Bookkeeping is the practice of maintaining detailed records of the money flowing in and out of a business. Without it, gauging the actual performance and profitability of your Amazon store can be challenging. Surprisingly, many Amazon sellers tend to overlook its importance. Some find it daunting, while others believe it’s unnecessary, and some even rely on guesswork rather than solid financial data. It’s time to change that mindset.
In this guide, we will delve deeply into the essentials of bookkeeping tailored specifically for Amazon sellers in 2024. Let’s get started!
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What Is Bookkeeping and Why Is it Important?
Bookkeeping is the process of recording and organizing all financial transactions within your business. For Amazon sellers, this means keeping track of sales, expenses, fees, and taxes. But why is it so crucial?
First and foremost, with countless transactions happening daily, things can get chaotic very quickly without a systematic approach to managing financial data.
Secondly, it gives you a clear and accurate picture of how your business is doing financially. You can see what’s working and where you might need to make improvements.
Thirdly, bookkeeping also makes tax time less stressful. When all your financial data is neatly organized, you won’t be scrambling to find crucial information when the tax deadline approaches.
Lastly, it supports decision-making. When you maintain accurate financial records, you can make informed choices to guide your business toward success and long-term sustainability. So, it’s not just about keeping track of numbers; it’s about helping your business thrive.
What Makes Amazon Seller Bookkeeping Different?
Amazon seller bookkeeping is different from traditional eCommerce business bookkeeping because it operates within a unique marketplace. As a result, this brings about different categories of income and expenses that sellers need to account for. Here’s a simplified breakdown:
Amazon sellers earn income based on the orders they fulfill through Amazon. This income can be different from what traditional business owners earn due to Amazon’s distinct policies and procedures.
Here’s a list of income sources that require monitoring for accurate bookkeeping:
- Product Sales: This includes the revenue generated from selling products on Amazon.
- Discounts and Promotions: Income earned from promotional activities, such as discounts, special offers, and marketing campaigns.
- Reimbursements: Money received for items lost or damaged during fulfillment or for other Amazon-related issues.
- Shipping Income: Any income earned from shipping fees charged to customers.
- Other Income: This category covers any additional sources of income that may arise from Amazon operations.
Similar to income, Amazon sellers incur unique expenses associated with selling on the platform. Here’s a list of expenses that you need to keep tabs on:
- Monthly Inventory Storage Fees: These are monthly charges for storing products in Amazon’s fulfillment centers.
- Amazon FBA Fees: Fees associated with Amazon’s Fulfillment by Amazon (FBA) program, which includes packing, shipping, and customer service.
- Per Item Selling Fees: Charges for each item sold on the platform.
- Amazon Seller Referral Fees: Fees paid to Amazon as a percentage of the sale price for using their platform.
- FBA Disposal Order or Removal Order Fees: Fees for disposing of or removing items from Amazon’s fulfillment centers.
- High-Volume Listing Fee: A fee that may apply to sellers with a large number of product listings.
- Other Fees: Depending on the type of products you sell and your specific business arrangements with Amazon, there may be additional fees that need to be accounted for.
Accounting Methods for Amazon Bookkeeping
When it comes to keeping track of your finances for your Amazon business, there are two main accounting methods to choose from:
Cash Basis Accounting Method
Cash Basis Accounting is a simple method where you record income and expenses only when you receive or pay money. For example, a sale is noted when you actually get paid, and an expense is recorded when you pay the bill.
This method is easy to follow and is commonly used by small business owners and professionals. However, it may not provide the most accurate financial picture for Amazon FBA sellers. This is because Amazon typically processes payments every two weeks, making some months appear overly profitable or loss-heavy, regardless of the actual sales performance.
Accrual Basis Accounting Method
On the other hand, Accrual-Based Accounting records income and expenses when the transactions occur, regardless of when the actual money is received or paid. This means that even though you haven’t received payment immediately, sales are recorded as income, and expenses are logged as expenditures when incurred. Many accountants and eCommerce businesses, especially those dealing with inventory, prefer this method because it offers a more accurate representation of monthly or periodical financial performance.
