Cash vs. accrual: the fundamental choice

The two accounting methods differ in when a transaction gets recorded:

  • Cash-basis accounting records revenue when cash is actually received and expenses when cash is actually paid. Simple to understand and maintain, and common among smaller sellers.
  • Accrual-basis accounting records revenue when it's earned (e.g., when an order ships or a sale occurs) and expenses when they're incurred, regardless of when cash actually changes hands. This gives a more accurate picture of profitability in a given period, especially when there's a lag between a sale and the cash landing in your account (exactly the situation marketplace settlement cycles create — see How Marketplace Payouts Work).

Why the marketplace payout lag makes this a real decision, not just a technicality

Because marketplaces batch and delay payouts by a settlement period, a purely cash-basis view of your business can be misleading: a strong sales week might not show as "income" until weeks later when the payout lands, while heavy ad spend or a refund might hit your cash flow before the corresponding sale's payout has even arrived. Accrual accounting smooths this out by matching revenue and its related costs to the period the sale actually happened in, which is usually a more useful view for understanding whether a given month or week was actually profitable.

That said, cash-basis is simpler, and for a very early-stage or simple single-channel seller, the gap between the two methods may not be large enough to justify the added complexity. As revenue and channel count grow, most sellers benefit from moving to accrual (or at least a hybrid approach), and this is exactly the kind of decision worth a specific conversation with a tax professional or bookkeeper, since your accounting method also affects your tax return.

A starter chart of accounts for a marketplace seller

A chart of accounts is the categorized list every transaction gets sorted into. A reasonable starting structure for an ecommerce seller:

Revenue - Gross sales (by channel, if you want channel-level visibility) - Sales returns/refunds (contra-revenue) - Shipping income (if charged separately to customers)

Cost of goods sold - Product cost - Inbound freight/duties - Packaging directly tied to units sold

Operating expenses - Marketplace referral/commission fees - Marketplace fulfillment fees - Payment processing fees - Advertising (broken out by platform if you want that visibility) - Software/subscriptions - Shipping (outbound, not otherwise in COGS) - Contractor/employee payments - Professional fees (accounting, legal) - Business insurance - Office/home-office costs, if applicable

Other - Sales tax collected/remitted (a pass-through liability, not revenue or expense) - Reserve held by marketplace (an asset until released)

This structure lets your profit-and-loss statement actually show gross margin, operating expenses, and net profit as distinct, meaningful numbers rather than one blended figure.

Setting up the mechanics

  1. Open a dedicated business bank account and card — this alone prevents the majority of bookkeeping headaches.
  2. Choose accounting software appropriate to your stage (see Ecommerce Accounting Software Comparison) and connect it to your bank feed and, ideally, your marketplace sales data.
  3. Set up a clearing/holding account to properly reconcile marketplace settlements rather than booking bank deposits directly as revenue (see Reconciling Marketplace Payouts With Your Books).
  4. Establish a monthly close routine — reconcile bank and marketplace accounts, review the P&L, and catch anything miscategorized while it's still recent and easy to fix.

Common mistakes

  • Never formally choosing cash vs. accrual and ending up with an inconsistent mix by accident.
  • Using a single "sales" account for everything instead of separating COGS from operating expenses, making gross margin impossible to see at a glance.
  • Booking net marketplace deposits as revenue instead of reconciling gross sales and fees separately.
  • Not opening a dedicated business bank account, mixing personal and business transactions from day one.

Best practices

  • Decide your accounting method deliberately, with input from a bookkeeper or tax professional once revenue is meaningful.
  • Build your chart of accounts to separate COGS from operating expenses so gross margin is visible without extra calculation.
  • Close your books monthly, not just at year-end.
  • Revisit your chart of accounts periodically as the business adds channels, products lines, or complexity (like international sales or subscriptions).

FAQs

Do I have to pick one method and never change it? You can change methods, but it typically requires informing the IRS and can have tax implications in the transition year — this is a case where professional guidance is worth getting rather than switching casually.

Is cash-basis accounting "wrong" for a small seller? No — it's a legitimate, simpler method that many small businesses use. The tradeoff is a less accurate picture of period-by-period profitability when there's a lag between a sale and the related cash movement, which is common in marketplace selling.

How detailed should my chart of accounts be? Detailed enough to answer the questions you actually care about (channel-level margin, ad spend by platform, etc.) without becoming so granular that categorizing transactions becomes a burden. Start with the structure above and split out further only where you find yourself wanting more visibility.