In a previous guide, we answered the question, ‘ what is ecommerce accounting? ’ in great detail. For a broad understanding of what accounting means in the online business world, we’d recommend reading through that if you haven’t already.
Here, we take our exploration even further with a deep dive into Amazon accounting specifically –
with a focus on accounting for Amazon FBA sellers in particular.
In this guide, we’ll be providing insights and knowledge around topics including:
- What Fulfilment by Amazon (FBA) is
- How Amazon accounting is different to normal accounting
- Why Amazon accounting is so important
- What Amazon bookkeeping involves
- The benefits of cloud-based software for
- Amazon bookkeeping
- The best accounting systems for Amazon FBA sellers
- Why you should hire a specialist ecommerce accountant
- Whether you should register as a limited company or sole trader
- Find out how to change from sole trader to limited company on Amazon
What is Amazon FBA?
Fulfilment by Amazon (FBA) is an extensive fulfilment network operated by Amazon for its sellers. Merchants can store their goods in Amazon’s fulfilment centres and when a sale is made, Amazon will pick, pack and ship it to the customer.
Using FBA has the potential to help customers scale their business and reach wider audiences more quickly:
“Selling Partners, on average, have seen a sales uplift of 35% when moving their products
to FBA in the UK, as a result of faster delivery that customers love. (1)”
FBA is not only designed to support logistics, it is also there to make customer service, international sales, inventory and customer returns more easy to manage. There are fees attached to FBA, including inventory storage fees, fulfilment fees and other occasional fees incurred case-by-case.
Further reading: Amazon’s European Fulfilment Network (EFN) between the UK and EU
Some common questions ecommerce sellers have around Amazon FBA and Amazon selling in general are:
Do you need a business bank account to sell on Amazon?
No, you don’t need a business bank account to sell on Amazon; you can become an Amazon with a current (personal) bank account.
However, there are multiple reasons why getting set up on Amazon’s Seller Central with a separate business bank account is more advisable, including only having to go through the verification process once and keeping your personal and professional finances separate.
Plus, some banks might not let you use a personal account for business transactions. So, to save you time and energy in the long run – as well as possible operational delays – we’d recommend setting up a business bank account if you’re planning to sell goods via Amazon.
Do you pay taxes on Amazon FBA?
If you earn money through Amazon FBA sales, you will need to pay tax on your income in the same way you would with any other business. You will need to report these earnings to HMRC through an annual Self Assessment Tax Return (sole trader) or Company Tax Return (company) and pay Income Tax or Corporation Tax respectively.
How do I account for Amazon sales?
You will need to record any sales you make on Amazon in the same way you would any other sales (income). You can do this by integrating your Amazon account with whatever bookkeeping software you use, providing you choose one that facilities integration with the platform. This will allow you to automate the recording of transactions so that they can be reflected in your accounts.
Take a look at this post: Top 8 Making Tax Digital for VAT Software Solutions
Why is Amazon accounting so important?
Accounting should be an integral part of any company’s operations, not just ecommerce businesses or Amazon sellers, for a multitude of reasons. The overarching reason being to ensure that the business has a solid system in place for recording and reporting financial information.
“The sustainability and development of a business are conditioned by the generation of profits. However, only the accounts can provide the necessary indicators to know if the turnover achieved covers all expenses. While the basic principle seems simple, but finding a profitable source is very difficult. You have to adopt good management to be successful, and this also requires a good accounting management system within the company. (2)” – Appvizer
Specific reasons why accounting is so important for ecommerce and non-ecomm businesses alike include:
- Staying on top of tax returns – Recording and submitting annual tax returns and paying the necessary tax on time, meeting all of HM Revenue & Customs’s (HMRC) stipulated deadlines. This process is made significantly easier when you maintain thorough financial records through the tax year.
- Tax compliance and tax efficiency – Bookkeeping and accounting is also essential if you’re going to run your business in the most tax compliant and tax efficient way possible. Having a complete understanding of your finances will allow you to not only make sure that you’re adhering to all rules and regulations but also spot where you could be taking advantage of tax relief.
