eCommerce Accounting Automation for Amazon/Shopify Sellers

How can you grow your e-commerce business? The 3 primary ways to grow are:

• Expand to more channels beyond Amazon, such as setting up your own e-commerce site using Shopify.
• Expand to international markets, such as the UK, Germany, and Japan
• Find new products to sell to your existing customer base

But before doing any of the above things, you need to make sure your current business is as efficient as possible. The primary way to make your business more efficient is automation using software. Manual tasks are the enemy of scalability. You need to automate as much as possible.

Making Everything Easier by Automation

Why software is better?

• Time-efficient: Accounting software can save a lot of time and reduce errors.
• Money-efficient: You don’t need to hire an accountant if you don’t want to spend a huge amount of money and time hiring people.

What You Need for e-Commerce Accounting Automation

• Quickbooks: This helps you to manage accounting on a computer instead of on paper.
• Webgility: This is used to connect Quickbooks to your e-Commerce store on Amazon/Shopify.
• A business bank account that can integrate with Quickbooks (such as Mercury or Brex).

2 Wrong Ways to Grow

• Unprofitable growth
• Profitable growth where ROC (Return on Capital) < COC (Cost of Capital)

Competitive Advantages:

• Economies of scale: cost advantage
• Customer captivity: Customers are stuck to you for various reasons.
• Legal protection of your IP rights.

Profit = (Price – Cost) * quantity

Your Costs

• Returns
• overhead
• shipping
• storage fees
• Amazon fees
• banking fees
• taxes

Amazon Fees

common fees

• monthly subscription fees
• per-item fee
• referral fees
• closing fee
• high-volume listing fee
• refund administration fee

FBA Fees

• Fulfilment fees per unit
• pick, pack, shipping and handling
• monthly inventory storage fees
• based on daily average volume (cubic feet)
• long-term storage fees (6 + months)
• labeling fee
• package and prep fee
• unplanned prep fee
• repackaging fee (in case of return)
• stock removal fee

Multichannel FBA fees

• uses different multichannel fee
• schedule

Get an instant overview of your profitability

How to Lower Your Costs

• Lower shipping costs (compare rates of shipping carriers) webgility can help
• Cut inventory carrying costs with forecasting
• Minimize mistakes & returns with automation.
• Negotiate lower prices with your supplier
• Improve analytics
• Lower your customer acquisition costs (key influencers)
• Drive ads to your own store instead of Amazon

How to Increase Quantity

Expand to more channels

• Walmart, eBay, jet.com
• Build your online store
• Brick and Mortar (Big-box retailers: EDI)

Why multichannel is essential?

• leverage all the work you have already done.
• Build economies of scale
• Amazon becoming more competitive
• Reduce risk
• SEO & Visibility benefits

Efficient Marketing

• with granular profitability, you know which products to promote
• Give products to influencers
• Get more positive reviews
• Integrated marketing (eg Goole Ads + retargeting with Facebook).

Repeat Customers

Amazon owns the customer relationship. How do you capture customer’s emails?

• One way is to offer warranties. People who sign up for your warranty.
• Another way around it is to use product inserts. (Enter to get a coupon)
• Amazon Pay

Drive traffic to your own store

Gain access to prime customers (seller fulfilled prime)

Sell products that are purchased repeatedly.

• Supplements: $900k in one month.

How Webgility can Help

Webgility provides automation for QuickBooks and Netsuite users, so you don’t need to spend so much time on the hard and dull work of recording business transactions and you can spend more time on other important stuff in your business.

Benefits:

• scale
• speed
• accuracy

You Still Need to Learn Accounting Basics

Most successful small business owners start out doing bookkeeping themselves and there’s a legit reason for that. Accounting is the language of business. Understanding what’s going on in the business is impossible if you don’t learn how to do bookkeeping.

Although online software can automate a huge amount of accounting tasks for you, you still need to learn accounting basics. You don’t need to learn the nitty-gritty. Basic knowledge of bookkeeping is enough.

Accounting Basic for Merchandisers/Retailers

Income Statement

For a service company, the equation for the income statement is very simple.

Revenue - Expenses = Net Income

But for a merchandising company, it’s a little bit different.

Net sales - Cost of Goods Sold = Gross Profit 
Gross Profit - Operating Expenses = Net Income

Why there are two equations?

