Accrual accounting records a sale when it happens and the cost of that sale in the same period, regardless of when money moves. For a marketplace seller, that matters because Amazon pays you two weeks after the customer bought, you paid your supplier ninety days before that, and cash-basis books will therefore report a profit figure that belongs to no particular month. The IRS has views on which method you are allowed to use, and for most sellers the deciding factor is inventory.
The rule that governs
IRS Publication 538 states it in one sentence: “If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales.”
The publication is equally direct about why inventory triggers the requirement: “An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor.” If you buy goods and resell them, merchandise is an income-producing factor. That is the entire test.
Then comes the exception that swallows most of the rule.
The small business taxpayer exception
Publication 538: “If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income.”
Qualifying turns on the section 448(c) gross receipts test. For tax years beginning in 2026, Revenue Procedure 2025-32 sets the threshold at average annual gross receipts of $32,000,000 or less over the three prior tax years. The 2025 Schedule C instructions put the equivalent figure at $31 million for tax year 2025.
A warning about the source most people reach for. Publication 538’s current revision is January 2022 and still prints “average annual gross receipts of $26 million or less (indexed for inflation)” in two separate places. The parenthetical is doing all the work, and the live number lives in the annual revenue procedure rather than the publication. Anyone quoting Pub 538’s dollar figure today is off by six million.
Practically: if your marketplace business does under $31 million in average gross receipts, you are a small business taxpayer and you have a choice. If you cross that line, the choice disappears.
What “choosing not to keep an inventory” means in practice
It does not mean ignoring the goods. Section 471(c), implemented by Treasury Decision 9942, lets a qualifying taxpayer treat inventory as non-incidental materials and supplies. Treasury named the approach “the section 471(c) NIMS inventory method” and noted it “greatly expanded the availability of this method of accounting to taxpayers in all types of trades or businesses, including producers and resellers.”
Critically, taxpayers using it “are eligible to use the overall cash method of accounting for purchases and sales of merchandise, rather than being required to use an accrual method.”
The trap runs the other direction. Publication 538 again: “If, however, you choose to keep an inventory, you generally must use an accrual method of accounting and value the inventory each year to determine your cost of goods sold.” A seller who puts inventory on the balance sheet because a lender asked for it has selected accrual by doing so.
A worked example
Take a seller with one product. In September they buy 1,000 units at $6.10 landed, paying the supplier $6,100 on September 4. Through October they sell 700 units at $29.99, gross sales of $20,993. Amazon takes a 15 percent referral fee and fulfillment charges totaling $9,140 across those orders, and issues two settlements, one on October 17 for $6,800 and one on October 31 for $5,053.
On a cash basis, September shows a $6,100 loss and no revenue. October shows $11,853 of deposits and no cost of goods, because the goods were paid for last month. September looks like a disaster and October looks like a 100 percent margin business. Neither month describes anything real.
On an accrual basis, October carries gross sales of $20,993, marketplace fees of $9,140 as an expense, and cost of goods sold of $4,270, being 700 units at $6.10. Gross profit is $7,583. The remaining 300 units sit on the balance sheet as $1,830 of inventory, and the timing of the two settlements does not affect the profit figure at all.
The accrual number is the one that tells you whether the product works. The cash number tells you whether you can make payroll, which is a different and equally important question, answered by a cash flow statement rather than by choosing a worse accounting method.
Where marketplace sellers get this wrong
Booking the deposit as revenue. The $11,853 that hit the bank is net of $9,140 in fees. Recording it as sales understates revenue by 44 percent and makes every fee invisible, so nobody ever asks whether the fulfillment charge on a heavy, low-priced SKU is eating the product.
Letting settlements straddle period ends. A settlement period that runs October 25 to November 7 contains two months of sales. Splitting it is tedious and it is also the difference between a real October and an approximate one.
Using a single average cost for a year of purchases. Landed cost moves with freight rates, duty and supplier pricing. A seller who bought at $5.40 in February and $6.85 in August and applies $6.10 to everything has a margin report that is wrong in both directions.
Treating returns as a revenue reduction only. A returned unit reverses the sale, reverses the COGS if the unit is resellable, and adds a return processing fee. Two of those three routinely get missed.
The standard the method has to meet
Whatever you pick, consistency is the requirement. Publication 538: “You must use the same accounting method from year to year. An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year.” On inventory specifically: “Your inventory practices must be consistent from year to year.”
And the sentence sellers should read twice: “If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income.”
Publication 538 also notes that an entity failing the gross receipts test “cannot use the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test,” and must file Form 3115 to request the change. Growth across that threshold is a filing event, not only a bookkeeping adjustment.
Making it work in practice
Three things carry most of the load. Book settlements gross, splitting each one into sales, fees, refunds and taxes rather than recording the net deposit. Load real unit costs including freight and duty, and pick a costing method you can hold constant. Cut each settlement at the period boundary.
Doing that by hand across five marketplaces is where sellers give up, which is why the work usually ends up inside software built for it. Connectors such as A2X, ConnectBooks and Bookkeep exist specifically to decompose marketplace settlements into accrual-basis journal entries and, in some cases, to maintain the inventory subledger those entries depend on.
Accrual is not a preference. For a business whose entire economics live in the gap between when goods were bought and when they were paid for, it is the only method that produces a monthly number worth acting on.
This describes how the rules work generally and is not tax advice for any particular business. Confirm current thresholds against IRS guidance and talk to a CPA about your own situation before changing methods.
