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Best way to do your bookkeeping and accounting for your Amazon business

November 20, 2020

Best way to do your bookkeeping and accounting for your Amazon business

Reselling and drop-shipping have become all the rage as people hear stories of others "striking it rich" and wanting their slice of the pie. There are videos, how-to's, and courses that explain almost every aspect of getting started with selling on Amazon. The one aspect that often gets overlooked is accounting.

What is Accounting?

Accounting is the process of keeping financial records, usually for a business. Although this is most often for tax purposes, it can also be for the ability to show the value of the business for a future potential sale of the business itself. Some people start businesses with the intention of building them up in order to sell them later. You need solid bookkeeping to prove the profitability and value of your business in order to sell it.

When it comes to taxes, most people only think of federal and state income tax. With nationwide sales, Amazon sellers must also consider applicable state sales taxes as well. Federal and state income taxes are determined by profits.

How Expenses Affect Profits

Profits are determined for businesses by deducting expenses from sales income. Expenses for an Amazon reseller would be purchases such as boxes, bubble wrap, shipping labels, and packing tape. Those are the types of things you can deduct from your business income as expenses. For businesses with inventories, it gets a bit more complicated. This is because the cost of the goods you are selling are not considered expenses.

Cost of Goods Sold

When a business buys or creates a product for a future sale, it is then considered inventory. Tax codes treat any costs involved in the acquisition or creation of inventory differently than expenses. The reason for this is that most businesses have large stores of products with costs paid upfront. Profits could continually be offset by creating or acquiring more products. To prevent this from happening, the costs of the products cannot be deducted until the products are sold.

To give an example of this, let's say you found ten-packs of light bulbs for $5 each and you can sell them for $20 each on Amazon. If you buy 100 of them, it would cost you $500 upfront. But let's say it takes you a month to sell 20 of them, you would only be able to deduct $5 x 20 = $100 for that month and you could not deduct the remaining $400 until the rest of the light bulbs are sold.

The same is true for drop-shipping. If you know it costs you $2 for each product you sell, you know that the "cost of goods sold" for each product sold will be $2. This is pretty straight forward and would be relatively easy to keep track of.

But most sellers on Amazon have multiple products from multiple sources. Resellers may have dozens or hundreds of products they have purchased at vastly different costs. This is where it can get very complicated when it comes to matching the cost of goods sold with each sale.

Accepted Costing Methods

Fortunately, there are several methods available to determine the cost of goods sold that you are able to deduct from your sales with your accounting.

Specific Identification

With this method, you match the actual cost to each product sold. This would be the best approach to take if you only have a few products that you sell at a high volume. The amount you can deduct would be a multiple of what was sold.

FIFO (first-in, first-out)

With this method, the first items purchased are the first items sold. This method is typically used in industries where products may become stale or spoiled. Because this is an acceptable accounting method, this method can be used for Amazon sellers as well. One way to do this is to track the average cost of goods purchased in the previous month and deduct it from the goods sold in the current month.

LIFO (last-in, first-out)

With this method, the most recently purchased products may be deducted as the cost of goods sold. Many businesses have hot sellers that eventually become stale and are left as excess inventory which sits for an undetermined amount of time before they are eventually sold. Meanwhile, the business may have another hot seller it is moving in large quantities.

This costing method assumes that the business is primarily buying and selling its most recently purchased goods while older inventory items remain on the shelves. Again, this is a costing method available for Amazon sellers. This method may especially be helpful to resellers who only sell a portion of the recent purchases and end up with some sitting on the shelves for longer periods of time.

Weighted-average

With this method, costs are determined by weight. This is especially helpful for businesses that sell products by bulk, like lumber yards or gravel. This method might be appropriate for Amazon sellers who primarily only sell used books. The cost of goods can be calculated by weight rather than with the individual books and then deducted by weight as well.

Bookkeeping for Amazon

Bookkeeping is the process of entering the data for accounting purposes. While it may be possible to keep track of costs of goods sold by adding up receipts, using a ledger, and applying one of the acceptable costing methods, there are much more simple solutions available.

Automated Amazon Accounting Solutions

One of the best solutions available for accounting for Amazon seller central is ConnectBooks. This service posts income from sales along with the associated costs of goods sold directly from Amazon to QuickBooks or Xero for Amazon seller central Quickbooks integration. We think this is the best accounting software for Amazon sellers because it takes all of the time-consuming calculating out of the equation and lets you focus on finding the best deals and making profits from your sales.

This also keeps you from putting off bookkeeping until it piles up and becomes overwhelming. No one wants to spend a weekend digging receipts out of drawers and trying to figure out which ones went with what products.

Having accurate records also helps you know your tax liability as you go rather than getting stuck with a huge tax bill at the end of the year. Your ability to be profitable has to do with cash flow and budgeting. A large tax payment made all at once could wipe out your ability to buy inventory at a great price and cause you to miss out on an amazing deal.

ConnectBooks is the automated accounting solution you are looking for to make bookkeeping for your Amazon business effortless.

Final Thoughts

Accountants and salespeople often are very different breeds. Details and numbers can seem daunting to people driven by success and achievement. But proper accounting is a very important part of measuring success.

If even the idea of setting up accounting software seems overwhelming, you can always hire someone to help you set up your automated software to ensure it's accurate. Regardless, the longer you put off bookkeeping, the more difficult it will be to get caught up. Don't put it off until the end of the year.

If accounting is the one area you don't feel is your strength, see how ConnectBooks can help your Amazon business keep up with its books and track your profits easily and accurately. Sign up today.