An accounting method that records revenue when earned and expenses when incurred, regardless of when cash actually changes hands. Required by GAAP for most businesses above a certain size threshold.
Understanding Accrual Accounting
Accrual accounting is the standard method required by Generally Accepted Accounting Principles (GAAP) for businesses that exceed a certain revenue threshold. Under this method, revenue is recognized when it is earned — for example, when an order ships — and expenses are recorded when they are incurred, regardless of when payment is actually received or made.
This approach provides a more accurate picture of a company's financial health at any given moment because it matches income with the expenses that generated it within the same reporting period. For ecommerce sellers, this means recording a sale on the date the order is fulfilled, even if the marketplace doesn't deposit the funds for another two weeks.
While more complex than cash-basis accounting, accrual accounting is essential for businesses seeking outside investment, applying for loans, or preparing for an audit, because it presents financials in accordance with universally recognized standards.
Why It Matters for Ecommerce
For ecommerce sellers, accrual accounting prevents misleading cash-flow snapshots. Marketplaces like Amazon and Shopify batch payouts every two weeks, so cash-basis books would show zero revenue on fulfillment days and large lump sums on payout days. Accrual accounting smooths this out by recording revenue when orders actually ship, giving you an accurate view of profitability per period.
Practical Example
Suppose you sell 200 units on Amazon between March 1-15, generating $5,000 in gross sales. Amazon deposits $4,200 (after fees) on March 17. Under accrual accounting, you record the $5,000 revenue across March 1-15 when orders shipped, and the $800 in marketplace fees as expenses in the same period — even though the cash didn't arrive until March 17.
Related Terms
Cash-Basis Accounting
An accounting method that records revenue and expenses only when cash is received or paid. Simpler than accrual accounting and commonly used by small businesses and sole proprietors.
AccountingAccounts Receivable (A/R)
Money owed to a business by customers for products or services delivered but not yet paid for. Recorded as a current asset on the balance sheet.
AccountingAccrued Expense
An expense that has been incurred but not yet paid or recorded in the accounts. Recognized under accrual accounting to match expenses with the period in which they were generated.
Related Tools
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