eCommerce Accounting: Lessons and Pitfalls

ax season is upon us. And with tax season comes a lot of work for eCommerce sellers as they siphon through the prior year’s finances to settle expenses, categorize sales data, and analyze profitability. While accounting is a major endeavor for all businesses, sellers leveraging marketplaces like Amazon, eBay, and Walmart are up against some very specific challenges.

Many online sellers let accounting fall through the cracks for too long. It’s important to remember that poor accounting will give you inaccurate financial data. The result? Poor decision-making and a false sense of how your business is performing.

But where to start? And why is accounting so hard for sellers leveraging marketplaces like Amazon?

After working with Amazon sellers, we want to highlight two key areas that often lead to trouble in accounting: Sales Data and Inventory/COGS control.

Gathering Accurate Sales Data

When Amazon revenue hits your bank account with a deposit every two weeks, that deposit offers no insight into the breakdown of fund sources. Especially if you are using Amazon for shipping and warehousing, there are a lot of activities going on in your seller central account. The deposit that hits your bank account does not account for when each activity took place. You will only see the net deposit on the date that you receive that deposit. Period. Further compounding the problem, deposits include all other activity in your Amazon seller accounts such as FBA fees, shipping fees, warehouse fees, sales tax, returns, and chargebacks.

To address this problem, sellers are forced to reconcile financial data themselves. This usually means going into the back end of your Amazon seller account, pulling all the data into a spreadsheet, sifting through the data, and accurately accounting for the data for each line item within your accounting software. If you are using accounting solutions such as Xero or Quickbooks, this can help. But it still doesn't scale well.

When FeedStation works with customers, we address financial reconciliation at the order level by default. Data is typically pushed into our customer's accounting solution to include information like cost (which is incredibly helpful for dropshipping), shipping fees, and marketplace fees (including FBA adjustments).

The result? An easier tax season, less bookkeeping, and most importantly, elevated decision making.

Inventory and COGS Control

Inventory and COGS errors are one of the most common (and problematic) accounting challenges for Amazon sellers. Errors typically begin occurring when inventory is purchased. Often, companies will immediately record the cost of purchasing that inventory as a cost of goods. If your cost is recorded outside of the period in which it is sold, it can lead to a lot of confusion and discrepancies, which directly impact your balance sheet.  For example, purchasing $100K in inventory may show a $30K loss in January, a $40K gain in February, and a $30K gain in March. While this is reflective of how cash is moving through your business, it does not accurately reflect the performance and profitability of the business.

The inaccurate recording of COGS and inventory becomes more detrimental as your business grows. You will get lost on how your business is truly performing, and the value of your assets will be inaccurate.

So, how do you accurately record COGS and inventory? For COGS, there is an accounting rule called the matching principle. This states that expenses are matched in the same time period as associated revenues. In other words, COGS should not be recorded until you sell an item. As an Amazon seller, this will require you to:

1. Look up quantity sold for each SKU
2. Multiple the quantity by SKU cost
3. Record this amount as COGS

To use matching principles correctly, you should also have an ending inventory balance for each month. When you purchase inventory, the amount of inventory you purchased should be added to your inventory balance. Then, each month you subtract your COGS from your inventory to get a new inventory balance.

While simple in theory, it can get a little complicated as you add more SKUs to your portfolio and will inevitably require automation. At FeedStation, many of our customers choose to automatically update COGS and inventory information throughout the system. Once we can pull the cost of each SKU (from wherever that data lives) we can run profitability equations based not only on the item, but on each channel.

Don’t wait on elevating your accounting practices.

No one loves spending time with accounting, but (steps on soap box) you need to start making investments right away in organizing your financial records. Accounting is more than just filing your taxes. It's the lifeblood of eCommerce sales and will help you make critical decisions for where to invest (and not invest) in your business. Marketplaces like Amazon don’t make it easy, but we are here to help.