What accounting method should Amazon sellers use?
Most Amazon sellers can choose either cash or accrual accounting. For the majority of small and mid-sized sellers, cash basis works well for tax purposes while still requiring you to track inventory properly.
The traditional rule said businesses with inventory had to use accrual accounting. That changed with the Tax Cuts and Jobs Act. If your average annual gross receipts are $27 million or less, you can use cash method even with inventory. Most Amazon sellers fall well under this threshold.
Cash basis means you record income when Amazon deposits funds into your bank account and expenses when you pay them. This is simpler to manage and often results in better tax timing since you’re not paying tax on revenue you haven’t collected yet. For e-commerce sellers doing under $1 million annually, cash basis keeps things manageable while still providing useful financial information.
Accrual basis means recording sales when they happen and expenses when incurred, regardless of when money moves. You sold $5,000 worth of products this month but Amazon hasn’t paid you yet? That’s still December revenue on accrual. You received inventory in December but won’t pay the supplier until January? That’s a December expense.
For growing Amazon businesses, accrual provides a more accurate picture of profitability. When you’re selling $50,000 per month and carrying $100,000 in inventory, cash basis can make your financials misleading. A big inventory purchase tanks your profit for that period even though it’s really an asset, not an expense. Accrual accounting combined with proper inventory tracking shows your true margins.
Amazon’s payment structure adds complexity. You receive settlements every two weeks, but those settlements include sales from the previous period minus fees, refunds, and reserves. Reconciling Amazon settlements to your books requires understanding what’s in each payout regardless of which accounting method you use.
If you’re seeking investors or preparing for acquisition, accrual is typically expected. Investors want to see revenue matched to the period it was earned and understand your true cost of goods sold. Cash basis financials don’t give them that clarity.
Even on cash basis, track your inventory separately for cost of goods sold. Knowing your actual product margins matters for pricing decisions whether the IRS requires it or not. Working with an Andover, MA bookkeeper who understands e-commerce can help you set up the right structure from the start, with proper integration of Amazon reports and inventory costing that shows which products are actually profitable.
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