- Monitor and maximise cash flow – Generating financial reports and forecasts that enable you to effectively monitor how money is moving in and out of your account so that you can protect and maximise your cash flow. You can use these reports and analytical data to inform when you can afford to spend and when you need to tighten your budgets.
- Better management of stock and inventory – Better bookkeeping and accounting also contributes to more efficient stock and inventory management as you have a clear idea of what has been purchased and what still remains to be sold.
- Maintain good relationships with suppliers – A positive side effect of good bookkeeping and accounting practices is always staying on top of your invoices. When you pay your invoices on time, you then keep your suppliers and partners happy and willing to work with you.
- Optimise business growth – All of the factors listed above combine to stand you in much better stead when it comes to business growth and scaling your Amazon venture. Good accounting habits are a vital part of the foundations of any successful growth strategy.
Is Amazon accounting different to normal business accounting?
While Amazon itself doesn’t require a specific accounting process of its own, there are some important differences between ecommerce accounting and non-ecomm accounting that you should be aware of.
The best accounting systems for Amazon FBA sellers: cash basis versus accrual
The fundamental principles of bookkeeping and accounting are the same for businesses of all types. However, for ecommerce businesses, the processes are a little more specific. Ecommerce sellers typically choose from two main approaches to accounting: cash basis accounting or accrual accounting.
Cash basis accounting records transactions as and when money enters or leaves a bank account, making it easy to monitor how cash is flowing in real-time. The accrual method, on the other hand, records transactions as and when they happen, as opposed to when money actually lands in the account.
Cash basis accounting is generally considered the best option for new and small ecommerce operations for its ease and flexibility. However, it doesn’t take into consideration accounts receivables or account payables, which can be problematic for more established businesses.
The accrual method is typically preferred by larger businesses or those scaling quickly as it offers a more accurate and definitive view of finances. However, it is a more complicated system and requires more expert analysis, which is where the skills of a qualified accountant will most likely be required.
The choice really comes down to three main things:
- The size and scale of your Amazon business, mainly.
- Your proficiency with financial data.
- How much you’re able or willing to invest in outsourcing expertise.
But remember: consistency is key, as explained by finance expert, Dock Treece:
“Because of the differences between cash and accrual accounting, one method may be more appropriate for your business than the other. Luckily, most accounting software makes it easy to track your business’s finances with both cash basis and accrual methods. Keep in mind, however, that you must decide which method you want to use and then be consistent when tracking your income and expenses. (3)”
Amazon bookkeeping and the benefits of cloud accounting software
The first important thing to convey here is how pivotal bookkeeping is to the success of any accounting effort—whether you choose to outsource or not.
Bookkeeping is the administrative process that has to come first in order to lay the appropriate foundations for any accounting activity. Bookkeeping gathers the financial information and transactional data that an accountant will need in order to steer their more analytical responsibilities. In other words, you cannot execute effective accounting without best-practice bookkeeping—Amazon and other ecommerce businesses included.
What does Amazon bookkeeping involve?
As an Amazon seller, there are a number of different transactions that you’ll need to take into consideration as part of your accounting, outside of your standard sales and expenses. This is where bookkeeping comes in, to ensure that you’re recording all of these numbers correctly and efficiently, so that you’ve got a robust financial reporting system in place.
The main information you’ll need to record in your Amazon bookkeeping process includes:
- Sales
- Allowable expenses
- FBA fees
- Other Amazon fees (including selling fees)
- Reimbursements
- Settlements
One of the best ways you can maintain thorough bookkeeping when it comes to the hustle and bustle of running an ecommerce business is to deploy good bookkeeping software—better yet, cloud-based bookkeeping software.
Why cloud-based software?
As an Amazon seller, there are a number of different transactions that you’ll need to take into consideration as part of your accounting, outside of your standard sales and expenses. This is where bookkeeping comes in, to ensure that you’re recording all of these numbers correctly and efficiently, so that you’ve got a robust financial reporting system in place.
The main information you’ll need to record in your Amazon bookkeeping process includes:
- The ability to tap into your financial information anywhere with an internet connection.
- Convenience for teams and remote staff thanks to multi-user, remote accessibility.
