Accrual Accounting for Ecommerce: The Basics

March 3, 2025
Written by Geoff Gualano, Head of Marketing at A2X
Reviewed by Cyndi Thomason, President of bookskeep

Accrual accounting is recognized as the preferred accounting method for ecommerce businesses.

If you’re new to ecommerce accounting (or accounting in general) and are wondering: What is accrual accounting, and why is it preferred over cash accounting? You’ve come to the right place.

This guide will cover the basics of accrual accounting for ecommerce.

This guide has been reviewed by Cyndi Thomason, President of bookskeep, who works with scaling ecommerce businesses every day to help them achieve accurate financials.

Key takeaways:

• Should you use full accrual accounting? Accrual accounting is the most accurate method for tracking financial performance, making it ideal for ecommerce businesses looking to scale, secure investments, or comply with regulations. However, smaller sellers who don’t require full accrual can start with Modified Cash accounting for a simpler yet effective approach to understanding profitability.
• Modified Cash accounting offers a practical middle ground. By using accrual accounting for revenue and inventory while keeping operating expenses on a cash basis, Modified Cash accounting provides better profitability insights without the full complexity of accrual accounting. This method is a great stepping stone for growing ecommerce businesses that need more accurate financial tracking without unnecessary administrative burden.
• Transitioning to accrual accounting unlocks growth opportunities. While not always required, accrual accounting is essential for businesses seeking investment, loans, or long-term scalability. It ensures accurate financial reporting by aligning revenue and expenses with when they occur, rather than when cash changes hands. Using tools like A2X and accounting software can simplify the transition and improve financial accuracy.

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Cash vs. modified cash vs. accrual accounting for ecommerce

There are three primary methods of accounting:

1. Cash accounting
2. Modified cash accounting
3. Accrual accounting

To explore the three accounting methods in depth, watch this webinar with Cyndi Thomason, President of bookskeep, where she compares various accounting approaches for ecommerce and explains which method suits different types of online businesses best.

The key distinction between cash, modified cash, and accrual accounting lies in timing.

Cash accounting

• Records income and expenses when money changes hands, for both revenue received and inventory purchased.
• Provides a real-time view of cash on hand.
• Example: An ecommerce seller using Amazon would record sales only when settlements hit their bank accounts, while a Shopify dropshipper would (typically) receive revenue within a couple of days but pay suppliers immediately.
• Is best for small businesses with minimal delay between transactions and payments.

Modified cash accounting

• Combines elements of cash and accrual accounting:
  • Revenue and COGS/inventory are managed using accrual accounting to provide accurate product profitability insights.
  • Operating expenses on the P&L are not always handled through accrual, keeping things simpler for smaller sellers.
  • For example, an insurance policy costing $12,000 paid in April is recorded in full during that month instead of being spread out as a $1,000 monthly accrual.
• Provides a clearer picture of profit by aligning costs (e.g., inventory) with associated sales.
• Example: An Amazon seller would recognize $2,000 in sales when the product ships, aligning with accrual accounting principles. At the same time, they would adjust for $800 in inventory costs tied to those sales to accurately reflect a $1,200 profit.
• Is best for small to medium-sized ecommerce businesses that want a balance of simplicity and accurate profit tracking.

Accrual accounting

• Records income and expenses when transactions occur, regardless of payment timing.
• Focuses on value movement rather than cash flow.
• Example: Sales made on Amazon on June 5th are recorded on that date, even if the settlement arrives on June 10th.
• Required by the IRS for larger businesses and ideal for businesses with delayed payments.

Here are some of the pros and cons of each method.

Why accrual accounting is best for ecommerce

Ecommerce businesses often face unique challenges, such as delayed payouts, currency conversions, and platform fees.

Accrual accounting is recognized as the best method for ecommerce businesses because it ensures all transactions are accurately recorded and allocated to the correct periods.

