Amazon FBA cost tracking for UK e-commerce sellers: practical Xero VAT and SKU-level profitability

Understanding Amazon FBA Cost Tracking for UK Sellers

The Amazon deposit lands in your bank account, but the number rarely makes sense. It does not match your gross sales, and the accompanying report is a maze of fees, charges, and adjustments. For a growing UK e-commerce brand, this gap between gross sales and the net deposit is where profit quietly leaks away. Without a clear system for tracking Amazon FBA costs, you are flying blind on your most critical metrics: product profitability and cash flow.

Learning how to record Amazon FBA fees in your accounting software is not just a bookkeeping chore; it is a foundational business process. An inaccurate understanding of your costs can lead to poor pricing decisions, wasted advertising spend, and a distorted view of your company’s financial health. This guide provides a practical, three-part framework for UK sellers using Xero to tame their Amazon data, stay compliant with HMRC, and finally understand the true profitability of every product they sell.

Decoding the Amazon Settlement Report: Your Source of Truth

Before you can properly account for the fees, you must understand where they come from. The Amazon settlement report, specifically the Date Range Summary, should be treated as a mini profit and loss statement for a given period. It tells a clear story, starting with your total revenue and then subtracting all the costs Amazon incurred on your behalf to generate that revenue.

Your net deposit is simply the result of this equation: Gross Sales - Refunds - Amazon Fees = Net Deposit. The complexity lies within the 'Amazon Fees' category. While there are dozens of potential line items, they generally fall into a few core buckets. The most significant are often called the 'Big Three' FBA costs:

• Referral Fees: The commission Amazon takes for each sale. Amazon Referral Fees are typically between 7% and 15% of the selling price.
• Fulfilment Fees (FBA): The cost to pick, pack, and ship your item from an Amazon fulfilment centre to the customer. This varies based on product size and weight.
• Storage Fees: The monthly cost for storing your inventory in their warehouses, calculated based on the volume your products occupy. This is a key part of FBA storage charges UK sellers must monitor.

Beyond these, your report will also show other deductions, such as advertising costs (PPC), return processing fees, and other adjustments. Understanding this structure is the first step in effective e-commerce bookkeeping for Amazon, as it clarifies why the cash you receive is always less than the revenue you generated.

Part 1: How to Record Amazon FBA Fees in Accounting Software

Manually reconciling every single transaction from Amazon is not a scalable use of a founder’s time. A more pragmatic approach is using the Date Range Summary report to create a single summary journal entry in Xero for each settlement period. This groups all sales, refunds, and fees into one clean, organised entry that matches the bank deposit exactly.

Step-by-Step Guide to Creating the Journal Entry

Follow this process to accurately record your Amazon FBA fees in accounting software like Xero:

1. Download the Report: In Seller Central, go to Reports > Payments > Date Range Reports. Generate a summary report that corresponds to the exact period of your settlement.
2. Create a Manual Journal: In Xero, navigate to Accounting > Manual Journals and create a new journal. The goal is to make the debits and credits balance, with one line item that perfectly matches the cash deposit to your bank account.
3. Structure the Entry: Instead of posting the deposit as a single revenue line, you will break it into its constituent parts: gross sales, refunds, and the various fee types. This gives you a true picture of business performance.

Example Journal Entry Breakdown

To correctly reflect the transaction, your summary journal entry in Xero should be structured with the following lines. In this simplified example, we assume gross sales of £10,000.

• Credit to Revenue Account: Post total gross sales to your sales account. In this case, a credit of £10,000.
• Debit to Sales Returns: Account for any customer refunds during the period. Here, that is a debit of £500.
• Debits for Amazon Fees: Create separate debit entries for each major fee category to track your Amazon seller fees breakdown. For instance: £1,500 to 'Cost of Goods Sold: Referral Fees', £2,000 to 'Cost of Goods Sold: FBA Fees', and £200 to 'Expense: FBA Storage Fees'.
• Debit to Bank Account: This is the final and most crucial line. It must match the exact net deposit received from Amazon. In this scenario, that is a debit of £5,800.

When balanced, the total debits (£500 + £1,500 + £2,000 + £200 + £5,800) equal the total credits (£10,000). This summary method provides 95% of the financial clarity most businesses need for a fraction of the effort.

