Cash vs Accrual Accounting: What’s Best for Your eCommerce Store?

What is Cash Accounting?

Cash accounting records income when you receive payment and expenses when you pay for them. It’s straightforward and mirrors the actual flow of cash in and out of your business.

Example:

• You sell a product on Shopify in June but only receive the payout in July. In cash accounting, you would record the income in July.
• You order stock in May but pay the supplier in June. The expense is recorded in June.

Who typically uses cash accounting?

• Small businesses with simple operations
• Businesses focused on cash flow management
• Australian businesses with a turnover under $10 million (eligible for cash basis GST reporting)

Advantages of Cash Accounting:

• Easier to manage and understand
• Provides a real-time view of cash on hand
• Can defer income to manage tax obligations

Disadvantages of Cash Accounting:

• Doesn’t match income to related expenses (can distort profitability)
• Poor reflection of business performance if payments are delayed
• Harder to value stock and cost of goods sold (COGS) properly

What is Accrual Accounting?

Accrual accounting records income when it is earned (regardless of when payment is received) and expenses when they are incurred (regardless of when you pay).

Example:

• You sell a product on Shopify in June. Even if the payout comes in July, you record the income in June.
• You receive a supplier invoice in May but pay it in June. The expense is recorded in May.

Who typically uses accrual accounting?

• Growing businesses with complex operations
• Businesses carrying inventory
• Businesses wanting more accurate financial reporting
• Businesses aiming for external investment or sale

Advantages of Accrual Accounting:

• Matches income and related expenses for more accurate profit tracking
• Provides a clearer financial picture
• Necessary for businesses with stock or large payables/receivables

Disadvantages of Accrual Accounting:

• More complex to maintain
• Might show profit without actual cash in hand
• Requires good bookkeeping practices and regular reconciliations

Key Differences Between Cash and Accrual Accounting

Feature	Cash Accounting	Accrual Accounting
Income Recorded	When cash is received	When a sale is made
Expenses Recorded	When cash is paid	When an expense is incurred
Complexity	Simpler	More detailed
Reflects Profitability	Less accurately	More accurately
Cash Flow View	Real-time	Needs management
Inventory Tracking	Difficult	Essential
Best for	Small businesses	Growing businesses

How Shopify and Xero Handle Cash vs Accrual Accounting

If you’re running your eCommerce store on Shopify and managing finances through Xero, the good news is that both platforms can support either method.

In Shopify:

• Sales data is recorded at the time of transaction.
• Shopify payouts can create timing differences between sale and cash receipt.

In Xero:

• You can produce reports on either a cash or accrual basis.
• GST reporting can be set to cash or accrual.
• If integrated with A2X, your Shopify sales data will be posted in batches, helping match income to settlement dates.

Which Method is Best for Your eCommerce Store?

1. If You Are Just Starting Out

If you’re a sole trader or very small business, cash accounting may be easier. It helps you focus on managing real money in and out of your account without overcomplicating things.

2. If You Hold Inventory

Accrual accounting is usually the better choice if you have significant stock. It helps track your COGS accurately and gives a true sense of profitability by matching sales to the inventory costs associated with them.

Tip: Australian tax rules require businesses with stock to account for inventory movements if the difference between opening and closing stock is more than $5,000.

3. If You’re Focused on Growth or Funding

Planning to raise investment, secure a business loan, or sell your eCommerce business in the future? Accrual accounting gives a more professional, transparent view of financial health.

Lenders and investors typically require accrual-based financials.

4. If You Want Simplicity and Ease

If keeping bookkeeping simple is your priority and your operations are straightforward, cash accounting can work well, especially when you have low overheads and low stock levels.

Tax Implications: Cash vs Accrual for Australian Ecommerce Businesses

• GST Reporting: If you are eligible (under $10 million turnover), you can choose cash basis GST reporting.
• Income Tax: You need to declare income based on your accounting method consistently.
• ATO Preference: The Australian Taxation Office (ATO) generally requires consistency year-to-year unless you have a good reason to change methods.

Changing methods (e.g., from cash to accrual) may require ATO approval and careful adjustment to your bookkeeping records.

Important: If you’re using Xero, always check that your GST settings align with your chosen accounting method to avoid BAS errors.

Practical Tips for Implementing Your Choice

If using Cash Accounting:

• Regularly reconcile Shopify payouts in Xero.
• Monitor when cash hits your account.
• Use bank rules in Xero to automate coding where possible.

If using Accrual Accounting:

• Use A2X to post daily or weekly summaries to Xero.
• Match sales to COGS by tracking inventory properly.
• Create and manage accounts payable and receivable accurately.
• Use accrual-based reports to guide decisions.

No matter the method:

• Keep your receipts and records organised.
• Review financial reports monthly.
• Get professional bookkeeping help if needed.

Common Mistakes to Avoid

• Using cash accounting while holding significant stock: This distorts your real profits.
• Switching between methods mid-year: This creates reporting chaos.
• Ignoring timing differences: Particularly with Shopify settlements and payment processors.
• Not adjusting for merchant fees: Always factor them in to avoid overstating income.

By sticking to one method and aligning your systems accordingly, you avoid confusion and maintain cleaner financials.

Conclusion: Choose the Right Foundation for Growth

There is no “one-size-fits-all” answer when it comes to cash vs accrual accounting for eCommerce stores. The best choice depends on your current business stage, goals, inventory levels, and operational complexity.

• Startups and simple businesses often benefit from cash accounting.
• Inventory-heavy, scaling businesses are better served by accrual accounting.

Choosing the right method early on sets the foundation for smarter financial management, clearer insights, and sustainable growth.

Need help setting up the right accounting method for your Shopify store in Xero? Talk to our team today to make sure your bookkeeping is accurate, efficient, and tailored to your eCommerce goals!