Accrual vs Cash Based Accounting: What Every Maker Needs to Know

Nobody tells you that the way you record your income and expenses is a choice — and that choice has real consequences for your bookkeeping, your tax return, and your ability to track inventory accurately.

That choice is your accounting method: cash or accrual. If you’ve heard both terms and aren’t sure which applies to you, or which one should, you’re in the right place.

What Is Cash-Based Accounting?

Cash-based accounting is exactly what it sounds like — you record revenue when money lands in your bank account and expenses when you actually pay for them. No payment, no entry.

For many small businesses, this feels intuitive. You sell three necklaces today? You don’t record that income until the payment clears. You ordered silver wire on credit? It doesn’t hit your books until your bank account shows the transfer.

Why makers like it: It’s simple. Your bank statements and your books stay roughly in sync. If you’re just starting out and your business is relatively straightforward, the cash method is easy to follow without a bookkeeper.

The catch: It doesn’t always reflect the real financial picture of your business. If you receive a big wholesale order in December but the retailer pays in January, your December looks leaner than it actually was. This matters at tax time — and it matters even more if you’re tracking inventory and materials.

What Is Accrual-Based Accounting?

Accrual accounting works differently. You record revenue when it’s earned (when the order is placed or the work is done) and expenses when they’re incurred (when you receive the bill or order the materials) — regardless of when cash actually changes hands.

Say you ship a batch of candles on the 28th of March and invoice your wholesale customer for $800. Under accrual, that $800 is revenue in March — even if the customer pays 30 days later.

You order beeswax on the 5th of February. Under accrual, that expense is recorded in February — even if you’re on 60-day payment terms and the actual bank transfer doesn’t go out until April.

Why it matters: Accrual gives you a more accurate snapshot of your business at any given point in time. Revenue and costs are matched to the period when the economic activity actually happened — not to when your bank balance happened to shift. That accuracy becomes critical once you start tracking inventory.

Cash vs Accrual: A Side-by-Side Comparison

Which Accounting Method Is Right for Your Maker Business?

For most handmade sellers and small makers, the answer comes down to two things: whether you hold inventory and how complex your operations are.

If you’re purely service-based

If you make custom one-off items fully to order with no materials held on hand, cash accounting is perfectly workable and keeps things simple. A commission-based illustrator or a portrait painter with no stockroom rarely needs accrual.

If you hold physical inventory or buy materials in bulk

Accrual accounting is almost always the better choice — and there’s a strong argument it’s the only choice that makes your books honest.

Here’s why: when you purchase materials, they don’t immediately become an expense. They become an asset (inventory). That inventory only becomes an expense — cost of goods sold — when you sell the product it went into. Cash accounting doesn’t handle this timing difference well. You end up with costs and revenue showing up in completely different periods.

The result? A distorted picture of your profitability, and an inventory valuation you can’t trust when it counts.

IRS Rules: Who Can Use Which Method?

The IRS allows most small businesses — including those that sell physical products — to use the cash method if their average annual gross receipts fall below a certain threshold. Thanks to the Tax Cuts and Jobs Act and subsequent inflation adjustments, many small and mid-sized maker businesses qualify.

Qualifying to use cash accounting doesn’t mean you should use it.

If your gross receipts are above the IRS threshold, you’re generally required to use accrual — particularly if you hold inventory. The threshold is indexed for inflation and changes year to year, so check with your accountant to confirm which side you fall on. They’ll know the current figure and how it applies to your business structure.

The bottom line: even makers who are technically allowed to use cash accounting will often find accrual significantly more accurate and less painful when tax time comes — especially once they start tracking materials and COGS.

How Your Accounting Method Affects COGS and Inventory Tracking

This is the part that trips up a lot of makers — and where the difference between cash and accrual becomes very concrete.

COGS (cost of goods sold) is the direct cost of producing the goods you sell: raw materials, direct labour, and costs that go directly into making each product. Getting COGS right is essential for understanding your actual profitability — and for filing accurate taxes.

Under accrual accounting, the flow makes logical sense:

1. You purchase materials → they enter your inventory as an asset at their cost
2. You manufacture products → materials flow from raw materials inventory into work in progress
3. You sell products → the cost moves from inventory into COGS on your income statement

The timing is coherent. Your inventory valuation at year-end is accurate. Your COGS matches the revenue period it was generated in.

Under cash accounting, the timing falls apart. Here’s a real-world example:

You buy materials on 60-day payment terms in November, manufacture products in November and December, sell them in December, but don’t pay for the materials until January. At year-end:

• Your December sales are recorded (revenue is there)
• Your material cost is not recorded (no cash paid yet, so nothing in the books)
• Your COGS for those December sales is essentially zero

That’s not an honest picture of your business. And if you’re trying to track inventory, you end up with materials that appear in your physical stockroom but don’t yet appear in your books — a reconciliation headache you don’t need.

For a deeper dive into this specific problem, see our post on why inventory-based businesses should use the accrual method.

How to Switch from Cash to Accrual Accounting

If you’re currently on cash accounting and realising accrual is the better fit, it’s a manageable switch — but it does require some paperwork.

The IRS requires you to apply for permission to change your accounting method using Form 3115 (Application for Change in Accounting Method). When you switch, transition adjustments are needed to make sure income and deductions aren’t counted twice (or missed entirely). Your accountant can handle this, but it’s not a DIY job for the transition year.

A few practical tips if you’re planning a switch:

• Switch at the start of a new tax year so the change takes effect cleanly on January 1
• Clean up your inventory records first — inaccurate stock data becomes much messier once you change how costs are recognised
• Talk to your accountant before you file — the transition year return has specific requirements

How Craftybase Supports Accurate Inventory and COGS Tracking

Regardless of whether you’re on cash or accrual accounting, Craftybase gives you the underlying data your accountant needs: materials received, products manufactured, orders fulfilled, and COGS calculated per product.

When tax time arrives, you have clean records to hand — not a pile of receipts and a rough estimate. You can generate COGS reports by time period, track material costs by batch or production run, and reconcile your physical inventory against your books without starting from scratch.

Most makers using Craftybase pair it with accrual-basis bookkeeping in QuickBooks or Xero — using Craftybase as their operational record of what was made and sold, and their accounting tool for the financial reporting layer. If you’re not sure how this workflow fits together, our guide to calculating COGS for handmade products is a good place to start.

Frequently Asked Questions