Cash accounting records income when money hits your account and expenses when you pay them. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when cash actually moves.

For online sellers, this distinction matters more than most businesses because of how marketplaces and inventory work.

If you sell on Amazon, you might ship 50 orders this week but won’t see that money for two weeks when Amazon runs its next settlement. Under cash basis, those December sales paid out in January show up as January revenue. Under accrual, they count when you actually shipped the product in December. Same goes for Shopify Payments, Etsy deposits, and any other platform with delayed payouts.

Inventory is where the accounting method really starts to matter. Under cash basis, you might buy $15,000 in inventory in October, sell $8,000 worth in November, and your books show a big loss in October followed by inflated profit in November. That doesn’t reflect what actually happened in your business.

Accrual accounting matches the cost of inventory you sold against the revenue from those sales. You see real margins on what you actually moved, not distorted numbers based on when you happened to restock. For e-commerce businesses trying to understand which products are profitable and which ones aren’t worth reordering, this matters a lot.

Most small online sellers can legally use either method for taxes. The IRS requires accrual for businesses with inventory exceeding certain revenue thresholds, but that limit is around $29 million in average gross receipts. If you’re under that, you have a choice.

Cash basis offers some tax timing advantages. Stock up on inventory in December and you get the expense deduction this year. Under accrual, you don’t get the deduction until you actually sell that inventory.

The practical answer for most sellers is a hybrid approach. Use cash basis for your tax returns because it’s simpler and gives you some timing flexibility. But track inventory and cost of goods sold properly so you understand your true margins. This isn’t complicated to set up, but it does require categorizing purchases correctly and reconciling inventory regularly.

A Scottsdale bookkeeper familiar with product businesses can configure your books so they work for both purposes. The goal is having numbers you can actually use to make decisions, not just numbers that satisfy the IRS. When you can see real profit by product or sales channel, you make better buying decisions and stop wondering why your bank account doesn’t match what you thought you earned.