As an Amazon seller, it’s easy to get caught up in the hustle of running your online store. However, overlooking accounting can lead to financial chaos down the road. Tracking your finances not only helps you understand how much money is coming in and going out but also ensures that you remain compliant with tax laws. In this blog post, we’ll guide you through X essential steps to start accounting for your Amazon business so that you can manage profits and expenses effectively and worry less about getting audited by the IRS!
Why Is Accounting Important for Amazon Sellers?
As an Amazon seller, accounting is crucial to the success of your business. It’s more than just keeping tabs on how much money you’re making or spending. Proper accounting helps you make informed decisions about pricing, inventory management, and marketing strategies.
By tracking your expenses and revenue regularly, you can quickly identify patterns in your sales and recognize areas where you may be overspending. Additionally, accurate financial records enable you to project future cash flow needs accurately.
Accounting also plays a critical role when it comes to filing taxes. As a business owner selling products through Amazon’s marketplace, there are specific tax laws that apply to you. Failure to comply with these regulations could result in hefty penalties.
Moreover, having detailed financial statements readily available makes it easier for potential investors or buyers to understand the value of your company if you ever decide to sell or seek financing.
In short, accounting provides valuable insights into the health of your business and helps ensure its longevity by guiding decision-making processes based on reliable data rather than guesses or assumptions.
What Are the Accounting Methods?
When it comes to accounting for Amazon sellers, there are two main methods that can be used: cash basis and accrual basis. Each method has its own advantages and disadvantages, so it’s important to understand them both before choosing which one is right for your business.
Cash basis is one of the two accounting methods that Amazon sellers can use to keep track of their finances. It’s a straightforward method that involves recording transactions only when cash changes hands. This means that revenue and expenses are recorded at the time they are received or paid, respectively.
Cash basis accounting may be suitable for small businesses with simple transactions because it provides an easy way to track your cash flow. However, it has some limitations that you should be aware of before choosing this method.
One disadvantage is that you won’t have an accurate picture of your financial position since you’re not taking into account any future income or expenses. Also, if you have customers who pay on credit terms or vendors who extend payments to you, then cash basis accounting may not be appropriate for your business.
Another limitation is that according to IRS regulations, this method cannot be used by companies with inventory exceeding $1 million in sales per year.
While cash basis accounting is a simpler option for tracking finances as an Amazon seller, it’s important to understand its drawbacks and whether another method such as accrual might better suit your needs depending on the size and complexity of your business operations.
Accrual basis is a method of accounting that records transactions when they occur, even if the payment hasn’t been made or received yet. This means that revenue and expenses are recognized at the time they’re earned or incurred, rather than when money changes hands.
This approach provides a more accurate picture of a company’s financial health since it takes into account all obligations and earnings in real-time. Accrual basis enables businesses to get a better understanding of their cash flow situation by keeping track of accounts receivable and payable.
Accrual basis is perfect for Amazon sellers because it allows them to keep track of inventory costs effectively. With accrual accounting, you can record inventory as an asset on your balance sheet until you sell it. When you sell the product, you’ll recognize the cost as an expense on your income statement.
While accrual-based accounting requires more work upfront than cash-based accounting, it offers significant benefits in terms of accuracy and visibility into your business’s finances. By using this method, Amazon sellers can make informed decisions about how to invest their profits back into their business for future growth.
Getting Started with Accounting for Amazon Sellers
Getting started with accounting for Amazon sellers can seem daunting, but it’s essential to the success of your business. Here are the all key steps:
Step 1: Purchase the Right Accounting Software
One of the most important steps in starting Amazon accounting is to purchase the right accounting software. The right software can make all the difference in tracking your finances accurately and efficiently.
First, consider what features you need in your accounting software. Do you need something that will integrate with your online store? Should it offer inventory management or time tracking capabilities? Make a list of your must-haves before beginning your search.
Next, research different options for accounting software. Look at reviews from other Amazon sellers and compare pricing plans. Many popular options include QuickBooks, Xero, and Wave.
When making a final decision, take advantage of free trials offered by many companies to test out the user interface and ensure it meets all of your needs. Keep in mind that while some programs may have a steeper learning curve than others, investing time into learning new software can save plenty of headaches down the road.
Once you’ve selected an accounting software option that fits well with both your needs as an Amazon seller and budget constraints – start familiarizing yourself with its features so you’re ready to hit the ground running when it comes time to use them on daily basis!