• net sales: It’s the same as revenue, but we use the terms sales for merchandising companies.
• cost of goods sold (COGS): For example, if a merchandiser source a product for $5 from the manufacturer, and sell it for $20 to the consumer. The net sales would be $20, and the cost of goods sold would be $5. The expense (the cost of goods sold) isn’t recorded until the products are actually sold to customers.
• Gross Profit (Gross margin): The gross profit would be $15.
• Operating Expense:  advertising expense, rent expense, salary expense, just as a service company would have.

So we can see that the only difference between service companies and merchandising companies is that the latter has an account called cost of goods sold because they need to source products from manufacturers.

Isn’t the cost of goods sold an expense? You might ask. Yes, it is. Inventory is an asset when you don’t sell them. After selling the inventory, they become expenses. However, it’s meaningful for merchandising companies to have a separate account for the cost of goods sold.

• Top of the line: It’s a figure for the revenue in the income statement.
• Bottom line: The bottom line is a figure in the income statement. It’s the net income or net loss (Revenue less expense)
• Gross margin: It’s the ratio of gross profit divided by revenue.  gross margin = gross profit / revenue
• Profit margin: It’s a ratio of net income divided by revenue.  profit margin = net income / revenue

Inventory flow equation for merchandiser

Beginning Inventory + Net cost of purchases = Goods available for sale 

Goods available for sale - ending inventory = cost of goods sold

The first equation is in the purchase cycle and the second equation is in the sales cycle.

The ending inventory of the current month is the beginning inventory of the next month.

To calculate the cost of goods sold, you can use

cost of goods sold = Goods available for sale - ending inventory

or

cost of goods sold = beginning inventory + purchases - ending inventory

Purchase Cycle Journal Entries

Let’s say on March 20, your company sourced $10,000 worth of products from China with cash. The journal entry will look like this:

                               Debit       Credit
March 20      Inventory        10,000 
                  Cash                     10,000

Terms for merchandisers

• MOQ: minimal order quantity.
• trade discounts: used by manufacturers and wholesalers to offer better prices for greater quantities purchases.
• purchase discount: 2/10, n/30. To incentive the retailer to pay early. aka credit terms.
• Purchase returns: Merchandise returned by the purchaser to the supplier
• Purchase allowance: a reduction in the cost of defective merchandise received by a purchaser from a supplier.
• FOB shipping point: The buyer will pay the transportation cost. and the product in transit is owned by the shipment company.
• FOB destination: The supplier will pay the transportation cost. and the product in transit is owned by the supplier.

Let’s say on April 20, your company sourced $20,000 worth of products from China on credit. Credit terms are 2/10, n/30. The journal entry is:

                                 Debit      Credit
April 20        Inventory        20,000 
                    accounts payable        20,000

On April 30, you pay the manufacturer 19,600 because you have 2% discount. The journal entry:

                                   Debit     Credit
April 30       accounts payable    20,000 
                         Cash                19,600
                         Inventory           400

You need to credit inventory because the cost of the inventory is reduced by $400.

#3

On May 6, your company sourced $20,000 of products from China on account. Credit term is 2/10, n/30.

                                 Debit          Credit
May 6       Inventory            20,000 
              accounts payable                  20,000

On May 10, your company returned $500 of defective products to the supplier.

                                Debit     Credit
May 10    accounts payable       500
                    Inventory              500

On May 15, your company paid 19,110 to the supplier.

                                Debit        Credit
May 15   accounts payable       19,500
                  Cash                       19,110
                  Inventory                  390

Note: If the buyer source $10,000 products from the supplier, but the buyer also pays the transportation cost ($100), the inventory will be $10,100. There’s no separate transportation expense in the accounting records.  The journal entry for the transportation cost would be:

                         Debit                 Credit
Inventory                100
          Cash                                 100

You debit the inventory account when the shipping cost is incurred. This is like you as a consumer buying something online. You care about the product price and the shipping cost. If the product price on an online store is $50, and you have to pay $5 for shipping to your home, you would think the cost of this product is $55.

Question: A car dealer bought a used car for $3,000. The transportation fee is $150 (FOB shipping point). Another $200 is paid for import duty and $50 for shipment insurance. The advertising fee is $25 and sales stuff salary for selling this used car is $250. What’s the cost of the inventory?

$3,000 + $150 + $200 + $50 = $3,400

advertising fee and sales stuff salary are operating expense.

