Detailed Guide to Amazon Accounting
For Amazon sellers, accounting can seem like a daunting task. But with a bit of organization and knowledge of the Amazon accounting system, it doesn’t have to be complicated. In this post, we’ll walk you through the basics of Amazon seller accounting.
So whether you’re just starting or you’ve been selling on Amazon for a while, read on for some helpful advice!
What is Amazon Accounting for FBA Businesses?
Amazon Accounting for FBA businesses is how Amazon calculates the fees to retailers who sell products on Amazon. The fee calculation is based on several factors, including weight, dimensions, and product category.
For retailers who sell products through the Fulfilled by Amazon (FBA) program, Amazon takes care of all the storage, packing, shipping, and customer service associated with those products. In return, retailers are charged a fee based on the size and weight of each product and the category it belongs to.
The fees that Amazon charges can be significant, so it’s vital for retailers to be aware of them and understand how they impact their bottom line. By understanding Amazon’s fee calculation process, retailers can pay the lowest amount necessary to sell their products on Amazon.
The Importance of Accounting and Bookkeeping for FBA Businesses
Bookkeeping and accounting are essential for any business, especially for Amazon FBA businesses. When it comes to accounting and bookkeeping, there are a few key things to keep in mind:
- You need to track your income and expenses to stay profitable.
- You need to keep on top of your tax obligations, which can be complicated when you’re doing business online.
- Keeping accurate books is essential for obtaining loans and other forms of financing.
- Good bookkeeping practices will help you make sound business decisions based on data rather than hunches.
- Lastly, good accounting records will help you protect yourself in the event of an audit or other government agencies if you are in a high-risk category like food or supplements.
What Are the Most Important Advantages for Amazon FBA Sellers?
Understand Your Business’s Finances
There are several benefits to selling through Amazon FBA, but one of the most important is that it can help you better understand your business’s finances.
By seeing how your products sell on Amazon, you can get a good idea of which products are selling well and which ones aren’t. This information can help you make more informed decisions about what products to produce and sell in the future.
Build a More Profitable Business
There are two main reasons you want to keep track of your Amazon fees: to help make sure that you don’t overpay and ensure the profitability of your business.
Overpaying for fees decreases your profit margins, which can impact your long-term success as an Amazon seller. For example, if you use the default fee structure (which is often incorrect), you could lose out on money you could save or spend elsewhere in your organization.
Furthermore, if all of your products are classified into too high of a category (so that they cost more to sell overall), this will also decrease the profits you receive from each sale (and thus reduce your cash flow).
Make Cash Flow Projections
If you want to accurately forecast the amount of money your business will make each month, you must keep accurate accounting records (and bookkeeping processes like bank reconciliations).
This allows you to see how much cash is coming in and going out for your business, which means that you can better anticipate future expenses or if/when you need additional capital from investors or loans.
Avoid Frightening Letters and Receive Hefty Penalties
To avoid being fined by the government, businesses must have access to their financial data at all times so that they can prove how much income was earned and what type of expenses were incurred during a given period.
For instance, if you happen to miss a filing deadline for your annual tax returns, then the government may send you a scary letter demanding that you pay them back taxes and interest on time or else face additional penalties.
Bookkeeping processes can significantly help with this because they allow businesses to file their financial data on time for all periods of operation, so the government assesses no fees.
How to Perform Accounting for an Amazon FBA Business?
Choose an Accounting Software
It can be tough to know which accounting software is best for your Amazon FBA business when you’re first starting. Here are a few factors to consider:
- The features offered by the software. Ensure the software provides essential features, such as invoicing, inventory tracking, and expenses.
- The price of the software. Some accounting software can be expensive, so make sure you find one that’s affordable for your budget.
- The ease of use of the software. Ensure the software is easy to use, so you don’t have to spend much time learning how to use it.
- The customer support offered by the software company. Make sure the software provides excellent customer support so if you ever have any questions about how to use it, you can get them answered.
- The number of users supported by the software. Find a software that helps more than one user so all team members can access and use it.
- The platform the software runs on. Some accounting software is web-based, which means that it uses an internet browser interface instead of being downloaded onto your computer like other types of programs (which may be better if you’re looking for long-term compatibility with devices).
- The time required to learn the new system after switching from another system to this one (called “transitioning”). If from another accounting system to a new one, this is a crucial element to consider. Ensure the software you choose offers excellent transitioning services, so it’s easy for you and your team members.
Accounting Tech Stack You Will Need to Build
Now that you’ve found the perfect bookkeeping software for your business, you need to build an accounting tech stack around it to ensure everyone in your company has access to real-time data at all times so they can make informed business decisions.