Is Amazon Bookkeeping and Amazon Accounting the Same?
Amazon Bookkeeping and Accounting are closely related but not the same.
Bookkeeping for Amazon sellers primarily focuses on keeping track of daily financial transactions. Accounting, on the other hand, goes beyond just recording transactions. It involves understanding and analyzing the financial data.
To put it simply, while bookkeeping captures the ‘what’ of financial activities, accounting delves into the ‘why’ and ‘how’.
How Do Amazon Sellers Manage Bookkeeping?
Amazon sellers typically handle their bookkeeping in one of two ways: outsourcing the task to specialized Amazon bookkeeping agencies or managing it in-house.
Outsourcing to Amazon Bookkeeping Agencies
Many Amazon sellers choose to outsource their bookkeeping needs to specialized agencies staffed with seasoned professionals who possess extensive knowledge of the industry. These agencies offer a range of services to ensure accurate financial record-keeping, including:
- Precise recording of all financial transactions, including sales, fees, and expenses.
- Generating essential financial reports like profit and loss statements, balance sheets, and Amazon-specific reports.
- Managing cash flow to guarantee sufficient capital for day-to-day operations and future growth.
- Ensuring strict adherence to tax regulations while also providing guidance on potential tax-saving opportunities.
- Keeping financial documents organized and accessible for audits or reference
- Providing regular financial summaries to evaluate business performance and make informed decisions.
In-House Bookkeeping with Software
Alternatively, some sellers opt to manage their bookkeeping in-house, either by handling it themselves or using their in-house bookkeepers in conjunction with specialized software. These tools are designed to seamlessly integrate with Amazon Seller Central, automatically fetching real-time data on sales, returns, and fees to ensure accurate transaction recording.
If you decide to manage your bookkeeping in-house by yourself, it’s crucial to have a solid understanding of accounting principles. Bookkeeping includes various aspects, and diving into it without adequate knowledge can lead to costly mistakes, such as missing important tax deadlines or filing incorrect tax returns.
How Much Does Bookkeeping Cost in 2024?
If you go the agency route, a specialized bookkeeping agency will charge around $75/month to $1,000/month or more for mid to large-sized sellers. Full-service agencies that offer additional services beyond bookkeeping can charge up to $5,000/month.
On the other hand, if you decide to use bookkeeping software, the cost can be more budget-friendly. The price varies depending on the features you require, with rates ranging from as low as $10/month for basic services to $200/month for advanced services.
Is It Risky to Manually Manage Your Own Bookkeeping Without Software Tools or Agencies?
If you’re thinking about managing your bookkeeping tasks manually to cut costs, it likely means you’ll be relying on Excel spreadsheets to input your financial records. However, there are several compelling reasons why this may not be the best approach:
- Increased Risk of Errors: Since all data will be manually entered, there’s a higher likelihood of making mistakes due to typos or miscalculations. In fact, Market Watch reports that approximately 88% of spreadsheets contain some form of error. These errors, if undetected, can significantly impact your financial records and lead to costly decisions. A notable example of this occurred in 2003 when a simple copy-and-paste error in a spreadsheet cost TransAlta a staggering $24 million.
- Time-Consuming: Manual bookkeeping can be extremely time-consuming, especially when dealing with an Amazon business. You’ll find yourself dedicating a substantial portion of your day to entering, categorizing, and reconciling transactions.
- Lack of Insights: Specialized tools and agencies often provide valuable dashboards and insights derived from data analysis. By relying solely on spreadsheets, you may miss out on crucial trends or potential issues that could impact your business.
- Scalability Concerns: As your business grows, your financial responsibilities will inevitably increase as well. Spreadsheets are not known for their scalability. A recent example of this occurred in the UK in 2021 when an improperly formatted Excel sheet reached its capacity, resulting in unreported COVID-19 cases. In contrast, by hiring agencies or using software to handle bookkeeping, you can confidently expand your business without the fear of this happening.
In conclusion, while it is technically possible to manage your bookkeeping tasks manually without specialized tools or agencies, it is strongly discouraged due to the considerable risks and limitations involved.
