When you take the plunge and start your own Amazon business, there are a lot of things to consider. One of those considerations is accounting.
The question being asked most often is “do I need accounting for my Amazon business?”
The short answer is yes!
This blog post will explain why you need to register as a business, how to perform accounting for your Amazon e-commerce company, when is it time to hire an accountant and more! So, let’s get started on this exciting topic!
Why are accounting and bookkeeping important for Amazon sellers
When it comes to accounting and bookkeeping, there are several reasons why this is important for every Amazon seller.
First, if you sell on Amazon then it is important to keep all your financial information organized in one place. Second, keeping track of expenses and income helps with budgeting to help you allocate the right amount of resources and funds into the right place.
Next, accounting can help reduce your tax liabilities by keeping track of all taxable and non-taxable income. Finally, accounting is the only way to keep your books in such a way that you can know how much money your business makes each year so that you can plan for future growth or scaling down.
Accounting helps keep track of your Amazon business finances
A well-organized financial system allows you to stay informed about your finances which helps with better decision-making about your Amazon business. Keeping track of your sales, expenses and profit margins can help you plan for the future by providing insights about what products are selling well or if certain product lines need to be cut.
This will help build a more profitable and sustainable business since you’ll know which items are making you money, where you can cut unnecessary costs as well as how much money you have left at the end of the period.
Having a good understanding of your finances can also help with decisions like which products you should promote with paid advertising, which products you should try to improve, how much you can afford on marketing, and when is the best time for promotions.
Accounting can help with cash flow forecasts and projections
Keeping track of your business’s financials can help you create cash flow forecasts. For example, a more accurate projection will allow you to plan for important purchases or changes in inventory that could impact the company financially.
You might need to purchase additional storage space if an unexpected quantity of goods has been purchased and must be stored before they are sold by your Amazon store. You can also use cash flow forecasts to determine when you need to hire extra staff to help with fulfillment, if you need to get extra stock, etc.
Cash flow forecasts can also help you manage debt and repayment better. By having a clear projection of your cash flow over the next month or quarter, you can plan accordingly and ensure that you don’t default on any of your payments.
Accounting will help reduce tax liabilities and avoid fines
Another benefit is that it helps with tax time. Accounting and bookkeeping are also important for avoiding fines from Canadian tax authorities (CRA).
There are lots of deductions available for Amazon sellers so being organized will make filing taxes easier.
Also, as an Amazon seller, it’s very important that you keep your business finances separate from personal expenses. This helps limit your liability as well as help reduce your tax burden.
How to do accounting for an Amazon business
Amazon seller accounting consists of a few key areas: registering a business, choosing the right accounting software, creating financial reporting systems and dashboards, and adhering to tax regulations.
To ensure your Amazon accounting is well-organized, accurate and compliant, follow these 7 steps:
Step 1: Register your business
Registering (incorporating) your Amazon seller business will have some important implications, both from a legal and tax standpoint. Incorporating helps separate your business expenses and income from your personal ones.
This is important as it helps limit your liability in case something goes wrong with the business (e.g., if a customer makes an accusation or claim or in case of loan default). You can be sued only to the extent of what’s owned by your business, not personally. So, your personal assets will stay protected.
Taxes are the second biggest reason in favour of incorporating. An unincorporated business is taxed as a flow-through entity, which means that the income “flows through” to you and your personal taxes are owed. However, if the business is incorporated it becomes taxable in its own right (meaning corporate tax rates apply).
If your Amazon business is making more than $100,000 and you expect it to grow, then the savings from tax deferral, dividend splitting or favourable tax rates on dividends will likely be greater than the additional legal and accounting costs.
Step 2: Choose the right accounting software
Choosing the right accounting software is essential for Amazon sellers. You’ll want to pick a cloud-based tool that automatically syncs to your bank account, credit card and other software, as well as allows you to access data and information from anywhere. It’s also very important that your accounting software integrates with your Amazon Seller Central account.
There are many options available, including Xero, FreshBooks, and QuickBooks. Other software you might want to consider include HubDoc, Dext, and A2X.
Build the right tech stack for your business based on your needs and lifecycle stage. It’s always good to start small and decide on software that can scale and grow with your business.
Step 3: Create your financial reporting systems
Having a well-thought-out financial reporting system is critical for Amazon sellers. As your business grows, so do your expenses, income, debt, and other transactions. That’s why you need to create a system to keep track of all financial activity in a clear and organized set of accounts as well as a set of standardized reports that provide a high-level view of your finances.
A basic Amazon accounting system should contain the following information:
- Accounts receivable – The amount of money due from your customers.
- Accounts payable – The amount of money you owe to suppliers.
- Purchases – Contains any business-related purchases that are paid upfront.
- Sales – This contains all sales from your customers.
- Loans payable – Any potential loans you might have taken, including the information about how much you borrowed, whom you borrowed from, what you currently owe, and when those payments come due.
- Payroll – The amount of money you owe to your employees (if you have any).
- Owner’s equity – A record of how much of your own money you invested into the business.
Start by creating the following four reports:
- Profit & loss statement – A report showing all your revenue and expenses over a time period.
- Balance sheet – A summary of all assets, liabilities, and owner’s equity at a specific point in time.