Accrual accounting also offers several advantages for online sellers, such as:

• Accurate financial insights – Tracks deferred revenue (e.g., pre-orders) and expenses (e.g., advertising) in the appropriate period, giving a true picture of cash flow and profitability.
• Growth enablement – Provides investor-ready financial data needed for funding applications or scaling decisions.
• Forecasting ability – Helps predict cash flow needs and avoid deficits.
• Compliance – Certain businesses are required to use accrual accounting (more on this below).

When is accrual accounting required?

Accrual accounting is mandated for certain businesses to ensure accurate financial reporting and compliance with regulatory standards.

In the US, the primary criteria determining when a business must adopt accrual accounting include:

Regulatory compliance – Certain businesses must adhere to GAAP (Generally Accepted Accounting Principles, set by the Financial Accounting Standards Board in the US), which requires the use of accrual accounting to provide a true and fair view of financial performance. The IRS also mandates accrual accounting for businesses that have achieved scale ($25 million in revenue over 3 years).

Inventory considerations – Companies where inventory is a significant income-producing factor are typically required to use accrual accounting to accurately match income with the Cost of Goods Sold so they can understand their profitability at the gross margin level.

Seeking investment or loans – If you’re looking to sell your ecommerce business, or acquire investment or a loan, accrual accounting is usually necessary because it provides the most accurate business financials. Potential lenders, investors, and acquirers often rely on GAAP-based financial reporting to assess the true profitability and financial health of your business.

If you need help understanding if your business needs to use the accrual accounting method, contact one of the ecommerce accounting experts in the A2X Directory.

How to transition from cash to accrual accounting

We strongly recommend working with an ecommerce accounting professional to guide you through your transition from cash to accrual accounting.

Key accounting areas that might be impacted include:

• Accounts Receivable (AR): Record revenue when earned, not when cash is received.
• Accounts Payable (AP): Record expenses when incurred, not when paid.
• Inventory: Track inventory as an asset and recognize COGS when items are sold.
• Prepaid expenses: Allocate costs over the period they benefit rather than expensing them upfront.
• Deferred revenue: Recognize payments received in advance as liabilities until the goods or services are delivered.
• Accrued expenses: Account for expenses incurred but not yet paid, such as payroll or utilities.
• Opening balances: Adjust the Balance Sheet to reflect accrual-based assets and liabilities.

To make the transition to accrual accounting at an ecommerce business, you may need to do the following:

Complete any necessary administration – In the US, businesses required to switch from cash to accrual accounting due to changes in their status or revenue may need to file Form 3115 to request a change in accounting method. Talk to an accounting professional to determine if/when you need to do this.

Use accounting software – You can do accrual accounting without accounting software, but it can be very challenging and time-consuming. Without software, you’ll need to manually track accounts receivable, accounts payable, inventory, prepaid expenses, deferred revenue, and accrued expenses. Accounting software simplifies and automates many of these tasks, making accrual accounting much simpler (and more accurate).

Use A2X – A2X simplifies accrual accounting for ecommerce businesses by automatically categorizing and reconciling revenue, fees, and taxes from platforms like Amazon and Shopify, ensuring accurate financial records and seamless integration with accounting software. It saves time and reduces errors in tracking complex transactions.

Accrual accounting = growth and opportunities

Even if you’re not required to do accrual accounting – e.g., you’re just trying to figure out the best way to do accounting for your small online store – it’s a good idea to implement accrual accounting as soon as it’s economically feasible.

Why?

Accrual accounting is the preferred method because it provides a complete and accurate picture of financial performance, helping online business owners make informed decisions and plan for growth. However, if switching to accrual accounting isn’t feasible right now, Modified Cash accounting can serve as a practical interim solution. It allows growing businesses to track profitability more accurately by matching revenue with inventory and Cost of Goods Sold while keeping accounting practices simpler.

If your plans for growth involve investment, accrual accounting is necessary. By aligning revenue and expenses with the periods they occur, it builds credibility with investors, lenders, and potential buyers, ensuring long-term success and scalability.

A2X can help ecommerce businesses achieve accurate accrual accounting – try A2X for free today.