Amazon has significantly reduced, if not eliminated, the barriers to entering the e-commerce realm as a seller. The global giant reported $469 billion in revenue, with 22% of that revenue being driven by third-party sellers.
From handling inventory storage and customer service to facilitating returns and shipping items, Amazon makes being a seller seem simple. However, Amazon sellers still need to remember that they are running a business, requiring accurate Amazon accounting.
Amazon accounting focuses on four main areas: sales tax compliance, accurate revenue recognition, proper inventory accounting, and effective tax planning.
If you’re new to running a business, it can take some time to learn the ins and outs of Amazon accounting, making it important to reach out to a qualified accountant when you feel overwhelmed or simply don’t have the time to dedicate to your accounting function.
Sales Tax
Sales tax compliance in e-commerce businesses is on the rise following the passage of South Dakota v. Wayfair, where the courts ruled in favor of charging sales tax on out-of-state purchases. If you’re like most Amazon sellers, your business spans across the United States, or even globally.
The global phenomenon that Amazon is had led most states to classify Amazon as a marketplace facilitator, meaning the burden of sales tax collection and remittance falls on Amazon. Instead of you having to implement the necessary Amazon accounting controls to charge customers sales tax, Amazon will do all the backend work for you.
If you only sell on Amazon, you don’t need to worry about sales tax. However, if you have a presence on other e-commerce platforms, such as Spotify, you will need to determine if your business has nexus. When you exceed the nexus thresholds set by each state, you will need to file and pay the necessary sales tax.
Revenue Recognition
Maintaining GAAP-compliant financial statements is not as clear-cut following the passage of ASC 606, which requires businesses to defer revenue when performance obligations are not complete. In Amazon accounting, a customer may pay you for a good or service when you haven’t fulfilled the performance obligation.
For example, maintenance packages and warranties are becoming more common to add to purchases. When a customer purchases a one-year warranty, the amount will be lumped in with the product revenue; however, your business won’t complete the performance obligation for the warranty until the one-year period has lapsed.
Only recording revenue based on what is transferred to your bank account results in overstating revenue by the amount of the warranty, creating noncompliance with GAAP. Investors, lenders, and the IRS do not take misreporting revenue lightly.
Since ASC 606 is a guideline that accounting professionals must abide by, most accountants should have a working knowledge of the adjustments needed in your software. The issue arises when Amazon sellers go with the cheapest accountant that might not know the intricacies of proper revenue recognition. Paying the extra money for added experience and knowledge of ASC 606 can lead to fewer mistakes in your financials.
Inventory Accounting
Inventory accounting is another basic component of Amazon accounting. Even though Amazon may store the inventory for you in their warehouse, you still own the inventory. When you purchase products to be sold, the amounts go to the balance sheet as a current asset. It isn’t until the units are sold that they will get moved to the income statement under cost of goods sold.
Amazon provides sellers with the capability to track their inventory levels. This gives you the ability to engage in the proper re-order quantities and understand the landed cost, which is the amount you paid for the inventory. With rising prices, it’s not uncommon for sellers to have different purchase prices for the same goods, making inventory accounting a vital component of Amazon accounting.
Tax Planning
Last, but certainly not least, is tax planning. Properly planning for any upcoming tax liability is an important segment of Amazon accounting. Your tax liability depends on a variety of factors, from how many partners are in the business to where they are located.
As an Amazon seller, you might not know every provision in the tax code that affects your business, leading to missed saving opportunities. Working with an expert that has the knowledge applicable to Amazon accounting can save you money.
Effective tax planning requires strategies to be implemented before year-end, such as purchasing new equipment to take Bonus Depreciation or setting up a home office for the Home Office Deduction.
Summary
Regardless of how much revenue your Amazon business is currently bringing in, incorporating the basic principles of Amazon accounting can promote success and ensure compliance with regulatory agencies. To work with a qualified accountant that specializes in e-commerce businesses, reach out to BUSINESS today. We have the capabilities to help you properly navigate through sales tax remittances, revenue recognition, inventory accounting, and tax planning.
