Launching an Amazon business is exciting—the possibilities are nearly endless, and there is a low barrier to entry. However, 80% of Amazon sellers say that bookkeeping and accounting are their biggest challenges. Oftentimes this is because sellers have little to no experience in accounting and make mistakes that harm their financials. These six Amazon accounting mistakes are the most common, and sellers and accountants should be aware so as to avoid making them.
1. Losing Track of Sales Taxes
Ever since the South Dakota vs Wayfair Supreme Court ruling in 2018, the ecommerce sales tax landscape has gotten complicated. There are currently more than 12,000 taxing jurisdictions, each taxing items at different rates throughout the year. Additionally, “economic nexus” laws are active in 40+ states and apply to all online retailers. These laws outline the tax obligations for sellers and are based on economic activity in the state. (Sellers who exceed the sales volume or revenue thresholds set by a state must then remit sales taxes to that state.) There are also local sales tax rates to consider.
Amazon sellers are spared the risk of making sales tax mistakes, as the marketplace automatically collects and remits taxes. However, the reality of ecommerce today is that many sellers are multichannel and need to keep track of their business transactions to ensure tax compliance.
2. Relying Solely on Amazon Data
Amazon provides its sellers with sales metrics data, but it is far from sufficient for understanding the financial health of the business. A Profit & Loss statement is only part of the picture that can be revealed using Amazon accounting software. With a more robust system like QuickBooks or Xero, sellers will also get access to financial reporting, analytics, and so much more. There are also Amazon QuickBooks integrations (like Webgility) that provide even more rich data. By tracking all Amazon transactions from sales and returns to expenses and fees, sellers and accountants see true cash flow.
3. Expensing Inventory
Accountants see this scenario often: A seller purchases inventory, writes it off as a business expense, and then tries to get a tax deduction when it’s time to file. Unfortunately, that’s not how inventory is accounted for. It’s a capital investment, so that’s how it has to be recorded. Amazon sellers can write off their inventory as it’s sold, but they cannot do so upfront. Instead, they can focus on other deductions:
- Cost of goods sold, also known as wholesale price
- Shipping fees, expenses, and supplies
- Home office costs
- Amazon FBA accounting software costs
- Amazon seller fees
- Charitable donations
- …and more
4. Procrastinating on Bookkeeping
Books don’t keep themselves, no matter how badly sellers want to avoid them. Solid financials are required for any seller who wants to apply for a business loan, bring on a business partner, successfully sell the business in the future, or even identify errant Amazon fees. We hope the IRS doesn’t ever come knocking, but businesses need well-kept books in the event of an audit as well. Overall, it’s good practice to not procrastinate on bookkeeping, which is why many sellers outsource it—until it becomes too costly. At that point, it’s time for automation.
5. Not Identifying Profit Centers
There are two ways to handle ecommerce accounting: by transaction and by summary. The latter is preferred by accountants because it is easier and requires less bandwidth in their accounting software. However, there is a major benefit of transactional accounting. Sellers and accountants alike can identify profit centers, such as certain sales channels or products, and can strategize how to optimize them.
6. Estimating Seller Fees
Amazon spins a complicated web of fees for its sellers to navigate. There are monthly fees just to be able to sell on the marketplace, but they only apply to sellers who fulfill 40+ orders per month. There are referral fees for each item sold, but media items are subject to variable closing fees instead. Even shipping fees are dependent upon the item’s category, size, and weight. Many Amazon sellers also opt in to FBA (fulfilled by Amazon) for the added convenience. Amazon will receive inventory, store it, pack it as orders are placed, and ship those orders to the respective customers. With that comes—you guessed it—more fees.
Sellers who are scaling sustainably can typically afford these fees, but it’s hard to know what exactly the totals will be at the end of each month. Amazon’s data only shows profits and losses, not the granular line-by-line invoice that helps understand true business costs.
Automate Your Amazon Accounting
Accurate accounting is the key to the longevity of any Amazon business, but it can quickly become a costly and time-consuming endeavor. Neither business owners nor accountants want to spend their time on manual data entry—it leaves little to no time for strategizing business growth. Instead, technology can step in to save time and reduce errors. Accounting automation software for Amazon sellers streamlines your workflows and gives you the information you need to make smarter data-driven decisions.