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3 different ways to sell on Amazon and their accounting challenges

Amazon

As an e-commerce retailer, Amazon can be one of the most effective ways to reach large numbers of potential customers.  But did you know that there are at least 3 different ways to sell on Amazon?  And that each of them has different accounting challenges?

Amazon Vendor Central

This is a way of selling on Amazon that is by invitation only.  It works as if Amazon were a wholesale customer – you sell stock to Amazon at a wholesale rate and it is then up to Amazon to market it and sell it at whatever price they want.  You send a bulk shipment of stock to Amazon and they then deal with storing it and distributing it to customers – the Amazon listings will show it as being sold directly by Amazon themselves.  You receive payment for the stock, regardless of whether Amazon are successful in selling it or not.

From an accounting point of view, this should be fairly straight forward.  You send them a single invoice for the stock and then at some point in the future (possibly up to 90 days depending on the credit terms) you get paid.

However, it often isn’t that simple.  As part of the agreement with Amazon, you can be subject to various chargebacks and additional costs – for example for missing a delivery slot at a warehouse.  These costs are taken from the payment that you thought you were due and so you end up with a payment that doesn’t match the invoice amount and this needs to be dealt with in your accounting entries.  Amazon will also apply a discount for paying on time which needs to be dealt with and the VAT accounted for correctly.

Amazon Seller Central with own Fulfilment

With Amazon Seller Central, you use Amazon as a marketplace and sell directly to the public.  You control the selling price and the shipping and you are also responsible for dealing with any returns.   Items are listed as being from a third party seller and being dispatched by that seller.

For each sale made, Amazon take the payment from the customer and charge a fee based on the selling price.

At the end of a fixed period of time (normally 14 days), Amazon makes a payment to you which is all the money received from customers in that time, less any fees due to them.

The accounting challenge with this approach is to reconcile the single payment from Amazon with all the individual sales to customers and the fees due.  VAT also needs to be accounted for correctly (it needs to be calculated on a sale by sale basis rather than on the payment made from Amazon).  All the movements in stock also need to be accounted for correctly.

Amazon Seller Central with ‘Fulfilled by Amazon’ (FBA)

This approach is similar to the ‘own fulfilment’ version, except that you send bulk quantities of stock to Amazon to keep in their warehouses, and they then handle the fulfilment for you.  The stock still belongs to you although on the product listing it will say that it is fulfilled by Amazon.

As well as the accounting challenges described above for the ‘own fulfilment’ version, there are additional payments made to use the FBA service that need to be accounted for.  Amazon may also refund you for stock that is damaged or lost while they have control of it and this refund appears in your payment at the end of the period.  This means that the reconciliation of the payment amount and the calculation of VAT can be more complex when the FBA service is used.

Amazon are now also offering a ‘Pan European’ FBA service which means they can move stock to warehouses across the EU ready to service customers on the EU Amazon platforms.  This may sound tempting, but there are a number of VAT issues which need to be considered before using this.  A lot of companies will be currently selling goods to the EU under the VAT ‘distance selling’ regulations.  This means that as long as volumes remain below certain limits, then only a UK VAT registration is needed and UK VAT can be charged.  However, as soon as stock is stored in an EU country, then the distance selling rules can’t be used any more and VAT registration (and therefore VAT returns) need to be done in each country where stock is stored – as well as charging the correct EU VAT rate.

If you’re using Brightpearl, and need some hints and tips on how to reconcile your Amazon accounts, take a look at one of our other blogs here.

Or let us know if you have any other questions by contacting us here.

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