Accounting Basics


#1

Probably one of the most common questions for noob here. I’ve done some research but still need some clarification as there’s a lot of contradictory information out there, and varied use of terms.

I’ve just started as a non-pro FBM user, mainly just experimenting at the mo (not yet a formal business), so I’m not calculating things like staffing overheads / VAT just yet, (besides that on Amazon Fees). However I am trying to get a good grasp on basic individual item pricing, costs / revenue / profit calculations for selling a specific item, and still have some questions how to properly do all this:

1. Revenue
What’s classed as “Revenue”, is this what’s actually paid into my bank (after the removal of all shipping costs & fees), or is it simply List Price + Shipping Credit? (the amount the customer pays).

2. Actual Shipping Cost
How do you calculate this when you’ve bought the shipping labels through Amazon, do you deduct it separately from a subtotal (the total price - total fees) to then give the “Revenue” (the amount actually paid to your bank, that you then calculate profit from by subtracting “expenses”)?

OR do you add the amount to the total expenses instead? (Including the item cost, packaging costs, etc). Basically do you deduct the shipping to give the actual “Revenue”, or deduct it from the revenue to give the profit.

Bit stuck with when to calculate this one cause it gets more complicated if you buy it through Amazon, where the amount is taken off BEFORE the money gets to your bank, so I’m unsure whether to treat it like a normal cost / expense. Is it the same regardless whether you buy it through Amazon or not?

3. Profit Margin / Markup
I know the formulas: “(Price - Cost) / Cost” for Markup, and “(Price - Costs) / Price” for Margin, but I’m unsure what’s actually included in “Price” and “Cost”.

Is “Price” just the list cost, or the list cost + shipping credit? (Total amount the customer pays), or is it the final “revenue” paid to me?

Is “Cost” just the Cost of Goods Sold, as in the Item Cost (what I paid for it), plus any costs BEFORE the sale (to get it into my inventory, inc import costs, manual labour etc), plus any costs of MAKING the sale (packaging costs, along with any other costs of doing business), and does this value also INCLUDE the shipping? (even if it’s been taken off before it gets to me if bought through Amazon).

4. Marketplace Fees
Are these added to the “Costs”? Or treated separately (as they’re deducted before I see the money). Does this factor into the Profit Margin / Markup calculations? (As above), other than have already being deducted off the total Sale Price.

5. Gross Profit / Net Profit
Do I need to split the results of the above into Gross / Net profit? I’m reading a lot of contradictory stuff that Gross Profit is just Revenue - Cost of Goods, and Net is the Gross - all other operating expenses and all other expenses (including taxes etc).

Elsewhere I’m reading that the Gross is the Revenue - Cost of Goods - all other operating expenses, and that Net Profit is Gross Profit - Taxes only.

I’m just wanting to get all this clarified just for calculating individual listing calculations. I’ll start attacking the monthly turnover, expenses and the overall profit / loss etc later.

See 2nd post for my current calculations…


#2

Currently for:
An Item Listing at £7.99
A Shipping Credit of £3.99
The Item Cost of £1.72
Packing of £0.97
Actual Shipping of £2.85
Referral Fee of 15% (on the List Price + Shipping Credit)
Closing Fee of £0.75
VAT of 20% (on the Referral Fee + Closing Fee)

I have:
Total Sale Price: 11.98
Amazon Fees: £3.06
Subtotal: £8.92
Revenue: £6.07 (Subtotal - Actual Shipping, bought through Amazon. This amount is paid to my bank)
Profit: £3.38 (I presume this is the “Gross Profit”)
Margin: 55.68% (Probably wrong as not including the shipping as already been deducted)
Markup: 125.65% (Probably wrong as not including the shipping as already been deducted)

Any help is very much appreciated. As I’ve not much experience yet this is hard to get my head around.


#3

1. Revenue
Total amount paid by your customer

2. Actual Shipping Cost
Shipping cost is part of your expenses, but as they’re directly attributable to a sale they reduce your gross profit.

3. Profit Margin / Markup
I find it easier to work with profit margins (Percentage of gross profit from a sale). Think of it as a pie chart total amount paid by the customer is 100% then take off your direct expenses (cost of item, shipping, Amazon fees). The proportion you have left is your gross profit. This gross profit is then used to pay your overheads and hopefully leave you with a decent net profit.

I’d work with total amount paid by the customer as you’re be deducting the postage as a direct cost. If you use profit margins you can get a rough average for all your sales (e.g. 30%) then you can use your daily sales figures to work out an approximate gross profit.

4. Marketplace Fees
If you’re on an individual seller plan they’d all be direct costs that would reduce the gross profit. When you switch to a pro account your monthly subscription fee would be a fixed cost (overhead).

5. Gross Profit / Net Profit
Gross profit is income minus direct costs (products, packaging, shipping etc)
Net profit is gross profit minus overheads (fixed costs, and non-fixed if they can’t be directly attributed to a sale.)
Net profit is what you’re taxed on.