Step 2: Find the Best Add-ons
After purchasing the right accounting software for your Amazon business, the next step is to find the best add-ons that will help you streamline your accounting process. Add-ons are additional tools or features that can be integrated into your accounting software to enhance its functionality.
One popular add-on for Amazon sellers is A2X. This tool automates the process of importing and reconciling sales data from Amazon to your accounting software, thus saving you time and reducing errors in data entry.
Another useful add-on is TaxJar. It helps you calculate and file state sales tax returns by automatically syncing with your Amazon account and generating reports based on your transactions.
InventoryLab is another great option as it offers inventory management, listing tools, profit analysis, bookkeeping features all rolled into one platform specifically designed for FBA (Fulfillment by Amazon) businesses.
Shopify users may find an app like QuickBooks Online helpful when integrating their e-commerce store with their financial records.
Ultimately, finding the right add-ons depends on what specific needs you have in terms of streamlining workflow efficiency while also ensuring accurate record keeping practices.
Step 3. Creating your Financial Reporting Systems
Once you have the right accounting software and add-ons, it’s time to create a financial reporting system that works for you. This includes creating profit and loss statements, balance sheets and cash flow reports to help you keep track of your business finances.
Profit and Loss:
The Profit and Loss statement will show you how much money you’re making after all expenses are paid. It helps identify areas where costs can be reduced or profits increased.
A Balance Sheet is a snapshot of your business’s financial position at any given moment. It shows what assets are available versus liabilities owed.
Cash Flow reports show how much money is coming in versus going out of your business over a period of time. This report is essential for understanding the health of your cash flow situation.
Creating these reports may seem like an overwhelming task, but thankfully there are many resources available online to guide you through the process. With accurate financial reporting systems in place, Amazon sellers can make informed decisions about their businesses’ future growth opportunities while avoiding costly mistakes along the way.
Step 4: Create Your Chart of Accounts
After purchasing the right accounting software and finding the best add-ons, the next step in getting started with Amazon accounting is to create your chart of accounts. This might sound like an intimidating task, but it’s actually quite simple.
A chart of accounts is a list of all the categories you will use to track your business finances. These categories include assets, liabilities, equity, revenue, and expenses. It’s important to set up your chart of accounts accurately from the beginning so that you can easily access financial information when needed.
When creating your chart of accounts for Amazon accounting purposes, think about how you want to organize and categorize transactions within your online store. For example, if you have multiple products or services that generate income separately from each other then consider setting up separate accounts for them.
Another important aspect to keep in mind while creating a chart of accounts is separating business expenses from personal expenses. You don’t want any errors or confusion between these two types as they may impact tax filings which could lead to penalties.
Make sure that all accounts are consistent across different platforms (e.g., Shopify vs Amazon). Once done correctly at this stage there will be no future hiccups during financial reporting processes–making managing finances simpler than ever before!
Step 5: Prepare to Track Cost of Goods Sold
As an Amazon seller, it’s crucial to be able to track your cost of goods sold (COGS). COGS is the amount you spend on producing or acquiring the products you sell. Knowing this information allows you to calculate your gross profit and make informed decisions about pricing and inventory management.
To begin tracking COGS, start by gathering all relevant documentation related to what it costs you to produce or acquire each item. This could include invoices from suppliers or receipts for materials used in production.
Next, decide which method of accounting for COGS makes the most sense for your business – either FIFO (first-in-first-out) or LIFO (last-in-first-out).
Once you’ve determined your preferred COGS accounting method, create a system for recording the cost of each product sold. This could be as simple as keeping a spreadsheet that lists each sale along with its associated cost.
Regularly review and adjust your COGS calculations based on changes in expenses or market conditions. Keeping accurate records will not only help you analyze profitability but also ensure compliance with tax regulations.
Step 6: Reconcile Your Bank Statements
Reconciling your bank statements is a crucial step in keeping your Amazon accounting in order. This process involves comparing the transactions listed on your bank statement against those recorded in your accounting software. By doing so, you can identify any discrepancies or errors and make corrections as needed.
To begin reconciling, start by downloading a copy of your monthly bank statement from your online banking portal. Then, compare each transaction listed on the statement to those recorded in your accounting software. If there are any differences between the two, investigate further to determine where the error lies.
Common reasons for discrepancies may include data entry errors, delayed transactions or forgotten charges. Once you’ve identified the cause of the issue, make sure to update both records accordingly so that they match.
By reconciling regularly (ideally every month), you can ensure that all income and expenses are accurately reflected within your books and avoid costly mistakes down the line.
