Most Shopify store owners have two choices for their accounting method. Cash basis is simpler and usually legal for small stores. Accrual basis takes more work but gives you a clearer picture of whether you’re actually making money once you’re carrying meaningful inventory.

Cash basis means you record income when money hits your bank account and expenses when you pay them. If Shopify deposits $2,000 on Tuesday, that’s revenue for that week. If you pay for shipping supplies on Friday, that’s an expense for that week. Most small businesses use cash basis because it’s easier to track and aligns with how they think about money coming in and going out.

Accrual basis works differently. You record revenue when you earn it and expenses when you incur them, regardless of when money actually changes hands. Sell $5,000 worth of product in December but Shopify doesn’t deposit until January? The revenue belongs to December. Receive inventory in November but pay the vendor in December? The expense belongs to November.

For e-commerce businesses like Shopify stores, accrual accounting does something important. It matches your cost of goods sold to the revenue those products generate. Sell 100 units in March, and the cost of those 100 units shows up in March too, regardless of when you paid for the inventory. This gives you accurate gross margins by period instead of the distorted picture you get when large inventory purchases hit your books in months that don’t align with your sales.

The IRS allows small businesses under $27 million in average annual gross receipts to use cash basis even with inventory. So you’re probably not required to use accrual. But “allowed” and “should” aren’t the same thing. If you’re reviewing your numbers to make business decisions, you want those numbers to reflect reality. Cash basis can make a profitable month look unprofitable based solely on payment timing.

Shopify adds another layer. Payments don’t hit your account immediately. Refunds and chargebacks can come days or weeks after the original transaction. If you’re selling on multiple channels with different payment processors, the timing gaps multiply. Accrual handles this cleanly because you’re recording sales when they happen, not when Shopify decides to release your funds.

For most Shopify stores, starting with accrual makes sense even if you’re small. The setup takes a bit more work upfront, but your financial reports will actually tell you something useful about your business performance. If you’re already using cash and your store is growing, switching to accrual before things get complicated is easier than doing it later when you have years of transactions to convert.

Whatever method you choose, make sure your books are set up correctly from the start. A Scottsdale bookkeeping service familiar with e-commerce can configure your accounting software to track inventory and margins properly. Changing accounting methods after a few years involves IRS paperwork and potentially restating prior financials. Getting it right the first time saves hassle down the road.