This includes both employees (partners or outsourced helpers) and technology infrastructure providers like web hosting companies or internet service providers. Here are some of their main benefits:
- Lowers many other costs by freeing up time otherwise spent on admin work (e.g., finance manager).
- Allows better planning by providing updated numbers on sales, costs, margins, etc.
- Avoids the need to query staff for up-to-date data or go through multiple spreadsheets (e.g., finance manager).
- Even if the business is complex with many locations and subsidiaries (e.g., global retailer), it provides accurate data.
- It uses open standards to be accessed from any location with an internet connection (e.g., online accounting software).
- Enables fast access to relevant reports at all times thanks to its zero-latency capabilities (e.g., cloud computing services).
Create Financial Reporting Systems
Now that your software and tech stack is in place, it’s time to create your financial reporting systems. This includes setting up your chart of accounts, assigning account codes and categories, and implementing a double-entry bookkeeping system so you can record transactions correctly. Here are some reasons why it’s vital for FBA businesses:
- Allows accurate forecasting of future cash flows from the current business performance (e.g., avoiding cash flow problems).
- Provides more relevant information on business performance than vague metrics like gross margin percentage alone (e.g., allowing effective strategies to be developed for maximum profitability).
- It helps with tax accounting because correct accounting records must be kept for this purpose (e.g., avoiding unnecessary penalties or audits by the tax office).
- It gives a complete picture of the business’s financial situation (e.g., spotting potential problem areas early).
General Amazon Accounting Best Practices
A few Amazon accounting best practices can help businesses manage their finances and stay in compliance with Amazon’s terms and conditions. Here are a few of the most important:
Ensure Your Chart of Accounts is Current
Your chart of accounts is the backbone of your accounting system. It’s critical to be up to date and accurately reflect your business operations. Here are a few essential tips to help ensure that your chart of accounts is effective:
- Keep it simple. The more complex your chart of accounts, the harder it will be to use and understand. Stick to basic account categories that accurately reflect your business activities.
- Review it regularly. As your business changes, so too will your chart of accounts. Make sure you review and update it regularly to ensure accuracy.
- Use sub-accounts where needed. If certain account categories are too broad or don’t accurately reflect your operations, use sub-accounts whenever necessary. For example, if “Advertising” is a category that encompasses multiple advertising methods, create sub-accounts for each specific type of advertisement you use.
Make a Choice: Cash or Accrual Accounting
You have two options when it comes to how you record your income and expenses: cash accounting or accrual accounting. Your choice will depend on which business-standard makes the most sense for your operations and helps you meet Amazon’s requirements. Here are some pros and cons of each method:
Cash Accounting Pros: Cash accounting is relatively simple to implement once your accounts receivable and accounts payable processes are set up properly on Amazon Seller Central. It can also help you manage your working capital more effectively.
Cash Accounting Cons: You can’t accurately project your profitability, which isn’t ideal if you’re running a startup and planning for growth. This method also doesn’t help you identify potential trouble areas before tax season when it becomes more difficult to make adjustments.
Accrual Accounting Pros: Accrual accounting provides better insight into your business performance and profitability, but it’s more complicated to set up on Amazon Seller Central.
Accrual Accounting Cons: If you choose this method, be prepared to devote more time and resources to manage it. Accrual accounting can result in fines from taxing authorities or even audits that uncover previous mistakes if done incorrectly.
Reconcile Your Bank Statements
It’s important to reconcile your bank statements regularly to ensure that the figures reported in your accounting software are accurate. This will help you catch any discrepancies early and prevent them from snowballing into a more significant issue.
There are a few different ways to reconcile your bank statements. One is to match the statements’ transactions with those in your accounting software.
Another is to calculate the difference between the ending balance in your accounting software and what’s reported on your statement, and then determine where that discrepancy came from (e.g., deposits not showing up, expenses incorrectly categorized, etc.).
No matter which method you use, it’s essential to be as thorough as possible and account for every penny. This is a great time to catch minor inaccuracies that impact your bottom lines, such as incorrect fees or charges.
Organize Categories in an Efficient Manner
Properly accounting for your inventory is critical to ensuring you’re performing at peak efficiency and profitability. The best way to do this is by categorizing each product listing separately to be easily monitored for performance and compliance issues. Here are the rules you need to follow:
- For products that don’t have any variants (i.e., different versions of the same good), create separate listings every time you list one of those products on Amazon Seller Central. This allows you to monitor their performance metrics like sales rank, customer reviews, etc., which can help identify opportunities to optimize your listings.
- If you have multiple variants within the same product listing, group all of those together under one parent listing with a unique UPC or EAN, which helps keep things organized without sacrificing granularity. For example, if you’re selling black and white versions of the same shoes, you can create one listing with two color options that each has its own inventory management system to track performance metrics.
