What is Accrual accounting?

Why accrual accounting is the right method for Amazon sellers

Amazon pays on a rolling settlement cycle, typically every two weeks, and a single deposit can span two calendar months. Under cash basis, that deposit gets dumped into whatever month it arrives, smearing your revenue across the wrong periods and making month-over-month comparisons meaningless. Accrual accounting fixes this by recognizing each order's revenue, referral fee, FBA fee, and refund in the period the underlying event happened.

Accrual also forces you to match cost of goods sold to the revenue it produced. When you sell 500 units in June, the cost of those specific units belongs in June, even if you paid your supplier back in March. That matching principle is the whole point of accrual: it tells you the true margin on what you sold this month, instead of mixing in inventory purchases that haven't sold yet.

Refunds are the third leg. On accrual, a refund is recognized when it's issued, reversing revenue in that period, and often paired with a fee credit from Amazon. On cash basis, refunds just make some future deposit smaller and vanish into the noise. Sellers running cash books frequently can't answer a basic question like what their refund rate cost them last quarter, because the data was never recorded as refunds, only as smaller deposits.

• •Revenue is recognized at the point of sale, not at payout
• •Fees and refunds are booked in the period they occur
• •COGS is matched to the units actually sold, not units purchased
• •Inventory bought but not yet sold stays on the balance sheet as an asset
• •Monthly P&Ls become comparable and trend lines become trustworthy
• •Outside parties (lenders, buyers, CPAs) expect accrual financials

Accrual vs cash basis: a worked example

Say you ship $40,000 of orders in the last week of June, but the settlement doesn't deposit until July 5. On cash basis, June shows that revenue as zero and July looks inflated. On accrual basis, the $40,000 sits in June where it was earned, with the matching fees and COGS alongside it, and the July deposit simply clears a receivable you already recorded.

Push the example one step further with hypothetical numbers. Those late-June orders carry, say, $6,000 in Amazon fees and $16,000 in COGS. Accrual June shows $40,000 revenue, $16,000 COGS, $6,000 fees, and $18,000 gross profit, all in the month the selling happened. Cash-basis June shows none of it, and cash-basis July shows a $34,000 deposit with no COGS attached (you paid the supplier in March), making July look wildly profitable. Neither cash-basis month is usable for a decision.

This is also where a clearing account earns its keep. The Amazon settlement is booked in full at period-end, splitting out sales, fees, refunds, and reserves, and the bank deposit later nets against that clearing account. Done right, your reconciliation is clean and your gross margin is accurate to the period. Tools like BeanHawk automate this split so accrual-basis books reconcile to the penny without manual journal entries.

Now add a reserve to the picture, because Amazon usually holds part of each settlement back. If Amazon holds $2,000 of the June settlement in reserve, your July deposit is $32,000 instead of $34,000, and the $2,000 sits as a receivable until it releases in a later settlement. Accrual handles this naturally: revenue was already recognized in June, and the reserve is just a timing detail in the receivable. Cash basis has no vocabulary for it at all.

Here is the same scenario as an accounting journal entry example, using those hypothetical figures. Dated June 30, for the sales activity: debit Amazon clearing $34,000, debit Amazon fees expense $6,000, credit sales revenue $40,000. Also dated June 30, to move cost with the units sold: debit COGS $16,000, credit inventory $16,000. Then dated July 5, when the money arrives: debit bank $32,000, debit Amazon reserve receivable $2,000, credit Amazon clearing $34,000. Three entries, all balanced, and the clearing account is empty at the end. That pattern is the journal template you reuse every settlement; only the amounts and the fee categories change.

Modified accrual accounting and why most sellers can ignore it

Sellers sometimes encounter the term modified accrual accounting and wonder if they need it. Modified accrual is a governmental and fund-accounting concept used by public-sector entities to recognize revenue when it is both measurable and available; it is not the basis a private ecommerce business uses. For an Amazon or multichannel seller, the choice is simply full accrual versus cash basis.