How to Manage Bookkeeping Using Software
While manual bookkeeping through Excel spreadsheets may not be the best choice, you can certainly handle these tasks internally using software, provided you have the necessary accounting and tax knowledge. In fact, according to Statista, 64% of US business owners opt for this method.
Here’s a step-by-step guide on how to effectively manage your bookkeeping using software:
Step 1: Choose the Right Bookkeeping Software
The first thing you need to do when handling your own bookkeeping is to choose the right software. When evaluating your accounting software options, consider the following factors:
- User-Friendly Interface: First and foremost, prioritize user-friendliness. Look for software with an intuitive interface that’s easy to navigate. You don’t want to get bogged down in complex jargon and features.
- Integration with Amazon Seller Central: Secondly, make sure that the software seamlessly integrates with your Amazon Seller Central account. This eliminates the need for manual data entry, saving you time and reducing the risk of errors.
- Automated Sync with Financial Tools: Choose software that can automatically sync with your bank accounts and credit cards. This not only simplifies reconciliation but also ensures that your records are always up-to-date.
- Strong Security Measures: Your financial data is sensitive, so opt for software with strong security measures, such as encryption, to protect your information from unauthorized access.
- Accrual Accounting and Inventory Management: For a comprehensive financial overview, select software that uses accrual accounting. Additionally, look for software that includes inventory management features to help you track stock levels and calculate the cost of goods sold.
- Financial Report Generation: Your chosen software should be capable of generating essential financial reports, such as profit and loss statements, balance sheets, and cash flow statements.
- Tax Calculation: Lastly, consider whether the software can calculate income and sales tax based on your country’s tax regulations.
Step 2: Maintain a Record of Everything
Once you’ve picked the right accounting software, the next crucial step is to maintain a record of everything. This includes invoices, receipts, bank statements, and more. To simplify this, you can use tools like Google Drive or Dropbox for digital documents and apps like CamScanner or Adobe Scan for paper receipts. Alternatively, consider bookkeeping software like A2X for automation.
Step 3: Create a Chart of Accounts
The next step is to create your Chart of Accounts. This helps you categorize income, expenses, assets, and liabilities into five main categories:
- Assets: This tracks what your business owns, including cash, savings, and money owed to you (Accounts Receivable).
- Liabilities: This covers your business’s debts and obligations, like payroll liabilities, money your business owes (Accounts Payable), and outstanding expenses (Accrued Liabilities).
- Shareholder’s Equity: This reflects ownership interests in your company. It includes retained earnings (profits or losses), preferred stock (if applicable), and common stock (if applicable).
- Revenue: This tracks all income generated by your business, such as sales and services.
- Expenses: This records the costs to run your business, including operating expenses and overhead.
To set up your Chart of Accounts, start with Assets, then Liabilities, and Shareholder’s Equity. After that, create Revenue and Expense accounts. Most bookkeeping software can help automate this process for you.
Step 4: Track the Cost of Goods Sold (COGS)
After setting up your Chart of Accounts, the next vital task is tracking your Cost of Goods Sold (COGS) to determine your actual profit. COGS includes all expenses associated with producing or acquiring the goods you plan to sell.
To calculate COGS accurately, consider costs like purchase prices, packaging, shipping, Amazon fees, tariffs, and other miscellaneous expenses. Many bookkeeping software tools offer inventory management features to simplify this process.
Step 5: Reconcile Your Accounts
At the end of each month, it’s crucial to conduct a reconciliation process. This means carefully comparing your financial records with your bank and credit card statements to make sure everything matches up accurately.
Step 6: Generate Financial Statements
Once your data is organized and verified, the last step is to create financial statements. These include Profit and Loss (Income) Statements, Balance Sheets, and Cash Flow Statements.
A proper accounting system is essential for the success of your Amazon business. It might seem challenging at first, but with consistent effort and attention to detail, it becomes a manageable task that can offer profound insights into your business’s financial health. Keep learning and adapting to make your bookkeeping processes as efficient and accurate as possible in 2024.
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