Amazon 1099 vs. Financial Statement Activity | Amazon Bookkeeping Tips

So I want to start by reading you a statement from our ecommerce team that explains this on a high level, and then I want to show you some specific things you can use to validate this data for yourself. And if you're having a tax accountant or an auditor ask you these same questions about why the numbers don't match, here's information that you can give them to show them how to tie this out.

0:56 What our ecommerce team says

So I asked our ecommerce team, who is a lot smarter than me, for specific information that they could give me also. And this is the statement that they gave me that I want to review really quick.

Amazon Seller Central offers numerous business reports which are commonly viewed by sellers. However, these might lead to some confusion when compared to the information that LedgerGurus, or whatever accounting firm that you're using, provides in financial reporting. For instance, Amazon reports sales figures based on total order amount, whereas LedgerGurus uses the fulfilled, shipped order amount for sales.

So basically this is a timing issue. Using fulfilled sales data accurately reflects actual sales, and will tie to the transfers and deposits that Amazon makes after taking into consideration fees and other Amazon expenses. So again, this is a timing issue, and the way that we report expenses and income is slightly different.

1:42

Further, many of Amazon's business reports display gross figures only, and may not reflect shipping, returns, discounts, or other adjustments that need to be made to arrive at a net figure. LedgerGurus, or whatever accounting firm you're using hopefully, uses more specific reports in Amazon to classify all items related to selling, and appropriately determines the effect on accurate financial reporting.

So this one in particular speaks to the issue about the 1099, because the 1099, reflecting gross figures, really doesn't take into account any of these other things.

2:15 Comparing the 1099 to your books

So now let's get into some details about how you can look into this yourself.

So this is an example of a 1099 coming from Amazon, and this is an example of some of the underlying financial data that ties to the same period of time. In this particular set of books we have it broken out by class, and so we can see how each of these individual channels are performing individually. This is a much easier way to look at it if you're about to do what I'm getting ready to do, because I can see all the stuff that pertains to just Amazon and Amazon alone right now. We do this with class tracking. If you want more information about how to do this, if you're trying to do this yourself, then we have YouTube videos that show how to do this.

So let's just start with this evaluation first. In the books we see that we have total income of 649 thousand dollars, but on the 1099 they show 701,000. Obviously a fairly significant difference.

3:07 The cash basis problem

One of the reasons why you may have a massive difference between total income showed here and income on your 1099 is if you are basically using a cash only approach to the way you're recording data.

So I'm not going to go into a lot of depth on this right now, but we have other videos on our YouTube channel that talk about a cash approach to ecommerce and Amazon accounting versus a deeper dive.

So to sum it up quickly, the deposits that are coming into your bank account from Amazon are not your sales. They're basically the net of all Amazon activity. So in this case you see we have 135,000 in sales, and after all of this other stuff happened we actually got 92,000.

So first and foremost, if you're using a cash approach for accounting for Amazon activity, you will have a huge difference between what the 1099 says and what you're recording in your books, because you are missing all of this other stuff. And this is just already causing a problem.

So first and foremost I recommend you solve this problem. If you're not already working with LedgerGurus or another company that does the same kind of thing, this breakout, watch some of our YouTube videos on how to do it yourself, or reach out to us.

4:25 Tying out net income

But if you're assuming that you're having this done correctly, or that you're already working with us and we're breaking this out for you, then let me show you the next thing you can do to validate this data.

So when we look at this different channel activity, we have here the net income on this channel. Now what the tax accountant and what the auditors are really interested in is really a net income number. Are you correctly reflecting in your books your income minus expenses, which takes you to taxable income? So what is your true taxable income from this channel?

So here in the books we have it recorded as 152. But if you look up through all of this kind of stuff, most of these items are all coming directly from Amazon activity, except for this cost of goods sold number right here.

5:03

So if you want to evaluate your cost of goods sold from just Amazon related activity, I recommend doing this analysis. So what I'm going to do here is I pull up this statement from Amazon that basically shows us what our total income and total expenses were for the channel over the course of the year. So you basically go to reports, you say date range reports, and you run a report for the year on a summary basis, and this is the report that it gives you.

So total income minus total expenses is the net income of the channel. This is the true taxable income from your Amazon activity, and this is the number that your tax accountant and that any auditor will actually really care about, even more than just what the 1099 says.

5:45

So if you come in here and you pull this up, I'm going to start by saying here's my income and here's my expense from this channel. This minus this equals this.

Okay, then I'm going to pull up my books from here, and I'm going to take my net income number, 152,000, add back in the cost of goods sold, because this is a number that did not pass through the Amazon channel at all. This plus this gives me this. And as you can see, this minus this is a very, very minimal difference of 260 dollars.

So this is a margin of error that I'm very comfortable with. We're basically within just a couple hundred dollars on almost half a million dollars in revenue. That's a very good tie out there.

6:34 Handling international channels

So the other thing I wanted to talk to you about is how to handle this if you're doing international sales, if you're selling on international channels as well.

So if you have this report and you're pulling it up for say Amazon Canada, Amazon Mexico, all these other things, these numbers here are actually not going to be in US dollars. They're going to be in whatever currency is the home currency of that channel. So after you put in these numbers you're going to get pretty huge differences. So here you see the Mexican pesos, this is huge numbers, basically in the millions and in the hundreds of thousands.

So after you get this number you need to make an adjustment for foreign currency. Now this is not going to be exact. It's not going to be nearly as exact as this, because QuickBooks or Xero or whatever accounting software you're using typically adjusts for foreign currency in real time with each transaction, or each week or each month or however you're doing it. Whereas this is a comparison as of only one point in time, whenever you ran this. This is the point of time that you're making this adjustment. So it's definitely not going to be as accurate as if you were evaluating this when the transactions were actually happening. But it gives you a pretty good idea of whether you're wildly off or whether you're pretty darn accurate.

7:48

So what I did is I went to a website that basically just gives you a foreign currency exchange, and I calculated what this much in Mexican pesos was in US dollars, and this is the amount I got. And when I do this minus this you can see I get this.

So even though this is a lot bigger than this difference, I can see that we're within the range. Like 35,000, 33,000 in net income, those are definitely within the range. If one of these was like 80,000 and the other one was 33,000, I would be a lot more concerned. But this is definitely a range that's explainable in a foreign currency exchange. As is this one here, it's a little bit higher but it's still within a range of like, oh, I can see that we're in the same ballpark on this.

Obviously the US one's a lot easier to tie out, and luckily, as expected, we're a lot closer on that. But that's how you would handle each of the individual channels.

8:35 What to tell your accountant

So this is a good way to basically take this 1099 information that makes people kind of panic and say seven hundred and one thousand dollars, what, and kind of freak out a little bit, and say okay, actually I can see that if I were to pull this up and I had to show an auditor this information, and I could show them that my financials tie out to this very, very closely, that I would be just fine and that I would pass an audit.

So if you have tax accountants who really don't understand how this works, and they get your 1099 and they feel like this is the number you need to report, they're wrong. It's not. If your books tie out to this report, then you're good to go.