- If your product is part of an unlimited bundle or subscription (e.g., “the best craft beer kits”), list it as a single item on Amazon Seller Central and then create separate listings for each variant under that parent listing (i.e., one for kit and another for kit B). This will allow you to monitor the performance of each variant individually as well as that of the parent bundle.
Remain Compliant at Tax Time
Amazon sellers are legally required to file quarterly sales taxes in some places with a physical presence, such as an office or warehouse, and collect sales taxes for other states where their products are shipped to and sold on Amazon Seller Central.
If you don’t, it can result in fines and penalties from your state government and could also impact your liability during an audit.
It would be best to comply with federal tax requirements by filing all necessary forms. Many sellers have issues with this at tax time because they weren’t tracking all their business-related expenses, which is a red flag for more significant compliance problems down the line.
To avoid all these issues, it’s a good idea to hire a third-party service to manage your finances and perform an in-depth financial analysis when you’re not using that money or when you haven’t been using it recently. This way, you’re never surprised by an issue on tax day and can resolve it before things get out of hand.
Find Additional Revenue Sources
Here are a couple of best practices to create additional revenue streams from your Amazon account:
- Sell on other marketplaces: There are several other online marketplaces where you can sell your products, such as eBay and Walmart. You can also use Amazon’s Fulfillment by Merchant program to sell products on their platforms.
- Sell through Amazon Associates: Amazon Associates is a program that allows you to refer customers to Amazon and earn commission on sales made through your referrals.
- Sell digital products: You can sell digital products, such as e-books and courses, through your Amazon Seller Central account.
- Sell through your website: You can sell through your website. As long as you meet the product and service eligibility requirements for Amazon Seller Central, you can list them on their platform without owning or operating a separate e-commerce store.
- Consignment inventory: If you have inventory that isn’t selling on Amazon, consider consigning it with a company like LabelValue to improve your inventory turns and increase profitability.
- Create private label products: Private labeling allows you to take an existing product in the marketplace (i.e., silverware) and create your own brand. To do this, you purchase the product in bulk from a supplier and then rebrand it with your own logo before listing it on Amazon Seller Central.
- Sell wholesale: Selling wholesale means buying products in bulk directly from the manufacturer or distributor to resell at a markup.
How to Hire an Accountant, Bookkeeper, and VCFO at the Right Time?
When to Hire an Accountant?
An accountant can help you with tasks such as preparing your income tax return, advising you on how to reduce your tax bill, and helping you set up a record-keeping system. You may want to hire an accountant if you have a complicated financial situation or need help staying organized.
When to Hire a Bookkeeper?
A bookkeeper can keep track of your expenses and income, ensuring that your books are balanced each month. You may want to hire a bookkeeper if you don’t have the time or inclination to keep track of your finances or if you need someone to prepare monthly statements for your business.
When to Hire a VCFO?
A VCFO, or virtual chief financial officer, can manage your accounting tasks if you don’t have the time or expertise to do it yourself. They can maintain a record-keeping system and prepare tax returns for you. VCFOs also make recommendations on reducing taxes and saving money on expenses.
You might need a VCFO if your business is very small or making some significant changes in its structure, such as going from a sole proprietorship to an S Corp.
How to Vet Accounting Hires?
When hiring someone to help with your books, you should ask questions about their work history, education, professional associations, and client references. Here are some essential things that you immediately want to know:
- What experience does this person have? How long has the person worked in this field?
- What is their educational background? Will they be able to understand your business and how it works?
- Are they a member of any professional associations? These could be industry associations or bookkeeping associations. Membership in these organizations means that the person has taken some continuing education courses and has sought additional training on topics important to you as a business owner.
- Do they have any references from past clients whom you can speak with? In some cases, you may want to ask for client email addresses so that you can follow up directly with them if necessary. You can also ask whether those clients were satisfied with the accountant’s services and whether they would recommend them to others.
Why Hire JTT Accounting for Your Amazon Accounting Needs?
JTT Accounting is the perfect choice for your Amazon accounting needs because we have extensive experience with Amazon-specific tax laws and regulations. We understand how to report Amazon income and expenses properly, and we can help you stay in compliance with all relevant tax requirements.
In addition, we offer a wide range of services that are designed to help you manage your business finances more effectively. We can help you set up a bookkeeping system that meets your specific needs, we can provide monthly financial statements, and we can even help you negotiate better prices from suppliers.
So if you’re looking for reliable and experienced accountants who know how to handle all things Amazon, JTT Accounting is the right choice for you. Contact us today to find out more.