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Hey fellow scavengers! In all the forum discussions of accounting, taxes, inventory management COGS, etc, I find no mention of accounting method, ie: Cash vs Accrual. I’m new this year to Business, which I guess is obvious from this post, and I see varying views on the internets as to the best accounting method for small-biz online selling. Yes, I will be seeking advice from an accountant, but I’d really appreciate if some of you veteran sellers would weigh in on your chosen method. Thanks, Paul
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I wonder how many of us even know what that is, given that it hasn’t been mentioned here since I joined over a year ago. I certainly didn’t know – just looked it up now. I just do accounting according to how GoDaddy Bookkeeping does it. For eBay final value fees, they seem to do it on an accrual basis – I only actually pay the fees once a month, but in GD bookkeeping each FV fee is recorded on the date that the buyer paid for the item. But when I purchase things for the business, I do it on a cash basis – meaning, I record purchase on the date I paid for it, even if I don’t receive the item until a week or two later.
The accountant that does my taxes has never brought up this topic. Is there a reason why it’s important for me to think about?
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Well, I’m still on the learning curve of taxes and accounting, but it seems businesses have to adhere to one or the other method, the choice being formalized on the first tax filing (I ain’t there yet), and requires a formal appeal to the IRS to change method thereafter, but presumably bookkeeping and record keeping benefit from a choice at the earliest opportunity.
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It’s probably bc eBay businesses tend to be small and don’t have the same sorts of expenses that justify accrual systems. Most of us operate on cash. eBay’s accrual is really just one month’s fees, and it is deducted immediately from our cash flow. The only true “accrual”, imho, is inventory, for those who operate on a COGS basis. I find it easier to just write off my purchases as expenses, so my business is entirely cash-based.
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Amatino, technically you can’t do that. You can’t take credit for the COGS until item is sold.
In a perfect world you will keep a spreadsheet of all inventory, listed or not listed, with the associated cost as well as the date and place purchased. Then you would cross reference the ebay item ID as they are listed so you can reconcile against sold items at the end of the year.
At the least, keep a running spreadsheet of your LISTED inventory COGS so you can reconcile your inventory against sold COGS and remaining inventory at the end of the year.
At the very very least, keep a running spreadsheet of sold items COGS so you only report actual COGS at the end of the year.There have been MANY discussions of accounting here on the forum with very good data input. J&R also did an interview with an accountant who helps ebay sellers last year as well.
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Thanks for the input, Retro. I didn’t mean to imply there was little discussion of accounting, because, you’re right, there has been plenty, including some very knowledgeable folks (including the enjoyable interview with R&J’s CPA), but before I started this thread, a forum search for “accrual” came up empty. Maybe the choice of accounting method is mind-numbingly obvious, and is implicit in the discussions that do take place. If that’s the case, folks, please chime in. Or are the peculiarities of the two systems just built into the software of GDBK, Quicken, etc, so as to be of no daily concern.
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Cash vs Accrual accounting does not mean what most people think it means. In accounting theory income and expenses are recognized when they are earned/incurred. This is the accrual method.
For example, a business has a sale on June 29 for $100, but receives the cash on July 3rd.
When do you recognize the income ?Same thing for expenses especially recurring expenses. For example, you pay ebay $150 a year for an ebay store. Do you recognize the entire expense when you pay it or do you recognize 1/12 every month ?
Returns can be an issue, but returns are accounted for on the income statement (P/L statement) and subtracted from sales to come to a “net sales” number. Returns can also be calculated as a percentage of sales this way and if your returns are very high it needs to be investigated.
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Thanks, Gompers. I (mostly) understand the difference between the two systems; I’m just curious which is the predominant method eBay sellers are using, and why their choice works (or doesn’t work) for them.
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The predominate method is accrual based accounting. Cash based accounting is good for businesses that do not have inventory. Ebay sellers have inventory although that alone wouldn’t prevent an ebay business from using cash basis accounting.
Cash basis accounting allows one to defer income and/or expenses into other periods which is why the main reason the IRS does not allow businesses to switch between the two.
Cash basis may make sense for a new business that has low revenue, but if the business grows and starts making significant revenue the IRS is going to require it to switch to accrual basis. At that point most likely all previous tax returns will have to be restated and unless you are an accountant yourself that’s going to be expensive.
The only practical advantage cash based accounting has is that it’s easier to manage cash flow.
I would also assume every major consumer accounting program is all accrual based.
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I would probably advise you to get a consultation from professional to get to know about the pros and cons of both, cash and accrual accounting method. This will help you to know the difference between the two and you can choose the best one for your business. Browse on the source (http://www.bsmaccounting.com/taxservices.php) to get a genuine consultation from the experienced team.
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You are required to use the accrual method for the inventory portion of your business. If you are selling on ebay, you should be tracking inventory and deducting the related COGS as you sell an item. If you are deducting your purchases as expenses, this is incorrect according to IRS rules. There is no choice in the matter.
The choice of accrual vs. cash pertains to the rest of your business expenses, aside from inventory. Accrual is more complicated and less intuitive for the average person, and so generally people choose it only if there is a compelling reason to do so…for example, if you carry significant payable and receivables over from year to year and using the cash method would grossly under/overstate your income.
There are also situations where the accrual method is required, but they are specific in scope and/or at quite high levels of average income. These situations are unlikely to apply to most readers of this forum, but of course you should always consult a qualified accounting professional to advise you about your own business and tax situation.
If you do change your accounting method, there are specific rules about doing it and application forms you must complete.
There is some incorrect information in the responses above, so I would again reiterate that you should consult a qualified accounting professional, such as a CPA.
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Thanks, again, to all for the helpful info. Ultimately, I had to wade into the IRS pubs (as everyone should) and determine the requirements for myself.
Nevertheless, Junque: there is an IRS exception to the use of accrual-method accounting for small businesses that carry inventory, which I’ve posted on here:
As I mention in my “correction” post this morning, I am still fuzzy on the correct implementation, and do not use the exception myself, but it does exist (or did in 2017). I welcome all to weigh in on my posts, to help clarify the subject for folks starting out, though “get an accountant” is certainly the safest (and quickest) advice for beginners.
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Just in the interest of being a beginner… it seems like the best route to go is to set up a solid system for Accrual and not do cash? It seems like it will just be easier down the road even if your accountant does’t decide to use it in that way. I would hate to have to go back to previous years tax returns.
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Accrual, yes. But that also means using specific identification inventory, unless you’re selling multiple indentical items.
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Ashana: To be clear, yes, you need to do accrual for your inventory. All other costs (supplies, shipping, fees, etc.) should be on cash.
To do accrual for inventory, it is a simple calculation for the IRS. At the end of each year, you need a total value of your existing inventory. Then your COGS is:
Total Inventory Value from Prior Year + All Cash Purchases in Current Year – Total Inventory Value from Current Year.
To Luftmentsh point, you need to have a system to reduce your inventory value at the time of each sale. This will get you your inventory value at the end of the year.
PS – At least once a year, do an inventory to make sure your records are accurate. You can either do a full inventory all at once, or do a cycle count. Cycle counts are easier. For us, I can choose a couple of drawers and compare the drawer to our records. Do a few each week, and everything is done at least once per year.
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