- Cash flow statement – A report showing the difference between cash going in and out of a business for a time period. It includes every cost, such as rent, maintenance, and inventory, as well as every income stream.
- Cash flow forecast – A projection of your cash inflows and outflows which helps estimate your business’s future financial position and ensures you have enough cash to meet future obligations and better manage working capital.
Step 4: Categorize and keep track of your inventory
Accurately keeping inventory is an essential part of accounting for your Amazon business. To do this, you need a system that will consistently and accurately keep track of your inventory as it moves from warehouse into the hands of customers and how many units of inventory you have at any given time.
This can be accomplished by using software or developing processes inside your company for keeping accurate records on what is being sold and which items are coming in every day.
Keeping track of inventory ensures you don’t run out of stock before the next shipment arrives. It also provides a way to quickly see if there are any items that your company is selling too many or not enough, which will help you adjust accordingly and maximize profits.
Select the right inventory costing method
Besides keeping track of the number of physical units of inventory it’s also essential to establish a system for keeping track of inventory cost. There are a few different methods for working out the cost of your inventory:
- FIFO (first-in, first-out) – FIFO means that you calculate your current inventory cost by working backward from when an item was first purchased or created to what its cost at present would be using the quantity on hand and unit price for each time period.
- LIFO (last in, first out) – LIFO is the opposite of FIFO and calculates your current inventory cost by working forwards from when an item was most recently purchased or created to what its cost at present would be using the quantity on hand and unit price for each time period.
- Weighted average – A combination of both LIFO and FIFO, weighted average takes the average of all your inventory units and does not account for what inventory item sold first
- The retail method, etc.
There is no perfect system, and you need to choose the method that best works for your business.
Step 5: Reconcile your bank statements
To ensure your accounting is accurate, you need to regularly reconcile your bank statements. This means comparing the information on your bank statements with the account activity shown in your accounting software.
Why is this important?
For one, it can help you avoid fraud, especially if you hire VAs or other employees. This can help ensure no one is stealing from your company.
Reconciling bank statements also helps keep accurate accounting which is especially important for tax time.
Step 6: Perform regular checks to avoid mistakes
To keep your accounting accurate, it’s important to get into the habit of conducting regular checks to ensure all finances are free from errors or discrepancies. You can set up automatic reminders in your accounting software or just do it daily, weekly, or monthly as a part of the bookkeeping process. It’s even a good idea to have someone else check it as well, such as an accountant or bookkeeper.
Step 7: Ensure you stay compliant with CRA tax regulations
Amazon sellers need to be compliant with Canadian tax regulations and are liable for collecting sales taxes. That’s why it’s critical you understand how the tax system works but also keep accounting accurate to ensure tax compliance.
All Canadian provinces have sales taxes that may include GST, PST, or HST depending on the province. Canada has a 5% goods and services tax (GST) that is applied to most transactions. Some provinces charge an additional provincial sales tax (PST) or a harmonized sales tax (HST), which includes the GST. You should also be aware of GST Place of Supply Rules which means you have to charge GST or HST depending on the province where you are delivering the merchandise. In addition, you have to familiarize yourself with Zero-rated, Exempt and Taxable Supplies.
Failure to comply with CRA regulations can result in fines, interest, and even criminal prosecution.
It’s always a good idea to consult a professional accountant or a virtual CFO, as they will not only help you understand the tax liabilities but can also help with tax preparation and filing, as well as tax planning to help minimize your tax burden.
When to hire an accountant, bookkeeper and VCFO
Outsourcing your accounting to a professional CPA firm should be one of the first things you delegate as you grow your Amazon business. This can free up a lot of your time to focus on other important aspects of the business. It also allows you to take advantage of tax credits, cash flow opportunities and find new financial efficiencies.
A professional bookkeeper or accountant can help improve profitability by ensuring that all costs are accurately accounted for as well as help reduce your tax burden.
Virtual CFOs can be beneficial at any stage of your Amazon business, but they are most helpful when you have already established a good accounting system in place and need guidance on financial matters. This is especially true if you have no experience with financial management. Virtual CFOs help manage accounts ledgers, provide tax planning, monitor the financial health of your business, and provide you with regular financial insights and guidance on all company decisions.
One major advantage of Virtual CFOs is that they only cost a fraction of what you’d pay for an in-house CFO, and they provide full flexibility which allows you to scale your business.
You may start by doing some accounting by yourself, but as soon as you start generating consistent revenue, you should look to delegate your accounting to a professional CPA firm.
Amazon accounting key takeaways
Accounting is an important part of any Amazon seller’s business. It’s essential to keep track of your finances, not just to ensure tax compliance, but also to run a more profitable business.
You have the option to start doing accounting by yourself, but outsourcing will help ensure stability, growth, and more success over time.
It is important to find an accounting firm that has experience in working with Amazon sellers so that they can properly advise you on your accounting needs and requirements.
At Bronte Bay, we provide remote accounting services to Amazon sellers and other e-commerce clients. We offer a full range of bookkeeping, accounting, taxes, and business advisory services including a dedicated virtual CFO.
Contact us or book a free consultation with our experts and learn how we can help you manage your business finances more effectively.