As an example I count boxes for individual products as a direct costs, but parcel tape and larger boxes to send inventory into Amazon’s warehouse as non-fixed overheads.

Your margin calculation appears to be wrong (I haven’t checked the others):
Gross profit: £3.38
Total sale price: £11.98
Profit margin: 28.2%

If you’d had £250 in sales in a day you could multiply this by 28.2% to get an approximate daily gross profit figure of £70.50

Also, if you’re buying things to sell you’re trading as a business so should be registered as such on Amazon, which includes registering with HMRC as self-employed or as a company if you haven’t already.


#4

Total sale price: £11.98
Amazon Fees: -£3.06
Item Cost: -£1.72
Packing: -£0.97
Actual Shipping: -£2.85
Gross Profit: £3.38
Profit Margin: 28.2%


#5

Thanks Barry. Interesting Revenue is the amount paid by customer. For some reason I totally thought it was the final value I received to my bank heh. I presume you use the terms Revenue and Income interchangeably? Am I right in thinking that “Revenue” would be more suited to the Monthly totals sheet, and use “Income” for the specific sale.

What would be the correct term for the amount I actually receive in my bank from Amazon?

Also even if I buy shipping through Amazon then it will be treated no differently, just included as part of the Gross Profit from Income calculation yes? I presume so as it seems I need to record these values individually and factor them into my own calculations, rather than going off what Amazon actually deposit to my bank and then subtracting the remaining costs from that, which is what I was doing before, which is why my Margin was off. Fixed that now, cheers.

I presume generally for calculating a specific sale, only calculating up to the Gross Profit is necessary, as non-fixed costs and overheads would be tough to work out, unless an average is used, and that won’t always be possible. I presume save the Net Profit calculations just for the monthly totals?

Also following the deduction of Taxes from the Net Profit, what’s the final value called? (Net Profit After Tax?)

And yeah I noted about the registering, fortunately I’m just selling a few items I have and experimenting at the moment so I’ll be making bugger all profit. I’ll also only be buying recurring stock and performing the full financial calculations if I feel business is for me (rather than standard employment). I just feel it’s a good idea to practice and also fully understand what I’ll be in for if I take things further.

Very enlightening though, I understand a lot better now and it makes a lot more sense. Thankyou.


#6

Yes, I use the terms Income and Revenue interchangeably, because there’s no need to differentiate them. I use Amazon’s term for the money paid into my bank account, a disbursement. From an accounting point of view it’s simply moving money from one account to another.

Buying shipping through Amazon means it gets paid out of your ‘Amazon’ account. If you paid for shipping on a debit card it would be paid out of your bank account.

The main figures you’ll need are Income, Gross Profit (per item and a rough total), Profit Margin (per item and a rough average), and Net Profit.

It’s worth pointing out that there are two different but related things at play here:

  1. Per item calculations
    Income minus Cost per item, Amazon fees, postage, packaging which gives you a gross profit figure.
  2. Overall books
    Income minus all expenses, which gives you a net profit figure.

I keep my books using some bookkeeping software (currently GNUcash because it’s free), but I do the per item calculations on excel to work out whether an item could be profitable before jumping into it.

It’s the net profit figure that you’d pay tax on. I would call the resulting figure Net Profit after Tax. If you’re going to be registered as self-employed there’s no need to work out your tax manually. You could do a quick calculation but it won’t need including in your accounts, not that you need proper accounts anyway but it could help if HMRC investigate.


#7

Cheers Barry! That’s very enlightening. It’s the per item calculations I’m most interested in at the minute, but I’m going to log data for anything that sells and have a go at doing “Overall Books” too (even if I don’t need to submit anything). I’m wanting to get the general experience end-to-end to judge whether this is for me, or whether I should just stick with general employment, or try something else heh.

Your info has helped very much, I’ve sorted out my terminology now, and also corrected my Margin & Markup figures. Shame there’s so much contradictory info out there! Especially with the use of terms, which is where I was going wrong when trying to research.

For the Overall Books, I presume this is across ALL income / expenses to generate a total Net Profit overall? As I imagine that’s pretty tough to work out per sale due to several non-fixed costs.

I presume you don’t need to calculate tax yourself as HMRC do that for you, when you pass them the required information? (Income / Gross Profits / whatever). And then you use what you get back to get an idea of how much you’re in profit by overall? (Looking at Net Profit After Tax).


#8

It’s the concepts you need to understand rather than the terminology. Some of the terminology is quite fixed in its meaning but can vary depending on the situation, and some terminology doesn’t really have a standard definition at all.

