Should a Shopify seller use cash or accrual accounting?

The cash method of accounting recognizes income when it is actually received and expenses when they are actually paid. The accrual method recognizes income when it is earned (when the right to receive it exists) and expenses when they are incurred (when the obligation arises), regardless of when money actually changes hands. For a Shopify seller, cash-method income is recognized when the customer's payment clears; accrual-method income might be recognized at the point of sale even if the payment is pending.

The Tax Cuts and Jobs Act of 2017 expanded the small business taxpayer exception to allow businesses below an inflation-adjusted gross receipts threshold to use the cash method even when they carry inventory — a category where the accrual method was historically required. Most individual Shopify sellers qualify for this exception, which simplifies accounting considerably. Under the exception, sellers can also avoid certain complex inventory accounting rules and capitalize inventory under simplified methods.

For most small Shopify sellers, the cash method is simpler and the preferred starting point. Revenue and expense recognition align with actual cash flows, which matches how most sole proprietors think about their business finances. Sellers who want revenue and expense recognition to align more closely with business cycles may prefer accrual accounting. Switching accounting methods after initial adoption requires IRS approval via Form 3115 (Application for Change in Accounting Method) and cannot be done unilaterally on the annual return. IRS Publication 334 covers the accounting method rules for small business operators.

This is general tax information, not tax advice. Your situation may differ; consult a licensed CPA before making tax decisions.