Are you an e-commerce business owner? Is your bookkeeper giving you financials on a cash basis? It may be fine for your tax preparer but that’s not how you should be managing your business.

Here are some reasons you need to be switching to accrual accounting:

If you ever talk to one of those boring accountants then you might have heard them discuss the Matching Principle. This principle allows e-commerce businesses to match revenue and expenses in the same accounting period, regardless of when cash is actually received or paid. This helps provide a more accurate picture of the business's financial performance by recognizing revenue when it's earned and expenses when they are incurred. E-commerce businesses often have complex revenue recognition processes, such as subscription-based models or pre-orders, and accrual accounting helps capture these transactions appropriately.

Accrual accounting also assists in long-term planning and decision making by providing a more comprehensive view of a business's financial position. By recognizing revenues and expenses when they occur, e-commerce businesses can better evaluate their profitability, assess trends, and make informed decisions about future investments, expansions, or cost-saving measures. Accurate financial information helps business owners understand the true financial health of their operations.

If you are an e-commerce business, then you spend a lot of time managing inventory. Inventory management is a concern for many businesses but especially for e-commerce. These business owners face many challenges due to the fast-paced nature of online sales. Accrual accounting allows businesses to account for the cost of inventory as soon as it is sold and not when purchased. This helps in assessing the true cost of goods sold (COGS) and tracking inventory levels accurately. Accurate COGS calculations are essential for determining gross profit margins and evaluating the efficiency of inventory management practices.

Ever think about selling your e-commerce business? Accrual accounting is widely accepted and required by generally accepted accounting principles (GAAP) in many jurisdictions. Following GAAP ensures consistency, comparability, and transparency in financial reporting, which is essential for e-commerce businesses that may seek external financing, undergo audits, or engage in partnerships or acquisitions. Accrual accounting helps meet the reporting requirements and standards expected by investors, lenders, and other stakeholders.

Congratulations for making it this far! One last thing…accrual accounting also assists in tax compliance. Many tax authorities require businesses to use accrual accounting for reporting taxable income. By utilizing accrual accounting, e-commerce businesses can accurately determine their taxable income based on earned revenues and incurred expenses within a given tax period. Accurate tax reporting ensures compliance with tax laws and reduces the risk of penalties or audits.

Green Light Accounting utilizes the accrual method of accounting for all its customers.