Choosing an accounting method: Cash vs. accrual accounting

Cash accounting and accrual accounting are two distinct methods for tracking a business’s income and expenses. Cash accounting records money when it moves, meaning you record a sale only when the customer’s payment actually arrives in your bank account, and you record an expense only when you pay the bill. Accrual accounting records business activity when it occurs, so you recognize revenue when an order is received and expenses when they are incurred, even if cash has not yet exchanged hands.

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For an e-commerce business, these differences can be significant. Imagine you sell a flashlight for $100 on September 30 and ship it on October 2. With the cash method, you record the $100 only when the customer’s payment clears. With the accrual method, you record the $100 when you ship the flashlight because that is when the sale is considered earned. If you purchased 200 flashlights in August, the cash method would show the full inventory purchase as an expense in August, while the accrual method would spread the cost out by moving each flashlight's cost from inventory to cost of goods sold only when it is sold. This allows the expense to be matched with the related revenue. The same idea applies to fees. If your platform charges $39 at the end of the month, the cash method records it when payment clears, but the accrual method records it in the month the service was used.

Choosing an accounting method is important because it directly affects the accuracy of your financial reports. Accrual accounting gives a clearer picture of profitability by pairing revenues with the expenses that generated them. In contrast, cash accounting provides a simpler snapshot that mirrors your bank balance and is often easier to manage. Accrual accounting is also preferred by lenders, investors, and growing businesses because it supports more detailed metrics and long-term planning. Your choice also determines when income and expenses appear on your tax return, so it is important to select the method that best fits your business model and goals.

Once you choose an accounting method, it must be used consistently. Consistency ensures that your reports are reliable, comparable across periods, and compliant with accounting and tax rules. Changing from one method to another usually requires professional guidance and formal adjustments, so it is best to make the right choice early and apply it continuously as your business grows.