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Amazon is the world’s largest retailer and ecommerce provider. Millions of small merchants rely on Amazon to extend their reach and product offerings. It’s become integral for merchandisers and retailers of all stripes to sell on Amazon, and large corporations and the country’s smallest businesses alike both sell on Amazon through their FBA (Fulfilled By Amazon) program to take advantage of their unrivaled logistics network.
Here’s what sellers should know about basic Amazon bookkeeping, and accounting best practices for small businesses that rely on ecommerce.
Why do Amazon sellers need to be concerned with bookkeeping?
Amazon seller bookkeeping simply revolves around recording and storing daily transactions related to your Amazon operations.
Transactions are economic events, such as:
• Buying inventory
• Making sales
• Issuing full or partial refunds
• Credit memos
• Discounts issued
• Running ad campaigns
• Receiving Amazon Affiliates advertising income
• Shipping fees
• Supplies purchases
• Paying down loans and credit cards for your business
There are several other transactions that could go on this list, but these are the most common ones for Amazon sellers.
Having a bookkeeping system in place specifically for Amazon sellers is important because having all of your financial data aggregated in one place makes it easier to evaluate how your business is doing at any point in time. Bookkeeping software for Amazon sellers can also help you evaluate certain periods, like the month or quarter, in the event you need to reference these amounts for your own business planning purposes or when applying for loans, business grants and SBA aid, and other capital.
Bookkeeping is the sum of all these transactions that lets you know how much available cash you have and how you use it, how much you’ve earned proximal to what you’ve invested in the business, and your overall profitability. Profitability is how you know your business is worth running, and what external parties like lenders and investors use to evaluate your business as well. Even if you do not plan on obtaining outside capital at this time, you need to know what your profit is– revenue minus expenses– for tax reporting purposes.
By having regular bookkeeping that properly tracks all of your inventory activity, income, and expenses, it also helps you catch errors and discrepancies as they happen rather than when it’s too late.
How does bookkeeping for Amazon sellers differ from other retail operations, or other types of businesses?
Bookkeeping for Amazon sellers is best done using the accrual method of accounting. Most small businesses opt for the cash method, but if you rely heavily on inventory sales you may be best off with accrual because it matches inventory purchases, sales, and product ship times more efficiently and realistically. The cash method can present problems if inventory takes weeks or months to sell, and payment isn’t received until weeks after the merchandise ships. Your financials can look poor under the cash method if you just bought a great deal of new inventory.
Under the accrual method, the total amount you sell regardless of when you received payment is what gets reported and it can be more easily matched with the cost of goods sold even if the goods are fairly old. It helps provide a clearer picture of overall profitability.
Cost of goods sold (COGS) is also critical for Amazon sellers to keep track of. While this is important for any business that has inventory, it is especially dire for Amazon sellers because it is your single largest expense compared to other operating expenses. Because of the timelines with the FBA program, keeping detailed track of merchandise purchases and ensuing sales under the accrual method is what gives you the truest sense of how much it actually costs to sell with the program. Amazon sellers need to utilize the “landed cost” in COGS whenever possible: it accounts for both the merchandise’s purchase price, plus the costs involved in getting it to Amazon facilities like postage or freight, customs duty, and insurance. If you start to sell more products, whether through drop shipping or other methods, you may need additional inventory management tools to track your sales and determine your ideal product mix and complete picture of total cost per unit for each item.
Additionally, if you sell on multiple platforms and channels such as eBay, your own website, Etsy, and Amazon’s different regions like Amazon Canada vs. Amazon US, it would be best to separate your financial reporting by channel. Even though it all needs to be aggregated for your financial statements and tax filings, separating financial data by channel helps you determine which ones are the most profitable and efficient to work with.
A robust bookkeeping system helps track sales, COGS with complete unit cost, seller fees, and other expenses solely related to each channel in order to make an informed decision. One channel may provide poor numbers even if it seems to be generating traffic to your other product listings that are resulting in sales, but aggregating your channels will obscure this information.
Should Amazon sellers track inventory separately from other business expenses?
Operating expenses that are separate from inventory, shipping, and fulfillment absolutely need to be tracked. Your bookkeeping system for Amazon sales should separate these expenses into two categories: overhead that is direly necessary to run the business, then ordinary and helpful business expenses that are tax-deductible but not integral to running the business.
In the event you are having your business valued to sell it to another company, buyers and business consultants will examine Seller’s Discretionary Earnings (SDE), which is solely inventorial costs plus overhead. Even if you don’t plan to sell your business any time soon, it’s a good idea to know your ongoing SDE numbers so you can determine which aspects of your overhead can be minimized for maximum cost efficiency, and which expenses can be reduced or eliminated.