- More efficient integration with ecommerce platforms such as Amazon.
- More robust data security than traditional PC-bound software or hardware.
- An easier transition into the eventual Making Tax Digital (MTD) changes.
The bookkeeping tools you should be using for your FBA business:
There is no prescriptive answer to this question as it largely comes down to personal preference and individual requirements. However, we always recommend Quickbooks and Xero for their simple integration into a wide range of ecommerce marketplaces, including Amazon.
There are a number of great tools we support though and as a trusted partner, we can offer you discounted rates for a number of providers including A2X, Autoentry, Link My Books, Xero, Freeagent, Quickbooks, Sage Accounting—and more!
Top tip: When shopping around for bookkeeping software and accounting tools, make sure you do your homework before making any decisions. Read up on the various features and integrations available and make sure to read plenty of user reviews before choosing the one(s) for you.
Do I need an accountant for my Amazon business?
For some business owners, especially ecommerce sellers with a small operation, outsourcing their bookkeeping and/or accounting can feel like an unnecessary expense. In fact, less than a third of small businesses have an accountant (4) according to a recent analysis. However, there is a plethora of reasons why we would argue an Amazon FBA needs an accountant.
Of course, this can be a regular accountant with a general scope of skills. They will be able to support and guide you perfectly well, sure. A specialist ecommerce accountant with niche skills in your online sector, however, will provide a far greater return on investment. Next, we take a look at the main advantages that come of hiring a specialist accountant over a regular accountant—or indeed, no accountant at all.
Do you use Stripe to accept website payments? If you do, check out our article on Stripe Fees & VAT
The benefits of hiring a specialist Amazon accountant for your FBA business
Below are just some of the reasons why a specialists ecommerce accountant would be an invaluable asset for your Amazon business.
Recommended article: How much is my Amazon Business worth?
Support with company tax returns – An accountant will be there to ensure that you’re not only hitting all of the necessary deadlines but also that you’re including all of the correct information. Affording yourself the luxury of passing this responsibility onto a professional will free up more of your time and enable you to focus more sharply on other parts of the business. The last thing you want is to be getting distracted by deadlines and bogged down by bookkeeping when you’ve got products to sell and a business to grow.
Insights around tax efficiency – When the latest opportunities and regulations around tax relief are put in place or updated, there are often some specific to sectors and industries. So, if there is a measure that could help your ecommerce business save money or cut down your tax bill, a specialist accountant will be the first to know. They can then inform you and apply this to your Amazon operation.
A solid understanding of the Amazon platform – Whether it be Amazon or any other e-commerce platform, such as Etsy, Shopify or eBay, a specialist accountant will know how it all works. They’ll know where to find useful reports and information and how you can use this data to inform your financial strategy and overall growth plan.
VAT registration and compliance – You don’t need to register for VAT until your annual VAT taxable turnover reaches the specified threshold, which is currently set at £85,000. However, once you reach that point, or if you wish to register for VAT voluntarily, a specialist accountant can ensure you’re going about this the right way and ticking all of the necessary boxes.
Once you’re all set up and registered, an accountant can then show you how to navigate VAT compliance and the Amazon VAT reports that can be found in the Seller Central dashboard.
Can you sell on Amazon without VAT registration? Short answer is, Yes
Our Amazon accounting services explained
We specialise in e-commerce accounting, supporting Amazon sellers just like you when it comes to day-to-day financial requirements as well as wider strategic guidance. Our team of UK-based chartered accountants work on an online-only basis, which means we’re able to apply an affordable, fixed monthly fee that affords you considerable savings.
From setting up a new company and understanding VAT compliance to expanding into new markets or making the switch from sole trader to a limited company, we’re here to help.
To find out more about how we support Amazon sellers, book your free consultation.
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References/external links:
1. https://sell.amazon.co.uk/fulfilment-by-amazon
2. https://www.appvizer.co.uk/magazine/accounting-finance/accounting/importance-of-accounting
3. https://www.businessnewsdaily.com/16479-cash-accrual-accounting.html
4. https://onpay.com/hr/basics/2020-state-of-small-business#how-small-businesses-work-with-accountants
