Why Inventory-Based Handmade Businesses Should Use the Accrual Method
Cash basis accounting sounds simpler, but if you hold materials or finished goods, it quietly breaks your inventory tracking. Here's why accrual is the right choice for handmade sellers.
Nobody teaches you which accounting method to use when you open your Etsy shop. You’re expected to figure it out, which is a bit unfair honestly. Most advice aimed at small businesses says “use cash basis, it’s simpler.” And for a lot of businesses, it is.
But if you make things from raw materials and hold any kind of inventory? That advice can quietly wreck your bookkeeping.
This post explains both methods, shows exactly where cash basis breaks down for makers, and makes the case for why the accrual method is the right foundation if you’re running an inventory-based handmade business.
Last updated: April 2026.
What is the accrual method?
The accrual method records income and expenses when they are incurred, not when cash actually changes hands. You record a purchase the moment you place the order, regardless of when you pay. You record a sale the moment a customer orders, regardless of when they send money.
That timing difference sounds like a small technical detail. For makers who buy materials in advance and manufacture before selling, it’s actually everything.
What is the cash basis method?
The cash basis method records income when you receive payment, and expenses when you actually pay for them. Simple as it sounds: money in equals income, money out equals expense. No payment yet? It doesn’t exist in your books yet.
This works well for service businesses: freelancers, consultants, therapists. They deliver work and get paid. No stock sitting on a shelf between those two events.
For a maker, there’s a whole chain of activity between “buying materials” and “collecting payment.” That chain is where cash basis runs into trouble.
Why cash basis fails for inventory-based businesses
Cash basis accounting creates a timing mismatch that makes accurate inventory tracking essentially impossible if you purchase materials on any kind of credit or payment terms.
Let’s walk through a real example.
Say you order soap-making supplies on 90-day payment terms on 1 November. You receive the materials the same day, spend November manufacturing your products, and sell everything through December. You make the final payment to your supplier on 5 January.
Under cash basis:
- The materials don’t officially enter your books until 5 January (when you pay)
- But the products they went into were already sold in December
- So at 31 December close of year, your materials have zero inventory value, even though they existed in your stockroom in November and became products in December
The result: your December sales show no material cost associated with them. Your profit looks artificially high. And your inventory valuation at year-end is wrong.
Then in January, the materials finally hit your books — but the stock is already gone, used up in December. So now you have a cost with no corresponding inventory.
There is never a point in time where the materials have both a quantity available and a unit cost attached. That’s the core problem. It’s not a rounding error; it makes COGS calculation fundamentally unreliable.
How the accrual method solves this
Now run the same scenario under accrual.
On 1 November, the date you place the order, the purchase is recorded. The materials have a cost and a quantity from that moment forward. When they arrive the same day, your inventory asset valuation is updated with the correct unit cost.
You manufacture through November. Each batch you produce draws from that correctly-costed material. Your inventory at 31 December reflects what you actually have on hand, at the correct value.
You pay the supplier bill on 5 January. Under accrual, this event has no effect on your inventory valuation, because the expense was already recorded when you ordered.
The payment date becomes irrelevant. The inventory always has both a quantity and a cost. Your COGS is accurate. Your year-end figures are right.
Much more straightforward, once you see how it fits together.
What about the IRS rules on accounting methods?
Here’s where things have changed, and it’s worth knowing. Before 2018, the IRS generally required businesses with inventory to use the accrual method. The Tax Cuts and Jobs Act (TCJA) changed that.
From tax year 2018 onwards, businesses with average annual gross receipts under $30 million (measured over the prior three tax years) can generally use the cash method of accounting, even if they hold inventory. This is a significant threshold; the vast majority of handmade and small-craft businesses are well below it.
So: you’re not legally forced to use accrual. Many small makers can technically use cash basis without violating IRS rules.
But just because you can doesn’t mean you should.
The TCJA threshold is about what the IRS will accept for tax reporting. It says nothing about whether your books will actually be accurate. If you’re tracking materials, running recipes, calculating COGS, and managing a real inventory, cash basis will give you numbers you can’t trust.