Sales Cycle Journal Entries

Sales equation

sales - sales discounts - sales returns and allowance = net sales

Sales discounts and returns and allowance are contra revenue accounts.

#1

On May 20, your company sold $7,500 of goods on Amazon on account. (Amazon pays sellers every 14 days).  The products were carried in inventory at a cost of $42,00. The journal entry would look like this:

                                   Debit      Credit
May 20    Account Receivable       7,500
                 Sales                        7,500

          Cost of Goods sold       42,00
                 inventory                    42,00

Inventory method:

• perpetual inventory always adjusts the inventory when a sale is made.
• Periodic inventory: adjusts inventory for an accounting period like each month.

Nowadays we mostly use perpetual inventory method because computers can automatically keep track of inventories. You can check how many inventories you have at any time of the day. That why there are more than 2 entries in the above journal. We adjusts the inventory whenever a sale is made.

#2

On June 6, your company sold products costing $3,500 for $6,000 on account.

                                         Debit        Credit
June 6          Account Receivable       6,000
                             Sales                    6,000

                 Cost of Goods sold      3,500
                                inventory             3,500

However, you are offering coupon 2% off to your customers. So 14 days later, Amazon pays your $5,880.

                                    Debit                 Credit
June 20       Cash                  5,880
              Sales discount        120
                      Accounts receivable                  6,000

What if one of your customers doesn’t like your product and returned the product. Selling price $20, cost of goods sold is $4. The journal entry would look like

June 24                        Debit           Credit
          sales returns        20
                cash                           20

          inventory             4
               cost of goods sold              4

You could still sell this product if it’s not broken. But if the product is broken a few days later, it’s a dead inventory, so you remove it from the inventory, the journal entry would be like:

June 26                       Debit         Credit
    cost of goods sold         4
              inventory                      4

Current ratio vs Acid-test ratio

acid-test ratio = quick assets (cash, short-term investments, current receivables) / current liabilities.

quick assets: cash and assets owned by a company that can be easily converted to cash

Quick assets = Current assets - Inventory - Prepaid expenses

Inventory Methods

There are 4 inventory methods for merchandise companies.

• Specific identification: This is the preferred method if each item in inventory is unique (like in a car dealer or jewerly) or is equipped with a serial number that can be traced to its purchase price
• Weighted average: inventory and the cost of goods sold are based on the average cost of all units purchased during the period. This method is generally used when inventory is substantially the same, such as grains and fuel.
• First in First out: assumes that the oldest items in its inventory are the ones first sold
• Last in First out

Consignment

You don’t list consignment products in your inventory. Because you don’t own those products. Revenue from consignment arrangement should be recorded as sales commission.

Inventory Turnover

For inventory management,

• you don’t want to have lots of stock item because it increases inventory storage fee.
• You also don’t want to run out of inventory, because it causes lost sales

The formula for inventory turnover

inventory turnover = cost of goods sold / average inventory value

If in the previous month, cost of goods sold was $42,000, and average inventory is $9,700, then inventory turnover is 42,000/9,700 = 4.33. This means you need to replenish your inventory 4.33 times to keep up with customer demand in the last month.

• A low inventory turnover means your sales are low.
• A high inventory turnover means you have lots of sales.

Bank Reconciliation

A bank reconciliation is prepared periodically to find if there’s difference between cash reported on the bank statement and the cash balance on company’s accounting books (cash general ledger account), then find out why are the balance different and finally you prepare a statement of bank reconciliation. Add a signature on this statement.

Common Reconciling items

items to adjust on the bank statements:

• add deposits in transit: the company deposited money, but it haven’t been shown on the bank account.
• deduct outstanding checks: You wrote a check to a vendor, and you credited cash on your book, but the vendor didn’t withdraw the cash yet.
• Add or deduct bank errors.

items to adjust on your own book:

• add collections made by the bank: if your bank collected a note receivable for your company, but you didn’t know.
• add interest earned on checking account:
• deduct insufficient funds check: If your customer sent you a $3,000 check for your service, but the customer’s checking account doesn’t have $3000, then the check bounces.
• deduct bank service charge
• add or deduct book errors.

If there are adjustment on your own books, then you need to make adjusting journal entries (AJE). You don’t need to make AJE for bank adjustments.

Bank reconciliation should be done by the business owner, not by the accountant. This is to prevent employee from stealing money from your company. If you really don’t want to do it, pay an accounting firm to do this work.

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