The IRS does set rules on which method you may use. Businesses that carry inventory have historically been steered toward accrual, though the rules have loosened for smaller taxpayers under recent thresholds. Because those thresholds and rules change, confirm your specific filing requirement with a CPA rather than assuming. Many sellers keep their books on accrual for management clarity even when cash basis is permitted for tax.

That split (accrual for management, cash for tax) is common and perfectly legal, and good software can produce both views from the same underlying data. What you shouldn't do is run management decisions off cash-basis reports because that's what the tax return uses. The tax return answers what you owe; the accrual P&L answers whether the business is working. Keep both, but decide from the second one, and make sure your bookkeeper knows which basis each report is on before anyone quotes a margin number in a meeting.

Getting accrual books right without drowning in journal entries

The practical barrier to accrual on Amazon is volume. Thousands of transactions, dozens of fee types, refunds that cross months, and reserves that move between settlements make manual accrual bookkeeping brutal. The fix is to summarize each settlement into accrual journal entries by category and post them to the correct period, then reconcile the bank deposit through a clearing account.

Your COGS side needs the same discipline. You need a per-unit landed cost and an inventory valuation method (weighted average or FIFO) so that when units sell, the right cost flows to the P&L. Get both halves right and your accrual financials finally tell the truth about each month's profit.

There's a related choice hiding in that sentence: periodic vs perpetual inventory accounting. A periodic system leaves inventory untouched all month and calculates COGS at the end from a physical count, which is workable in a shop with one stockroom and hopeless when your units sit in six Amazon fulfillment centers. The perpetual method of accounting for inventory updates quantity and cost with every sale, so COGS accrues continuously and your balance sheet is right on any given day. Ecommerce inventory systems are perpetual by design for exactly that reason, and a monthly count becomes a check on the system rather than the source of the number.

Two more accrual mechanics catch sellers who came from cash books. Equipment and software you buy for the business get capitalized and depreciated across their useful life rather than expensed on the day you pay, usually with the straight line method, which spreads the cost evenly per period. And at year end, closing entries zero out every income and expense account into retained earnings so the new year starts clean. Your accountant or your software handles both, but you should recognize them on the balance sheet instead of treating them as errors.

The settlement that spans a month boundary deserves special care. A two-week settlement running June 25 through July 8 contains June activity and July activity, and a single journal dated July 8 puts two weeks of June sales into the wrong month. The correct approach splits the settlement at the month line and posts two journals, one per period. This is fiddly to do by hand and is precisely the kind of work automated accounting software should absorb: parse the raw settlement, split by date, post balanced journals to each period, and leave the clearing account at zero once the deposit lands.

Common accrual mistakes ecommerce sellers make

Switching to accrual doesn't automatically make the books right. These are the errors that show up most often when accountants review seller financials.

• •Booking the net Amazon deposit as revenue, which hides fees and refunds and understates gross sales
• •Expensing inventory purchases when paid instead of capitalizing them and releasing COGS as units sell
• •Posting a month-spanning settlement entirely into the month it deposited
• •Ignoring the reserve, so the clearing account never reconciles to zero
• •Recognizing refunds only when the cash impact hits, instead of when the refund was issued
• •Using a COGS percentage guess instead of real per-unit landed cost, which makes margin drift invisible
• •Running half the year on cash and half on accrual after a mid-year switch, making the year internally inconsistent

What to look for in software that does accrual for you

Almost nobody past a few hundred orders a month does this manually, and the tooling question comes down to what your ledger needs to receive. If you're on QuickBooks, the pattern that works is a connector that parses Amazon settlements and posts summarized accrual journals; that's the job quickbooks for amazon sellers setups delegate to tools like A2X, Link My Books, or BeanHawk. Xero users have the same need, and an amazon xero connection should behave identically: dated journals per period, fees split by type, refunds and reserves on their own lines.

