An e-commerce owner looks at January's P&L: margin collapsed. February: margin heroic. Nothing changed in the business — January had an inventory purchase and February didn't. That's cash-basis accounting doing what it does: recording inventory when you pay for it, not when you sell it. For product businesses, it makes the P&L nearly useless.
The two methods in one example
You buy $30,000 of stock in January and sell it evenly across three months at $20,000/month revenue. Cash basis: January shows a $10,000 loss, February and March show $20,000 of pure "profit". Accrual: each month shows $20,000 revenue against $10,000 COGS — a steady 50% margin, which is the truth. Same business, radically different story.
Why accrual COGS matters in practice
- Real decisions: reorder quantities, ad budgets and pricing all depend on true unit margin — cash books can't give it.
- Landed cost: freight, duties and prep belong in inventory cost, not lump expenses. Skipping them typically overstates margin by 5–15%.
- Financing and exits: lenders and buyers require accrual numbers; converting during diligence is expensive and erodes trust.
- Multi-channel clarity: COGS per channel is what reveals that (say) TikTok Shop's margin after creator commissions is half of Shopify's.
The monthly routine
- Post purchases to Inventory (asset), not expenses.
- Each close, move sold units' cost to COGS — from your channel reports or an inventory tool.
- Reconcile inventory value to a count periodically; write off shrink honestly.
Note: small businesses can be cash-basis for TAX in many cases — the point here is management accounting. We keep accrual books and let the tax preparer choose the tax method; you get both truth and flexibility.