Amazon sellers, by default, have complicated financials. Unlike a simple service business for example, an Amazon seller needs to account for inventory, cost of goods sold (COGS), sales, and Amazon fees (FBA, inbound shipping, fulfillment center, etc). If you have reached any sort of significant volume in your business, a robust bookkeeping system becomes necessary—unless of course you enjoy not knowing where your money is going, or even worse—IRS penalties!
One of the best accounting systems for Amazon sellers in Xero. If you’re not already familiar, Xero is a cloud-based accounting software that is increasingly popular amongst online entrepreneurs. It can be used on its own or in conjunction with third-party apps like A2X and Stitch Labs—more on that in a bit.
If you don’t already have a subscription to Xero, you can try a free trial for 30 days.
Recording sales and Amazon fees in Xero
One of the biggest headaches e-commerce sellers have is reconciling sales from their merchant services provider to their sales in their bookkeeping software. I’m going to show you a couple ways to do this in Xero, depending on the amount of detail you require.
Method 1: Use a third-party app like A2X
Want to automatically import your Amazon invoices into Xero? Yup, there’s an app for that. A2X imports your Amazon statements and automatically creates invoices in Xero to account to your sales (and Amazon fees). This is the fastest, easiest method, but starts at $19/mo.
Method 2: Manually enter your sales and fees data in Xero
This doesn’t have to be as time-consuming as it sounds. If you don’t care about a ton of data being in Xero, you can do this once a month. Take your month-end Amazon statement. Create a new invoice, and enter the details from your statement into Xero.
Product sales: Map this to an “Amazon sales” revenue account.
Amazon fees: Map this to an “Amazon fees” expense account. Alternatively, if you have several types of fees, you can split these out to separate expense accounts (one for shipping, one for FBA, etc).
Refunds: Show these as a negative value and map to the appropriate account (Amazon sales or Amazon fees).
The total amount of the invoice in Xero should match the “transfer amount” that Amazon will transfer to your bank account. When the funds are deposited in your account, you simply match the bank transaction to the invoice.
Inventory management and Cost of Goods Sold (COGS) in Xero
The #1 mistake I see Amazon sellers make in their bookkeeping is expensing the inventory they buy. When you purchase inventory, it is NOT an expense, it belongs in an asset account. When you sell the inventory, you reduce the inventory asset account and expense it as a “cost of goods sold.”
The easiest way to account for all this is using a robust inventory management system—which hopefully, you’re already using. The good news is that Xero integrates with several: StitchLabs, TradeGecko, and Cin7.
Our favorite is StitchLabs. If you connect the StitchLabs app to Xero, it will automatically update your inventory asset account and your cost of goods sold account as your inventory levels fluctuate.
For tax purposes, you need to save all your receipts. Skip the shoebox and move your documents to the cloud. The cheapest way to manage receipts in Xero is to simply add it as an attachment to each expense transaction. When doing your monthly bank account reconciliation, just ensure that for each expense or inventory transaction that you upload and attach a receipt to that transaction.
To make it even easier, you can use a cloud-based document storage option like HubDoc. HubDoc easily integrates with Xero to save you time and make sure you are squeaky clean if you were ever to get audited.
Calculating, collecting, and filing sales tax is one of the most complicated parts of being an Amazon seller. Whatever method you are using to manage your sales tax collecting and filing, it needs to be accounted for in your bookkeeping system. In Xero, you will have a sales tax liability account that sales tax is held in and paid from. Sales tax payments are never an expense!
Xero integrates with sales tax management platforms such as TaxJar and Avalar. I highly recommend using one of these services to help you manage your sales tax and make the appropriate accounting entries in Xero.
Financial Reporting in Xero
What’s the point of doing all bookkeeping? Creating accurate and useful financial reports. These reports: (a) provide the required information for tax reporting, and (b) help you make sound business decisions.
Fortunately, Xero makes creating these financial reports easy. Assuming you’ve done all the leg-work to accurately record your revenue, expenses, inventory, and sales tax—Xero will automatically generate several reports that you should be reviewing monthly.
These are the Profit & Loss report (also known as an income statement), balance sheet, and statement of cash flows. At the end of the year, you can easily print these reports, give them to your CPA, and be done with your taxes.
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If this all sounds overwhelming, or you simply don’t have the time to bother with bookkeeping, let us help. We can do your Xero setup, provide training, or provide full-service monthly bookkeeping. Contact us now to learn more.