When comparing amazon accounting software, test three things against a real settlement of yours. Does it split settlements at month boundaries into separate period journals? Does it carry the reserve as a receivable you can reconcile against Seller Central? And does it handle COGS with actual per-unit costs rather than a flat percentage? Those three separate genuine accrual automation from tools that just re-label your bank feed.

Watch out for tools sold to a different buyer. QuickBooks Self-Employed accounting software is built for freelancers tracking mileage and cash in and out; it has no inventory and no real accrual reporting, so it cannot produce the statements described here. The same goes for accounting software for home use or personal budgeting apps, which model a household, not a business that carries stock. Xero and QuickBooks Online both price by plan tier, with the cheaper tiers capping things like users, bills, or multi-currency, and Xero accounting software pricing in particular moves often enough that any figure you read in a review is worth re-checking on the vendor's own pricing page before you budget. Read Xero and QuickBooks reviews for how each handles bank reconciliation and reporting, then ignore anything the reviewer says about Amazon, since the marketplace half comes from the connector rather than the ledger.

One honest caveat: if you're doing under roughly a hundred orders a month on a single channel, a disciplined spreadsheet plus a monthly manual journal can deliver real accrual books for free. The software earns its subscription when volume, multiple channels, or month-spanning settlements make manual splitting error-prone. Good ecommerce accounting is defined by whether the output is right, not by how much you paid for it.

Frequently asked questions

What is the accrual accounting method in plain terms?

It records revenue when you earn it and expenses when you incur them, not when cash moves. For an Amazon seller, a sale is booked when the order ships, and the matching fees and product cost are booked in the same period, even if Amazon pays you weeks later.

Should Amazon sellers use accrual or cash accounting?

The difference between cash and accrual accounting is timing: cash basis records a sale when the deposit lands, accrual records it when the order ships. Accrual is almost always better for understanding your business because it aligns sales, fees, and COGS into the period they actually happened. Cash basis is simpler but distorts your monthly results because Amazon's payout cycle lags your sales. Many sellers run accrual for management and confirm their tax-basis requirement with a CPA.

Is accrual accounting required for inventory businesses?

Historically the IRS pushed inventory-carrying businesses toward accrual, but small-taxpayer thresholds have relaxed that in recent years. Because the rules and dollar thresholds change, verify your specific requirement with a tax professional rather than relying on a general rule.

What is modified accrual accounting, and do I need it?

Modified accrual is a fund-accounting method used by governments, recognizing revenue when it is measurable and available. It is not relevant to a private ecommerce business. Your real choice is full accrual versus cash basis.

How does accrual accounting handle Amazon's delayed payouts?

You book the sale, fees, and COGS in the period they occur, then record the eventual deposit as clearing a receivable through a clearing account. This keeps revenue in the correct month and makes your settlement reconcile cleanly to the bank.

Can QuickBooks do accrual accounting for Amazon by itself?

QuickBooks supports accrual, but it can't parse an Amazon settlement on its own; the bank feed only shows net deposits. Sellers pair it with a settlement connector (A2X, Link My Books, and BeanHawk are the usual candidates) that posts summarized accrual journals with fees, refunds, and reserves broken out, so QuickBooks receives period-correct data.

How do I switch from cash to accrual bookkeeping?

Pick a clean cutover date, ideally a month or year start. Build an opening balance sheet with inventory on hand at cost, the Amazon receivable including any reserve, and unpaid supplier bills, then run everything after that date on accrual. Doing the switch mid-month or leaving old periods on cash makes the year inconsistent, so restate back to the cutover if you can.

What's the best accounting software for Amazon sellers who want accrual books?

There's no single answer; it depends on your ledger and channels. Whatever you evaluate, test it on a real settlement and check that it splits month-spanning settlements into separate period journals, reconciles the reserve, and drives COGS from per-unit costs. A2X, Link My Books, and BeanHawk all target exactly this job on QuickBooks and Xero, with different strengths in multi-channel and inventory handling.

Related terms

Go deeper

• Bookkeeping for Small Business: A Plain-English Starter Guide
• The Profit and Loss Statement, Explained for Ecommerce Sellers