Launching an Amazon business is exciting. The possibilities are endless, and there’s a low barrier to entry. However, 80% of sellers in an informal survey said bookkeeping and accounting are their biggest Amazon seller problems.
These problems are likely due to sellers having little to no experience in accounting and making mistakes that harm their financials. So let’s look at how Amazon accounting works and how it contributes to six common Amazon accounting problems.
How Amazon accounting works
Accounting for Amazon sales is the process of ensuring the orders, expenses, and fees from your Amazon payouts and settlement reports make it into your accounting platform and reconciling each with what’s in your bank account.
Typically, Amazon issues payouts every two weeks and makes settlement reports available in your Seller Central account. To generate a settlement report, sign into Seller Central, navigate to the Reports menu, and select Payments. Open the All Statements tab to view and download settlement reports. Or download settlement reports by date range.
An Amazon integration with QuickBooks will allow you to sync orders and expenses between the two platforms. That way, all payments, expenses, fees, and adjustments go to QuickBooks automatically. But if you don’t have that, you’ll want to enter order and expense data manually to make Amazon accounting work.
Unfortunately, how Amazon accounting works is also part of what contributes to common Amazon accounting problems. For example, Amazon deposits a net amount into your bank account every two weeks.
But that net amount results from payments, refunds, adjustments, claims, fees, taxes, and other factors. And if you’re inserting that net amount into your QuickBooks manually and not sorting debits and credits, you’re probably not seeing the whole financial picture. If that’s the case, you’ll want to watch out for six common accounting problems.
1. Losing track of sales tax
The 2018 South Dakota vs. Wayfair ruling forever complicated the ecommerce sales tax landscape. Today, there are more than 12,000 tax jurisdictions across the United States. And each taxes items at different rates throughout the year.
Additionally, over 40 states have economic nexus laws for all online retailers. These laws outline tax obligations for online sellers based on their dollar amount of sales or the number of transactions they process in each state.
Sellers who exceed a state’s sales volume or revenue threshold must remit sales taxes to that state. There are also local sales tax rates to consider.
Luckily, Amazon automatically collects and remits taxes, so sellers are spared the risk of making accounting problems related to sales tax mistakes.
But the reality of ecommerce today is that many sellers are multichannel. So they need to keep track of every aspect of their business transactions to ensure tax compliance.
2. Relying solely on Amazon data
Amazon provides its sellers with sales metrics data. But it’s far from sufficient for understanding a business's complete financial health. For example, Amazon's profit and loss statement is one piece of the puzzle.
If you sell in many channels, you'll see profit and loss in all of them. More robust systems like QuickBooks can give sellers access to financial reporting, analytics, and much more. And connecting all your ecommerce stores to QuickBooks can provide even more rich data.
By tracking all Amazon transactions from sales and returns to expenses and fees, sellers can see true cash flow.
3. Misclassifying inventory as a business expense
Accountants see this scenario often: A seller purchases inventory, writes it off as a business expense, and then tries to deduct it from their taxes. Unfortunately, that’s not how to account for inventory.
Inventory is a capital investment, so that’s how you have to record it. Amazon sellers can’t deduct their inventory before they sell it. So instead of trying to expense inventory, focus on understanding and maximizing other tax deductions.
The following five are common. But if you need clarification on which costs are tax deductible for your Amazon business, consult the IRS guide and an ecommerce tax accountant.
1. COGs or wholesale prices: The IRS allows business owners to deduct the cost of goods sold for products they manufacture or purchase for resale. But remember, this only applies to costs of goods sold, not costs of goods unsold.
2. Shipping and postage: Business-related mailing, shipping, or postage fees are tax deductible. But beware. If you buy and resell goods you don’t manufacture yourself, packaging and shipping costs may not be deductible or included in your COGs.
3. Home office: You may deduct the use of your home office under certain conditions. The IRS defines business use of your home as “a specific area of your home only for your trade or business.” To qualify, the use of your space must be exclusive, regular, and for your business.
And the business part of your home must be your principal place of business, a place where you meet with patients, clients, or customers regularly, or a separate, non-attached structure you use in connection with your business.
4. Accounting software and Amazon FBA fees: If you’re a small business owner or self-employed, you can deduct the cost of your QuickBooks and other business software subscriptions. Similarly, if you’re an FBA (fulfilled by Amazon) seller, you may deduct the fees Amazon charges to manage your inventory.
5. Charitable donations: Typically, small businesses can deduct charitable donations of money or property from their taxes. But note that there may be specific requirements for donating food, non-food inventory, and intellectual property.
Meanwhile, the IRS doesn’t consider the following tax-deductible:
- A contribution to a specific individual.
- A contribution to a non-qualified organization.
- The part of a contribution from which you receive or expect to receive a benefit.
- The value of your time or services.
- Your personal expenses.
- A qualified charitable distribution from an individual retirement arrangement (IRA).
- Appraisal fees.
- Certain contributions to donor-advised funds.
- Certain contributions of partial interests in property.
4. Procrastinating 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, sell their business in the future, or even identify errant Amazon fees.
We hope the IRS never comes knocking, but businesses also need well-kept books in the event of an audit. Overall, it’s good practice not to procrastinate on bookkeeping. A great way to keep your accounts current is close your books monthly and engage in regular reconciliation practices.
5. Not identifying profit centers
There are two ways to handle ecommerce accounting: by transaction and by summary. Accountants prefer the latter because it’s easier and requires less bandwidth in their accounting software.
However, there is a major benefit of transactional accounting. Sellers and accountants can identify profit centers, such as certain sales channels or products, and strategize how to optimize them.
Meanwhile, ecommerce analytics tools can help you understand which products and channels are giving you the most return. The right solution can give you a snapshot of the current day or help you understand seasonality or trends over time.
Plus, explore monthly and daily sales performance and sales trends by channel, month-over-month and year-over-year comparisons of channel performance, and more.
6. Underestimating seller fees
Amazon spins a complicated web of marketplace fees. Sellers pay monthly fees to sell on the site, according to the number of items they sell.
Additionally, Amazon charges referral fees for each item sold. But media items are subject to variable closing fees instead. Even shipping fees depend on an item’s category, size, and weight.
Many Amazon sellers also choose FBA plans for added convenience. Amazon will receive inventory, store it, and pack and ship those orders as part of the program. But that convenience comes with — 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 actual business costs.
Ecommerce automation reduces Amazon accounting problems
As your Amazon business grows, avoiding common accounting problems will be paramount. You’ll want to separate all Amazon debits and credits in QuickBooks in favor of settling for net-amount details.
As your operation expands, you’ll want to keep Amazon SKUs consistent across a multichannel operation. And you’ll want to see profit centers for every store you open in one place. Through that expansion, you’ll tackle new challenges and greater fees.
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, as it leaves little time for strategizing business growth.
Instead, ecommerce automation technology, like Webgility for QuickBooks Online, can step in to save time and reduce errors — it’s even a tax-deductible business expense. Ecommerce automation software designed for Amazon sellers and QuickBooks customers streamlines workflows and provides the information you need to make smarter data-driven decisions.