40K gain in February, and a $30K gain in March. It may be reflective of the way cash is moving through your business, but it does not accurately reflect performance and profitability of the business. In addition, this method will show your inventory balance as zero.

The inaccurate recording of COGS and inventory is more detrimental as your business grows. You will get lost on how your business is truly performing, and the value of your assets will be inaccurate. As already mentioned, these problems become serious when trying to get investors, loans, or when selling your business.

Solution:

So how do you accurately record COGS and inventory? For COGS, there is an accounting rule called the matching principle. The matching principle states that expenses should be matched in the same time period for the associated revenues. Basically, COGS should not be recorded until you sell an item. As an Amazon seller, here are the basic steps to recording COGS each month:

  1. Look up quantity sold for each SKU
  2. Multiple the quantity by SKU cost
  3. Record this amount as COGS

It can get a little complicated when diving into these steps. If you find this to be true, click here more details on accurately recording COGS, and why COGS matters.

You should also have an ending inventory balance for each month. When you purchase inventory, the amount of inventory you purchased should be added to your inventory balance. Then, each month you subtract your COGS from your inventory to get a new inventory balance.

Using the previous example, this is what your books should look like if you sold $25K worth of inventor in January, $20K in February, $25K in March, and didn’t purchase anymore inventory during this period:

  January February March
Sales $30,000 $40,000 $30,000
COGS $25,000 $20,000 $25,000
Gross Profit $5,000 $20,000 $5,000

 

Balance Sheet (as of each date)
  January 31 February 28 March 31
Assets
Inventory $55,000 $30,000 $5,000

 

Manually recording COGS and inventory can be complicated and time consuming. Once again, we recommend using A2X – (yes, get emotional again). A2X will automatically update your COGS and inventory information. You just need to make sure that you have entered in the cost of each SKU on your Amazon seller account. If you haven’t entered the cost of each SKU in the past, this can be daunting task. At least start by making sure you do this moving forward.

Sales Tax Compliance

Problem:

One of the more complicated and ignored aspects of accounting for amazon sellers is sales tax. Ecommerce sales tax is a beast, it’s brutal. Some ecommerce businesses ignore sales tax for too long. Others that address it, have a hard time getting it right (we don’t blame you!). Since the South Dakota v Wayfair Supreme Court ruling in June 2018, states are basically making their own laws for when your business is legally required to collect and pay sales tax. Frankly, it’s a pain in the butt for Amazon sellers to track state sales tax laws and stay compliant.

If you don’t get on the correct path to sales tax compliance, you may find yourself scrambling to pay huge balances and penalties for sales tax liabilities. We have seen it absolutely destroy businesses, so don’t let this seemingly menial task slip through the cracks.

Solution:

If you don’t understand the laws behind physical nexus, economic nexus, FBA nexus, and click-through nexus, it’s time you get familiar with these laws or hire someone who is familiar with these laws. A good starting point is using the Sales Tax Analytics tool. This tool will show your sales tax exposure. It will connect to your Amazon account and give you the following information:

  • States in which you have nexus (you owe sales tax)
  • Year-to-date sales for each state
  • The amount of sales tax you owe each state

We suggest running this report quarterly to know where your business has sales tax liabilities. It’s especially helpful in following your Fulfillment by Amazon (FBA) nexus. FBA nexus basically refers to where your inventory has been stored when using FBA services. You will owe taxes for all your sales in these states.

If you notice that your sales tax liabilities are significant in multiple states, you will probably want the help of a sales tax professional and/or make use of sales tax automation software.

Your Amazon business is now setup for Success

By implementing the solutions in this blog, your Amazon business has an accounting foundation that will not only keep you safe but also provide you with important, accurate financial information. By understanding these areas of accounting for amazon sellers, and by using the resources and tools in this blog, you can’t go wrong. As a summary, we recommend you use the following resources as you move forward:

  • A2X with QuickBooks or Xero – your business will have accurate sales, COGS, inventory, and other financial data
  • Sales Tax Analytics – track your sales tax exposure by getting at least quarterly reports from Sales Tax Analytics
  • A sales tax expert and/or sales tax automation software – when your sales tax liabilities are significant in multiple states, sales tax experts will help you make strategic decisions for your sales tax compliance. Using an expert along with sales tax automation software will also help automate the complex process of sales tax compliance

Best of luck in building your successful Amazon business. What an awesome world of ecommerce and technology we live in!