With the advent of the world’s most profitable business corporation, Amazon, came a host of opportunities for the e-commerce market. Order fulfillment was one of the biggest hurdles the e-commerce market always dealt. Sure, you could book an order from across the world, but fulfilling that order promptly was nigh impossible without having deep connections in the market. But all of that changed when, in 2006, Amazon launched its Fulfilment By Amazon (FBA) service.
FBA has been a game-changer in the e-commerce industry. You no longer need to set up your supply chain to fulfill orders properly and can just outsource that work to Amazon!
The FBA service is pretty much as the name suggests. Sellers can use Amazon as their sales front, and whenever an order comes in, Amazon takes up the responsibility of delivering it. All the seller needs to get the products ready, and Amazon will do the rest. On top of providing e-commerce business owners with the world’s most robust supply chain network, Amazon’s FBA plan also throws in return and exchange services and customer support. So, sellers don’t need to worry about that part of the order fulfillment process. Read more about Amazon’s FBA services and how they work here.
With all that said, it’s not like all of your e-commerce woes can be solved through Amazon’s FBA service. One of the biggest complications of utilizing this amazing service is the complex accounting burden it brings. Let’s call this Amazon Accounting. Now, what exactly is Amazon Accounting?
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Amazon Accounting Explained
Amazon accounting is, pretty much as the name suggests, accounting that involves e-commerce businesses and Amazon’s services. You may simply be using Amazon as an online selling platform, or sign up for the FBA service. Either way, you must understand that your finances will change when you do business through Amazon.
Recognizing Revenue
When you use a third-party facilitator such as Amazon, you will naturally have to pay them. Amazon will be taking its cut from the profits of a sale, and charge you the costs of fulfilment if you are an FBA seller. The core principle of Amazon accounting is learning to distinguish between Amazon’s share of the revenue and your e-commerce business.
For example, if you sell a product for $300, you must consider the costs that Amazon will charge for using their infrastructure into the calculation. These costs must be properly recorded in the books of accounts and be properly reflected on your business’ financial statements. This is both to adhere to regulations and taxation policies and to have a clear picture of your revenue. If $70 of your $300 product is going to Amazon, you must factor that in to get a proper read on your profits.
Inventory Management
Even if you use Amazon’s amazing supply chain network, you still need to remember that you are the first link in the supply chain. You need to have products manufactured, packaged and ready to hand over to Amazon’s fulfilment centers. This means you still need to keep track of your inventory and the cost of maintaining it. The Cost of Goods Sold (COGS) must include all the expenses for inventory management on your end before you hand the package over to Amazon.
By regularly reconciling your inventory records with Amazon’s reports, you can also easily spot any discrepancies and work towards clearing those up. Inventory management is a fundamental part of Amazon Accounting to remember.
Tracking and Analyzing Expenses
An FBA business has many different moving parts, and since it’s e-commerce, all of it must be dealt with online. There are a ton of expenses to track and record, and staying on top of these expenses is crucial for Amazon’s accounting. Other than the Cost of Goods Sold (COGS), there are other expenses to consider, such as packaging, handling, shipping to Amazon fulfillment centers or establishing and managing a warehouse where products can be picked up from. You also need to remember to factor software and personnel costs into the mix, and keep detailed and accurate records of everything, and we mean everything, that happens in the business. Because this is e-commerce, you need to always have your finger on the paper trail, because there is a massive chance that you may end up conned out of your hard- earned money if you aren’t skeptical and shrewd.
This part is the same as regular retail accounting, except that it’s online, and so needs appropriate attention on that front. We recommend looking at EA article titled “A Guide to Cyber Risk Management in Business Accounting”, where we break down all the major cyber threats and prevention measures that e-commerce Amazon accounting needs and every FBA seller must be informed about.
Sales Tax
Sales tax compliance is a crucial aspect of Amazon’s accounting. With the growth of e-commerce, tax regulations have become more complex and vary across jurisdictions. As an FBA seller, you may have sales tax nexus in multiple states or countries, depending on your sales volume and business operations. Understanding your sales tax obligations and registering for the appropriate permits. Consider using sales tax automation software to accurately calculate and remit sales tax, reducing the risk of errors or penalties.
FBA sellers will find this breakdown by BigCommerce to be an invaluable resource in their career as an FBA seller, thanks to the simple and easy to understand wording integrated with complex Amazon accounting concepts.
Making Use of Accounting Software
Investing in reliable accounting software can streamline your Amazon accounting processes and save time and effort. Look for software that integrates with Amazon’s APIs and provides features tailored to e-commerce businesses. This includes automated data import, sales and expense categorization, inventory tracking, and robust reporting capabilities. Popular accounting software options for FBA sellers include QuickBooks, Xero, and A2X.
Professional Amazon Accounting Specialists
E-commerce and Amazon accounting especially have become such a huge industry that Amazon accounting is now it’s very own niche in the accounting industry. There are Amazon accounting specialist firms and professionals available today that know all the tips and tricks when it comes to managing an FBA e-commerce business. Such professionals can take the accounting workload off of your shoulders and enable you to focus on business growth, and the fact of the matter is that they are just better at the job.
Amazon accounting specialists are deeply familiar with Amazon’s policies, and can ensure that you are working within their terms and that the corporation isn’t abusing the terms of the agreement either. Plus, these specialists are highly familiar with taxation as it relates to Amazon accounting. They can keep your tax obligations straight and ensure that you are tax compliant.
Conclusion
Amazon accounting is its own complex can of worms, and entrepreneurs looking to partner with Amazon must familiarize themselves with Amazon accounting before they make any hasty decisions. Amazon’s FBA system is amazing of course, but it is not the end-all be-all solution. It comes with its own set of issues and complications that need to be dealt with and therefore requires sufficient research. This is why we recommend that you consult an Amazon accounting specialist firm and a lawyer before you sign up as an FBA seller.