QuickBooks is generally the most recommended option for Amazon FBA sellers. Of all the solutions on the market, it has the most support from both the Amazon seller community as well as accountants who are certified users and Pro Advisors for the program. In addition to being the most popular program for small businesses in America, QuickBooks offers both downloadable and online options and pre-built accounting systems for ecommerce sellers, including Amazon FBA sellers. There are also more reputable third party supports and add-ons for inventory management for QuickBooks users than there are for other programs.
While Wave, Xero, and lesser-known accounting solutions can be a good start if you do not have much inventory to track, QuickBooks is generally recommended if you are building a larger business on Amazon or a multiple channel approach that has more inventory to track, as Amazon and Shopify are more apt to offer integration with QuickBooks sooner than other programs.
However, if you are located outside the United States and/or sell on Amazon’s Australian and European channels, Xero may be a better option as there are larger user bases for this program in these territories than there are for QuickBooks. There are Amazon sellers in the United States who also use Xero and a sizable user and support network, but it is a fraction of the support that is available for QuickBooks users.
Regardless of which program that you use, your needs for third party add-ons and extraneous recordkeeping will vary by how many channels you sell on and how much inventory you carry. QuickBooks has the most official and unofficial add-ons and mods to make this aspect of recordkeeping easier than the pre-built options seen in most bookkeeping software. If you have several different types of merchandise for sale and need to track them by age, specific cost, additional costs to send to Amazon warehouses, or items that you only sell on certain channels, third party add-ons for inventory management become inevitable.
When you choose an accounting solution, integration options are key to save time and error-prone entries. Integration means that journal entries post in real time with your transactions, and these options may also be customizable as well. Integrating your bank and digital payment processor accounts helps provide a clearer and more accurate view of how much cash is on hand, how much you owe if you can integrate credit card and vendor accounts, and if any discrepancies are on the books.
When should an Amazon FBA seller outsource bookkeeping?
Amazon FBA sellers with sufficient resources and plans for rapid growth often prefer to work with a professional from the start. This is to ensure that the chart of accounts is correctly set up and the bookkeeper can also see transaction entries in real time to confirm that they are going to the right places. Sellers who are just starting out and unsure how much they will grow are more likely to get a copy of QuickBooks on their own and follow the directions for the retail sales model in the program.
It is not recommended that you set up a chart of accounts on your own unless you have an accounting background. Professionals who use QuickBooks are familiar with the preset charts of accounts that come with the program, if they do not set one up from scratch for you. Transactions must be posted in a specific manner
However, it becomes more urgent to outsource your bookkeeping when sales are taking off and the business is showing more growth with consistent velocity. As the number of transactions begins to grow, the more complex they will become and should be tracked and handled by a professional who can properly separate them by channel, and also give you your time back to focus on running and growing the business instead of doing tedious transaction entries and review. Volume and complexity are the two major determinants for when it’s time to outsource Amazon FBA bookkeeping.
If you are a QuickBooks user with an Amazon sales business, you should specifically look for a QuickBooks Pro Advisor who specializes in Amazon and ecommerce clients. In addition to other credentials they may have, these professionals have gone through rigorous training and testing to provide the highest level of support for QuickBooks users in setting up and maintaining their bookkeeping infrastructure.
It’s utterly crucial for Amazon FBA sellers to have a bookkeeping system in place. While this is true of all merchants who utilize online marketplaces, where sales should be tracked by channel if multiple marketplaces are used, it’s particularly important for Amazon sellers as there are additional quirks of selling on the platform. Small businesses that take advantage of Amazon’s indomitable foothold in the logistics industry have additional costs that must be accounted for aside from the actual merchandise cost itself, to get an accurate per-unit cost.
In setting up a bookkeeping system, Amazon sellers may need to integrate third party inventory management systems depending on how much merchandise they sell and how many SKUs need to be tracked. Because the recordkeeping needs for a business with inventory are more complex than for freelancers and service businesses, a more robust and “universal” solution should be used, such as QuickBooks. In addition to being the chief bookkeeping software for a majority of small and medium businesses throughout America, there is a large support network of QuickBooks users and advisors who are specifically attuned to the business needs of Internet retailers and Amazon FBA sellers.
Having accurate books is not only important for equally accurate and timely tax filings, but it also helps Amazon sellers spot discrepancies in real time and determine which products and channels are not as profitable as they could be. If you plan on obtaining outside financing for your business or perhaps selling your company, having well-organized financials and accurate numbers for your sales activity versus overall profitability is also key to succeeding with these endeavor
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.