For your books you need to account for all income and all expenses, which will generate your Net Profit. You might want to have a quick look at the GNUcash help pages as they’ll give you a good insight into double entry bookkeeping (where each transaction is effectively listed in two places):

  • Transfer between accounts: From and to accounts (e.g. Assets:Accounts:Amazon to Assets:Accounts:Bank Account)
  • Expenditure: Classification of expenditure (e.g. Expense:Admin:Stationery) and funding source (e.g. Assets:Accounts:Bank Account)
  • More expenditure: Classification of expenditure (e.g. Expense:Travel:Public Transport) and funding source (e.g. Liabilities:Credit:Tritivum Company Credit Card)
  • Income: Classification of income (e.g. Income:Amazon:Sale) and destination (e.g. Assets:Accounts:Amazon)
  • More income: Classification of income (e.g. Income:Compensation:Courier) and destination (e.g. Assets:Accounts:Bank Account)

You give HMRC your income and expenditure figures then they work out how much tax and NI you need to pay. There’s a longer version of the form where you can give them a breakdown of your expenditure but I’ve always just given them income and expenditure totals and kept records of how I arrived at those totals.

I wouldn’t worry about working out how much tax HMRC will take. If someone says they earn £35k in a job then that’s before tax. They don’t usually give a post-tax figure :slight_smile:

If you’re wanting to really make a go of it I’d work through a few different product options (I’ve found AmazeOwl quite good for finding potential new products), stock up on them and send a smallish amount (e.g. 10 units of each) into an Amazon warehouse. If you’re buying products to sell under your own brand you’ll need to register with GS1 for some barcodes. Don’t buy barcodes on eBay because Amazon is starting to reject them.


#9

Yeah a LOT to understand! It’s why I’m experimenting and trying to get an idea of what I’m in for, before jumping in with both feet and actually doing it heh. I’ve always just worked as an employee up to now.

I have single and double-entry bookeeping on my notes to research for later, I get the basic gist though cheers! Makes sense to ensure all accounts are balanced.

Yeah I heard you only need to give them a breakdown if you get audited. What sort of records do you keep? Just a list of transactions / dates / references etc, or do you keep physical or scanned copies of receipts for the whole year? This is another thing I have on my list to fully research.

That’s true, but it helps to have an idea in advance so you know if it’s enough to live on and pay all your bills! (Home ones), Though I presume you just go with a general idea, same as if I was looking at a pre-tax salary of a job I was applying for, yes.

Cheers for the AmazeOwl link, one of the irritating things about Amazon and others is you can generally only go off the feedback, so it’s hard to judge overall sales. The plan at the moment for me if this actually goes well is to purchase products from abroad (I have family ties in a country where stuff is cheap, and no import duties), and then yes look into building up a brand etc. For the moment though, just an idea of “can I actually sell anything, and how much work is involved in doing so, (including Admin)” is the thing I’m wanting an idea of.


#10

Incase HMRC investigate I’ve kept:

  • All receipts/invoices
  • Summary output from GNUcash for the relevant period
  • A sheet that lists all sources of income (e.g. employment), the tax already paid, the summary from self-employment etc
  • Documentation from employers (payslips, P60, P45, P11D etc)
  • A copy of the tax return

Here’s a link that you can use to estimate sales: https://www.junglescout.com/estimator/

I’d be careful with this. If it’s outside the EU you’ll probably at least need to pay VAT on import. If you provide an incorrect value on the documentation (or ask your supplier to so) to keep it under the threshold then it would be a criminal offence and HMRC financial penalties alone can be very severe, not even including the potential for prosecution.

If it’s within the EU then you’ve got Brexit to consider as any business you establish based on importing might not be that sustainable in the longer term.


#11

Cheers, I presume keeping a scanned copy of the receipts etc is easier than a huge cabinet full heh. Do you keep just the data for the year you need, or literally everything since the beginning of time? (With employment I’ve always kept my payslips and P60s etc going way back since I started).

Yeah as to the duties, it’s outside the EU in a least developed country so standard import duties would be 0% under the Everything But Arms initiative. However I may still have to pay 3% “Third Country Duty” and likely 20% VAT also. A hefty chunk! Especially with the actual costs of import. Must be possible somehow though, that’s something I’ll be looking into fully once I’ve had a go at whether I can actually manage to sell just a few things. As you mentioned, Brexit could change a lot of that, which is why I haven’t delved into that area yet other than a cursory look. It will probably be a while till I’m ready to start an actual business and bring in stock for real.


#12

I think HMRC are allowed to go back 7 financial years so I’ve found it easier to keep everything. When you register for VAT your receipts/invoices all need to be available electronically. It’s usually best not to register for VAT until you really need to (£85k turnover in previous 12 months, or expected £85k turnover within the next month).


#13

Yeah I saw that. That will be a looooong while off heh, if I even get going at all…

But alright then, makes sense to just scan and electronically archive everything then. Makes sense.

Thanks a lot Barry, got a LOT to think about. I’ve saved those links for later reference too, cheers.


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