Step 7: Start Recording Entries
Now that you have set up your financial reporting systems and created a chart of accounts, it’s time to start recording entries. This step involves tracking all the money coming in and going out of your Amazon seller account.
To begin with, make sure that you are tracking all transactions related to your business separately from any personal transactions. This will help ensure accurate reporting for tax purposes.
Next, record each transaction as it occurs using your chosen accounting software. Be sure to categorize each transaction correctly according to its appropriate account in the chart of accounts.
It’s important to keep detailed records of every expense and sale so that you can accurately calculate profit and loss at the end of a period. Make sure that you are regularly checking your reports for accuracy and correcting any errors as soon as possible.
By keeping detailed records of all financial transactions, you’ll be able to identify where improvements can be made in terms of reducing costs or increasing revenue. It also helps provide important data when making decisions about future investments or expansions for your online store.
Step 8: Figure Out Your Storage
As an Amazon seller, you’re likely to have a considerable amount of inventory that requires proper storage. It’s crucial to figure out your storage needs before getting started with accounting for your online store.
Firstly, take stock of the type and quantity of products you sell on Amazon. This will help determine the space needed for safekeeping. You’ll also want to consider the shelf life of certain items and make sure they are stored in optimal conditions.
Next, think about where you’ll keep your inventory. Will you be using a warehouse or renting a dedicated storage unit? If so, what are the monthly rental costs associated with these options?
It’s important to factor in additional expenses such as utilities and insurance when choosing a suitable storage option. For smaller sellers who operate from home-based businesses, setting aside a designated area can suffice as long as it meets safety standards recommended by Amazon.
Figuring out your storage requirements is an essential step towards effectively managing accounting for your online store on Amazon. Proper organization ensures that all transactions related to inventory management get recorded accurately while making things easier come tax time!
Step 9: Getting into the Habit: Regular Checks to Avoid Mistakes
Now that you’ve set up your Amazon accounting system, it’s time to get into the habit of regularly checking and reviewing your work. This is important as mistakes can happen, which could result in inaccurate financial statements.
To avoid errors, ensure that you make regular checks on all entries made into your software. Double-check each transaction for accuracy before finalizing them.
Another way to prevent mistakes is by reconciling accounts on a regular basis. This includes bank statements, credit card statements, and other accounts payable or receivable records.
It’s also useful to prepare monthly or quarterly reports so you can easily identify trends or issues within your business finances. This will help you stay ahead of any potential problems and allow for prompt action if necessary.
Don’t forget about tax deadlines! Make sure all tax returns are submitted accurately and on time to avoid any penalties or fines from the IRS.
By implementing these simple habits, you’ll be able to maintain accurate financial records for your Amazon store with ease while avoiding costly errors down the line.
Step 10: Outsource When You’re Ready
As your Amazon business grows, you may find yourself overwhelmed with managing the accounting side of things. That’s where outsourcing comes in handy. Outsourcing your Amazon accounting can save you time and money while ensuring accuracy.
When it comes to outsourcing, there are a few options available to Amazon sellers. You could hire an independent bookkeeper or accountant who specializes in ecommerce businesses. Alternatively, you could use an online accounting service that caters specifically to Amazon sellers.
Before deciding on which option is best for you, consider the size and complexity of your business as well as your budget. Hiring an independent professional will likely be more expensive but may provide more personalized attention than a larger service provider.
Regardless of which option you choose, make sure the outsourced individual or company has experience working with Amazon sellers and understands the unique complexities involved in ecommerce accounting.
Outsourcing can also free up valuable time for you to focus on growing other aspects of your business such as marketing or product development. So when you’re ready, don’t hesitate to outsource your Amazon accounting needs!
Accounting is crucial for any Amazon seller who wants to run their online store successfully. If you want to avoid making costly mistakes with your finances, accurate bookkeeping and financial reporting are essential.
By following the ten steps outlined in this article, you can get started on the right foot and ensure that your business is set up for long-term success. Remember to choose the right accounting software, create a chart of accounts, track cost of goods sold, reconcile bank statements regularly, and establish a solid financial reporting system.
While it may seem overwhelming at first, with practice and patience you will become more comfortable with managing your finances as an Amazon seller. And if you ever feel like outsourcing some or all of these tasks to professionals who specialize in e-commerce accounting services – don’t hesitate! Just take action today and start building a strong foundation for your business’s financial health tomorrow.