The question isn’t “what does the IRS require?” The question is “what will actually tell me whether my business is making money?”
For any maker who wants accurate COGS and reliable inventory tracking, accrual wins every time.
Which method should handmade sellers use?
If you sell services only, with no materials or stock, cash basis is genuinely fine and simpler to manage.
If you make products from raw materials, you need accrual. Not because the IRS says so (they may not, depending on your revenue), but because:
- Your COGS calculation depends on it. Without accurate timing, you can’t match material costs to the products they went into.
- Your inventory valuation depends on it. Stock that has no cost assigned is invisible in your books.
- Your pricing decisions depend on it. If you don’t know your real costs, you can’t know whether you’re pricing profitably.
The makers who discover they’ve been “losing money on their best seller for years” are almost always the ones who’ve been guessing at costs rather than tracking them properly. The accounting method is the foundation that makes real tracking possible.
How Craftybase handles accrual accounting
Craftybase uses the accrual method for all inventory and manufacturing tracking. When you log a material purchase, Craftybase records the cost and updates your inventory at that point, not when you pay the bill. When you log a manufacture, Craftybase draws from that correctly-costed stock to calculate your COGS per unit.
This means your reports reflect reality. Your COGS calculation matches what actually went into your products, not a mismatched collection of payments made in different months.
It also means the accrual headache (the manual reconciliation and timing adjustments) is handled automatically. You record what happened. Craftybase keeps the timing straight.
If you’ve been claiming your materials as direct expenses rather than tracking them as inventory, that’s a pattern worth revisiting. The short-term simplicity costs you accuracy that matters at tax time, and all year round when you’re trying to make good pricing decisions.
Frequently Asked Questions
Do I have to use the accrual method if I sell handmade products?
Not legally, in most cases. The Tax Cuts and Jobs Act (2018) allows businesses with under $30 million in average gross receipts to use cash basis even with inventory. Most handmade sellers fall well below this threshold. But the legal question and the practical question are different. If you hold materials and track COGS, cash basis produces inaccurate numbers that make it hard to understand whether your business is profitable.
What's the difference between accrual and cash basis accounting for a maker?
The key difference is timing. Cash basis records expenses when you pay them and income when you receive it. Accrual records expenses when they are incurred and income when it is earned, regardless of when cash changes hands. For makers who buy materials before manufacturing and sell before collecting payment, accrual keeps costs and inventory in sync. Cash basis creates gaps where materials have no assigned cost, making COGS impossible to calculate accurately.
Can I switch from cash basis to accrual accounting?
Yes, but it involves filing IRS Form 3115 (Application for Change in Accounting Method). The IRS generally allows small businesses to change methods, and in many cases the switch produces a one-time catch-up adjustment that can actually work in your favour. Switching mid-business is more involved than starting on accrual from day one, which is another reason to get this right early. Talk to a tax professional before making the change.
Does Craftybase use accrual or cash basis accounting?
Craftybase uses accrual-based inventory tracking. Material purchases are recorded and costed when they are logged, not when payment is made. This means your COGS reports, inventory valuations, and manufacturing costs are always calculated from accurate, correctly-timed data. The result is that your Schedule C and year-end reports reflect your actual cost of production, not a timing-distorted approximation.
What happens to my COGS if I use cash basis with inventory?
With cash basis, your COGS becomes unreliable, especially if you buy materials on credit terms or carry stock across reporting periods. The cost of materials hits your books on the payment date, not when you used them in production. This creates a mismatch: sales appear in one period, their associated material costs appear in another. Your profit figures are distorted in both directions, and your inventory valuation at any given date is likely wrong.
If you’re a maker who holds materials and manufactures before selling, accrual accounting is the foundation your bookkeeping needs. Not because it’s required, but because accurate COGS, reliable inventory tracking, and pricing you can trust all depend on it.
Craftybase handles this automatically. Every purchase you log is timestamped, costed, and tracked through your manufacturing workflow — so your reports are accurate without you having to think about the accounting mechanics behind them. Start a free 14-day trial and see what your numbers look like when the timing is right.
