Money Matters

Accounting for Amazon sellers

Accounting for Amazon sellers comes with unique challenges and potential pitfalls. Discover how Canadian sellers can streamline the process.

In 2023, online retail giant Amazon generated $554bn in revenue, which represents a $40bn increase over the previous year.

As the world’s leading e-commerce website, this is no surprise.

The company is constantly adding new products, both directly from suppliers and through what are known as Amazon sellers.

In this article, we talk about:

  • what Canadian sellers need to know about Amazon seller accounting,
  • how it differs from typical business practices,
  • what they can do to streamline Amazon accounting operations.

In this article we’ll explore

Amazon sellers: Brands vs resellers

What is accounting for Amazon sellers?

How does Amazon accounting differ from typical accounting?

4 ways to streamline your Amazon seller accounting process

Final thoughts on accounting for Amazon sellers

Amazon sellers: Brands vs resellers

Amazon sellers fall into two broad categories: brands and resellers.

Brands create and sell their products to consumers, using Amazon to display product details and handle product fulfillment.

Resellers do the legwork of finding popular products and offering them in Amazon stores directly to buyers.

According to the 2022 Amazon Canada Impact Report, sellers are seeing success in Canada. There are now more than 41,000 Amazon selling partners in Canada. They collectively sell 200 products per minute and average $85,000 per year in revenue.

For sellers to see sustained success, however, solid sales volumes aren’t enough.

Businesses and owners need accounting processes that address the unique challenges of selling on Amazon and ensure that relevant revenue data is effectively tracked, managed, and recorded.

What is accounting for Amazon sellers?

Accounting for Amazon sellers covers all the processes related to tracking and managing sales, cost, inventory, and tax data.

Accurate accounting data is critical for companies to ensure that current operations are profitable, remain in compliance with local and federal regulations, and reduce the risk of overstock or inventory stock-outs.

For many Amazon sellers building their online businesses, accounting takes a back seat to marketing, reputation building, and customer service.

The problem?

When tax time arrives, sellers may find themselves struggling to collect and unify a year’s worth of data in just days or weeks.

As a result, a robust Amazon selling accounting strategy is essential for long-term success.

How does Amazon accounting differ from typical accounting?

While the core principles of accounting remain the same across Amazon sellers, brick-and-mortar retailers, and dedicated e-commerce operations, managing Amazon seller finances comes with unique challenges.

Discovering data at a distance

Many Amazon sellers opt for fulfillment by Amazon (FBA) to streamline the sales process.

Using FBA, sellers can outsource order picking, packing, and shipping to Amazon. In addition, FBA offers customer service on these orders, including return processing.

FBA is a great choice for many smaller sellers because it allows them to focus on products and profits rather than the day-to-day tasks that come with fulfillment.

But the arms-length nature of FBA can also pose a challenge.

When the details are handled by Amazon, it’s easy for sellers to lose track of how many orders have been fulfilled, how many have been returned, and how much they’ve spent on FBA per month.

Cost of goods sold consistency

The cost of goods sold (COGS) is a key metric for Amazon sellers.

To calculate COGS, businesses must combine the costs of making (or acquiring) products with all other costs of bringing these products to market, including:

  • Packaging fees
  • Shipping fees
  • Tariffs
  • Taxes
  • Duty payments.

For many sellers, COGS consistency is problematic.

Consider the example of a seller who buys inventory with a total COGS of $100,000 at the start of June.

To keep accounts accurate, sellers often assign the entirety of this $100,000 cost to the month they purchase the inventory.

The issue?

If sellers earn $40,000 in June, $25,000 in July, and $45,000 in August selling this inventory, but assign the entire cost of inventory to June, it creates accounting inconsistency.

Here’s why.

In June, the seller earns $40,000 but subtracts the entirety of their COGS cost, which results in a loss: $40,000 – $100,000 = -$60,000.

In July and August, the seller records only earnings but not COGS costs, since they were subtracted two months prior.

The result is a seemingly terrible June and great July and August, when in fact the cost of inventory actually applied across all three months.

To ensure consistent calculation, companies should record COGS for items sold, rather than inventory received.

While additional reconciliation may be required at the end of the fiscal quarter or year if not all inventory is sold, this approach provides a much more accurate representation of cost vs income.

Solving for sales tax

Sales tax is also a potential challenge for Amazon sellers.

In Canada, sellers must contend with the:

  • goods and services tax (GST)
  • provincial sales tax (PST)
  • harmonized sales tax (HST).

For example, sales made in Alberta are subject to 5% GST.

In British Columbia, both the GST and a 7% PST apply.

For provinces such as Newfoundland and Labrador, Nova Scotia, and New Brunswick, meanwhile, there is a 15% HST.

In most cases, Amazon’s role as a Marketplace Facilitator (MFP) means the company is responsible for collecting and remitting sales tax.

However, there are instances where third-party sellers may be required to collect and remit their own taxes.

Digging into the details

Amazon typically pays sellers every two weeks with direct deposits into bank accounts. While this makes it easy to get paid, the amount deposited into accounts isn’t reflective of all seller costs and income.

Let’s say a seller receives a deposit of $150,000. How should this number be recorded in accounting ledgers?

It’s tempting to classify the deposit entirely as sales since it’s positive cash flow into an account, but it’s actually a combination of multiple activities.

First, sales tax and FBA inventory reimbursements are added to total sales. Then FBA fees, chargebacks, refunds, and any shipping or storage fees are subtracted.

As a result, relying on deposit data alone only provides part of the sales picture.

To find the details, sellers need to pull data directly from their seller account and then input it into a spreadsheet or accounting software.

4 ways to streamline your Amazon seller accounting process

Amazon selling is simple, but can make accounting processes more complex.

Here are four ways to streamline Amazon accounting actions.

1. Sideline spreadsheets

While spreadsheets remain a popular accounting tool, they’re not capable of handling the volume and variety of Amazon sales.

Even owners with accounting experience may be hard-pressed to ensure complete and accurate financial records, especially when dealing with COGS, FBA fees, and other expenses.

Best bet? Invest in accounting software.

Look for accounting solutions that offer multi-entity consolidation, interactive reporting tools, and a marketplace for add-on solutions to help sellers reduce accounting errors.

2. Automate key actions

Automation also plays a key role in successful Amazon sales accounting.

For example, by automating the process of data collecting from seller account back-ends, businesses can track and manage their complete sales picture.

Implementing automation can help sellers reduce monthly close times by up to 66%.

3. Track data in real time

Sales data is dynamic.

Both supply and demand can fluctuate month-to-month and even day-to-day, making real-time data tracking a key component of any accounting software.

With the ability to collect and correlate data from multiple sources, sellers are better prepared to manage financial records and ensure compliance with provincial and federal tax regulations.

4. Close the gap with cloud solutions

As sellers scale up their businesses, they need accounting software that can keep pace.

Cloud-based solutions offer the resources sellers need to capture current sales data, and the scalability required to meet future financial needs.

Final thoughts on accounting for Amazon sellers

Accounting for Amazon sellers comes with unique challenges tied to both the scale and speed of operations.

While the retail reach of Amazon is unparalleled, the sheer volume of data created by sales, costs, and fees can create complexity for sellers.

Streamlining the process starts with a recognition of potential pitfalls, such as calculating COGS and solving for sales tax. With issues identified, sellers can simplify accounting operations with the deployment of automated, real time, cloud-based software solutions.