Accounting
What Is Cash vs Accrual Basis Accounting?
Cash basis books revenue and expenses when money actually moves, while accrual basis books them when the economic event happens, which changes what your P&L tells you. Accrual matches revenue to the cost that produced it, so a $300K January inventory pre-order shows as a balance-sheet asset rather than crushing January profit. Brands under $1M with simple inventory can stay on cash basis, but accrual becomes required above $3M revenue or when raising capital, and the IRS mandates it above a $27M trailing 3-year average.
There are two ways to record revenue and expenses. Cash basis books transactions when money actually moves. Accrual basis books transactions when the economic event happens, regardless of when money moves. The choice fundamentally changes what your profit and loss statement (P&L) tells you about your business.
The mechanical difference
You ship a $1,000 order on March 28. The customer's card settles April 3. You paid your supplier $400 for that product on February 15.
- Cash basis March: $0 revenue (cash hasn't arrived). $0 March Cost of Goods Sold (COGS, paid in Feb).
- Cash basis April: $1,000 revenue (cash arrives). $0 COGS (already booked in Feb).
- Accrual basis March: $1,000 revenue (sale was earned). $400 COGS (matched to the sale).
Cash basis distorts your monthly results. Accrual aligns revenue with the cost of producing it.
A worked example: why accrual matters for ecommerce
A DTC brand pre-orders $300K of inventory in January for a March product launch. Under cash basis, January looks awful (huge expense, no revenue). Under accrual, January shows the inventory as an asset on the balance sheet and only books the COGS when the product actually ships. The operating story is unchanged month to month.
When to switch from cash to accrual
- Under $1M revenue, simple inventory: cash basis is fine
- $1 to $3M revenue, growing inventory: convert during the year
- $3M+ revenue, raising capital, or planning an exit: accrual is required
- Above $27M trailing 3-year average: the IRS requires accrual for tax
For monthly-close discipline, see the 2026 KPI Benchmark Report on close cadence and Financial Planning & Analysis (FP&A).
The most common mistake
Staying on cash basis past $5M revenue because it's "simpler." The $5M+ brand is making inventory-commitment, pricing, and channel decisions on data that's 30 to 90 days delayed and randomly misallocated. Decision quality degrades exactly when the stakes start getting higher.
Frequently Asked Questions
why do most ecom cfos prefer accrual?
Because accrual matches revenue to the costs that actually produced it. Cash basis distorts monthly comparisons and produces wrong-looking trends.
is cash basis ever okay?
Pre-revenue or micro-stage brands with minimal inventory and AR. Above $5M revenue, switch to accrual.
can i use cash basis for taxes and accrual for management reporting?
Yes, and many brands do. Cash on the tax return, accrual for management reporting. Two sets of books, both legitimate.
Related Terms
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
Need a CFO to plan the cash-to-accrual conversion? Talk to a CFO.