Part 2: Managing FBA Fees and VAT: The UK Reverse Charge Mechanism

For UK Amazon sellers, there is a critical VAT compliance step that is often missed when managing FBA costs. The key issue is that your FBA services are not supplied from the UK. For most UK sellers, Amazon's FBA fees are supplied from an EU entity, such as Amazon Services Europe S.à r.l. in Luxembourg. According to HMRC, fees for services from an EU entity to a UK VAT-registered business require the use of the reverse charge mechanism for VAT.

So, what does this mean in practice? Instead of Amazon charging you UK VAT on its fees, you must account for it yourself. Under the reverse charge, you act as both the supplier and the customer for reporting purposes. You record the VAT on your VAT return as if you had charged it to yourself, and then you reclaim that same amount as input VAT, subject to normal rules. The net effect on your VAT bill is typically zero, but the reporting is mandatory for compliance.

Failure to apply the reverse charge correctly is a common error in UK Amazon seller accounting and can lead to compliance issues. When you file your VAT return, the reverse charge must be reported in Boxes 1, 4, 6, and 7. Thankfully, most modern accounting software, including Xero, has a specific tax rate setting (e.g., 'Reverse Charge Expenses (20%)') that handles these postings automatically, ensuring your VAT return is correct.

Part 3: From Clean Books to Smart Decisions: SKU-Level Profitability

Getting your bookkeeping right is the first step. The real value comes from using this clean data to make better decisions. The most common mistake is evaluating product performance based only on a theoretical margin (Sale Price - Supplier Cost). This approach ignores the significant, variable costs of selling on Amazon.

To understand true profitability, you must calculate the contribution margin at the individual SKU level. This requires moving beyond your supplier cost to calculate your 'Amazon Landed Cost', which includes all the variable fees required to get the product to the customer. A primary component here is the FBA fulfilment fee, which can vary dramatically between products.

Calculating True Contribution Margin Per SKU

What founders find actually works is building a simple model in a spreadsheet that pulls data from their accounting system and Amazon reports. Let's walk through an example:

• Start with the Sale Price (A): This is the price the customer pays, for example, £50.00.
• Subtract the Supplier Cost (B): The cost of one unit from your supplier, say £10.00.
• Deduct the FBA Fulfilment Fee (C): The specific pick, pack, and ship fee for this SKU, which might be £8.00.
• Deduct the Amazon Referral Fee (D): Typically a percentage of the sale price. At 15% of £50.00, this is £7.50.

The resulting Contribution Margin (A - B - C - D) is £24.50. This means your Contribution Margin Percentage is 49% (£24.50 divided by £50.00), giving you a far more accurate view of product performance.

This calculation reveals which products are your true profit drivers and which might be underperforming or even losing money after all FBA costs are considered. This insight is essential for making informed decisions about pricing, advertising spend, inventory replenishment, and even which products to discontinue.

Practical Takeaways for UK Amazon Sellers

For UK-based Amazon sellers, gaining control over FBA cost tracking is not optional. It is fundamental to building a sustainable e-commerce business. The process can be simplified into a repeatable monthly routine that moves you from confusion to clarity.

First, use the summary settlement report as your source of truth, not individual transactions. Second, implement the summary journal entry method in Xero to keep your books clean and reconciled. Third, ensure you correctly apply the VAT reverse charge for FBA fees to remain compliant with HMRC. Finally, use that accurate data to move beyond basic bookkeeping and analyse true SKU-level profitability.

This disciplined approach transforms your accounting from a historical record into a forward-looking tool for making smarter decisions on pricing, inventory, and growth. Find detailed guidance in our Inventory & Fulfilment Cost Accounting hub.

Frequently Asked Questions

Q: Why can't I just book the Amazon deposit as revenue?
A: Booking the net deposit as revenue overstates your profitability and understates your expenses. It hides critical costs like referral and fulfilment fees, giving you a dangerously inaccurate view of your financial performance and preventing you from calculating true product margins.

Q: Do I need special software for tracking Amazon FBA costs?
A: While dedicated e-commerce accounting apps can automate the process, it is not strictly necessary to start. You can effectively manage FBA cost tracking using standard software like Xero by creating summary journal entries from Amazon's Date Range Summary reports, as outlined in this guide.

Q: How does the VAT reverse charge on Amazon fees affect my cash flow?
A: The VAT reverse charge mechanism typically has a neutral effect on your cash flow. You simultaneously account for the VAT as both a charge and a reclaim on the same VAT return. While no money changes hands, correct reporting in boxes 1, 4, 6, and 7 is a mandatory HMRC compliance step.