Cash or accrual accounting: which should an online store use?

Under the cash method, you count income in the year you actually or constructively receive it, and expenses when you pay them.^[1] Under an accrual method, you generally report income in the year it is earned and deduct or capitalize expenses in the year they are incurred; the IRS says the purpose is to match income and expenses in the correct year.^[1]

For an online store the difference is not academic. A marketplace payout is not a sale: it is sales, less refunds, less fees, less any reserve the marketplace holds back, plus money that belongs to someone else, such as sales tax. And a supplier payment is not a cost of the month: it buys stock that may sell next month or next quarter. The example above takes the demo store's September both ways. Accrual shows a gross profit after fees of 31,425.45. Counting bank deposits against what was paid for stock shows 32,388.85, and the 963.40 gap is made of money that was never profit, money that was held back, and stock paid for but not yet sold.

Take the demo store's Amazon September. Accrual books record each part of the settlement on its own line. A deposit-based view records one number when the money arrives.

The cash view gets the deposit right but loses everything behind it: it understates sales, hides the fees and never shows the reserve Amazon still owes you. Timing also moves. An order on September 29 that pays out in October is September income in accrual books and October income in a cash view. On Shopify, the payout also carried 1,412.35 of sales tax and 600.00 of gift cards sold; accrual books hold both as liabilities, because they are owed to the state and to the customer. Matching these totals to a Form 1099-K is a separate reconciliation.

In September the demo store bought 24,890.40 of stock, freight and duty included, and sold stock that had cost 23,190.40. It paid suppliers 23,640.40 during the month and owed them 1,250.00 more at month end than at the start.

Accrual books put purchases into inventory, an asset, and move each unit to cost of goods sold only when it sells. The cash view charges whatever was paid. In September the gap is 450.00. In October it is much larger: the demo store pays a 12,000.00 deposit on a 40,000.00 holiday order. A cash view books all 12,000.00 as October cost before a single unit arrives, so October looks poor and November and December, when the stock sells, look far better than they are. Accrual books carry the deposit as an asset until the goods arrive and sell.

The cost of each unit should include freight and duty, which is landed cost, and which units count as sold first depends on your inventory method.

The IRS starting point for sellers is direct: generally, if you produce, purchase or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise.^[1] A hybrid is allowed, combining cash and accrual elements if the combination clearly reflects income and is used consistently, but if an inventory is necessary, purchases and sales still go on accrual, subject to the small business exception.^[1]

The small business taxpayer exception. You qualify if your average annual gross receipts for the 3 prior tax years are at or below the threshold and you are not a tax shelter.^[1] The threshold is $31 million for tax years beginning in 2025^[2] and $32 million for tax years beginning in 2026.^[3] A small business taxpayer can choose not to keep an inventory, but must still account for inventory in a way that clearly reflects income: either treating it as non-incidental materials and supplies, or following its treatment in an applicable financial statement or, without one, in its books and records.^[1] So even under the exception, how your books handle stock can shape the return.

Entity limits. A corporation other than an S corporation, a partnership with such a corporation as a partner, and any tax shelter generally cannot use the cash method; a corporation or partnership that is not a tax shelter and meets the gross receipts test can.^[1] Changing your method of accounting for inventory means filing Form 3115 with the IRS.^[1]

Which method goes on your return is a decision for your tax preparer. Books kept on accrual track receivables, payables and inventory separately, so they can give your preparer the figures for either answer.

1. 01

   Margin matches the month

   Sales are matched with the cost of the units that made them, so a restock month and a sell-down month show the same margin when the business has not changed.

2. 02

   Payouts become sales, fees and reserves

   Every settlement is split into its parts, so fees per channel are visible and the reserve a marketplace still holds is on the balance sheet.

3. 03

   Money held for others stays out of sales

   Sales tax collected and gift cards sold are carried as liabilities until they are paid over or redeemed.

4. 04

   Cash is still reported, separately

   A cash-flow statement explains every difference between profit and cash, so you see both numbers and why they differ.

The demo store's September shows why the last point matters: net income of 7,463.25, yet cash fell by 160.75, because the month also built stock, repaid a credit line and bought equipment. Accrual books show both facts side by side.

If your profit swings with your restock calendar, or your sales figure is really a total of bank deposits, the books are running on cash whatever the software setting says. Our monthly e-commerce bookkeeping keeps seller books on accrual every month: each payout split into sales, refunds, fees and reserves, purchases held in inventory until they sell, and, on our Growth and Scale plans, a cash-flow statement that explains the gap, so your tax preparer has clean figures for whichever method they file on.