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Classic Amazon Accounting Mistakes
Allison Walker talks about Amazon accounting mistakes and discusses practical solutions that are most applicable to your business.
Mint Accounting works for these sellers:
Anyone selling on Amazon based in the UK and or those registered for VAT inc Canadians and Americans
Classic Amazon Accounting error 1: “Swapping” your amazon account between a sole trader and Limited Company.
- Depending on how you do this, you’ll likely need a new VAT registration number
- It’s usually more tax-efficient to use the new VAT number
- You can end up with a big-time lag
- Amazon can take a long time to update records
- You may end up with an old VAT number
How to move your Amazon business from sole trader to Limited Company in UK
- Incorporate directly – you’re just rolling Sole Trader into Limited Company, which keeps same VAT number
- But it can be more tax-efficient to sell your Sole Trader business to your Limited Company; which means you have a new VAT number in the new company.
This can mean you have to operate the two in parallel while Amazon works it through.
Running Amazon as Sole Trader and limited Company in parallel
Set up ltd co, had it VAT registered
If you’re moving Sole trader to a limited company.
If you’re selling ST to LC, run the two in parallel from an Accounting Pov for about 6 months
- Two sets of Xero books?
Although just have one Amazon account!
That gives you time if amazon is using an old VAT number until you get the point where they’re using the corrected VAT number.
You may not be trading via your ltd co, ie no sales yet, but you may be
- Making purchases
- Incurring other costs
Amazon Accounting error 2 – Not dealing with numbers in bulk
The key is to get the right Software in place
The amount of data you get from Amazon seller central is crazy.
It’s good information but it’s huge amounts of info to process.
Getting the information into your accounting software can be tricky.
Link my books is the product that Allison uses.
It takes the info from Amazon and syncs it accurately with Xero
How do we set up Xero for Amazon?
Your accountant can do it for you – and this is by far the best way to do things. DIY is not a great plan!
How they want a chart of accounts structured is important so they can easily create statutory accounts (for tax authorities etc.)
You also need to know what you as the business owner need the accounts to do for you.
Things to look out for setting up a Xero account:
- Xero has a standard Chart of Accounts
- But based on understanding your business, you may wish to tweak things.
Amazon account setup: Detail vs. Bundling together info
Try to break things out into separate lines for the accountant.
However, you might just as the business owner want things to be bulked together for monthly monitoring.
For example:
- Depreciation – if you have assets – chunk it together
- Vehicles
- Computer/IT equipment
- Desks etc.
- Staff or sub-contractors – try to chunk those together
- It makes it quickly easier to understand the cost base of your business
Amazon Accounting Error 3: VAT registration errors…
When you’re starting out, there isn’t a lot of free cash. So many people avoid employing an accountant.
But then what happens is: you do quite a bit of Xero yourself eg bank reconciling
Unless you’ve had training, you get 3 months in, first VAT return and you find that everything is posted incorrectly!
You need to set up the VAT rates set up correctly at the beginning.
Better: get the accountant to do this:
- Get them to set up a chart of accounts
- first 3-6 months of bookkeeping
- then you can do it yourself after 3-6 months
Example of a classic Amazon accounting mistake
Laptop purchase counted wrongly as software cost, so posted to P &L
But for an accountant, it’s a capital cost and depreciated – and the depreciation is posted to P & L!
Amazon Account Error 4: Purchase invoice errors with DIY book-keeping
- purchase invoices – so the cost is sitting there within your P & L account
- Recorded that in Xero or Quickbooks etc.
- Then you make a payment via bank account
- But the process that in Xero as another cost; NOT set against the invoice!
- This doubles the cost in the P & L!!
- Then the accountant has to unpick the transactions, which takes time and effort and thus money.
Solutions to avoid Amazon accounting mistakes
- Check purchase invoices
- Match that up against the bank account transactions
- You often don’t need to process invoices on Xero
- They use Receiptbank for purchase invoice processing – you can scan or email in your purchase invoice directly to Xero
- Xero have purchased Hubdock that does something similar to Receiptbank
Bank rules for Xero for ecommerce
- Bank rules are great – Xero works very well
- Eg every time you pay rent, it’s processed consistently
- It will be correct each time and it’s faster.
They work very well for regular, routine payments eg
- Broadband costs
- Rent
- Amazon seller central overheads etc.
Linkmybooks is excellent software by Amazon sellers to link Xero or Quickbooks to Amazon. It makes it much easier to automate importing transactions into Xero or Quickbooks.
How do we make sense of the numbers once we have them generated?
Amazon-specific Accounting KPIs
There are lots of different KPIs.
The classic to KPI to start with is Gross Profit Margin
Look at this on a product grouping or product-by-product basis.
There is a facility in Xero that lets you track product groups separately, e.g., selling cushions vs. Rugs
You should know it on a day to day and month to month basis
Also, be aiming to improve it all the time.
Other Amazon Accounting KPIs
- Net profit is important to monitor
- Quick ratio
- Current ratio= cash+stock+receivables÷current liabilities – similar info as Quick Ratio but includes
- Stock days or inventory days = stock value÷number of units*no of days (how fast stock turns over)
The key is to look at trends over a period of time.
This gives you a more in-depth understanding.
Current ratio
This tells Allison – if this company were to stop trading tomorrow, would it have enough receipts from selling all the assets to cover all the liabilities it has. It’s a fast, easy ratio to calculate from your balance sheet.
Free cheatsheet for Amazon Accounting using Xero
amazingfba.com/mint set up lead capture – download
Quick tips regarding Accounting for Amazon sellers:
- Set it up correctly from the beginning
- Have clean processes from the start
- Understand what your Balance sheet and P & L are saying: read up on it, and talk to your accountant.
- Know what works for you in terms of you understanding numbers eg graphs etc.
- Book-keeping daily, monitor monthly – at least!
- Then you can start to see trends.
- Then you can make decisions based on that.
Year-end of year accounts are 6 months after year-end – if that’s how you’re measuring your accounts, you’re miles behind your competition.
You need to be on this!
How to get hold of Allison at Mint Accounting
allison@mintaccounting.co.uk
Services
Two standard packages
Package 1: Accounting only
Statutory work
- Starter license with Xero
- Linkmybooks
- Payroll for two employees
Cost: £200 plus VAT/month
Package 2: Accounting plus Advisory
- Dividend review
- Monthly or quarterly
£400 plus VAT/month
Deal in place
Xero starter license is included
50% off premium license for 1st year (most Amazon sellers need this because have international transactions)
50% off Linkmybooks for 1st year
(save £600 a year)
Set those up free of charge (usual charge of £300)
Watch my full interview with Allison Walker
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