About
Finaloop supports both cash basis and accrual basis accounting.
Some ecommerce businesses prefer to use accrual accounting in their books for better operational visibility but file taxes using the cash method. If that’s you, no problem.
We recommend keeping your books in one consistent method (e.g., accrual) throughout the year inside Finaloop. Then, your CPA or tax preparer can handle the year-end tax adjustments needed for filing purposes outside of Finaloop. This approach helps:
Keep your books clean and accurate year-round
Give your CPA greater confidence in the numbers
Prevent reconciliation issues
Ensure your tax filings are accurate
If you are the tax preparer, we’ve included a checklist below to guide you through converting the year-end financials from accrual to cash for tax reporting.
First, an important note on COGS
All COGS tracking methods in Finaloop can work for both cash and accrual basis taxpayers.
However, under IRS rules, inventory and COGS generally should be reported on an accrual basis, no matter which accounting method the business uses. This prevents businesses from deducting the cost of unsold inventory too early (e.g., stockpiling purchases just to reduce taxable income). There is an exception to this rule called the small business exception under the final Regulations of IRC §471.
The small business exception can apply for businesses with average annual gross income of less than the small business threshold ($30 million in 2024) and which don’t track the value of their unsold inventory.
Because most businesses which hold inventory do actively track the value of their inventory, this exception is uncommon. For purposes of creating this checklist, we assumed it does not apply and didn’t include inventory-related year-end adjustments from accrual to cash. If you do qualify for the exception (which is rare for ecommerce businesses), you’ll need to handle those COGS adjustments separately.
CPA Checklist: How to Adjust from Accrual to Cash
Use the steps below to convert year-end accrual-based books to a cash-basis format for tax filing.
1. Accounts Payable
1. Accounts Payable
Remove unpaid expenses (for accruals still open at year end):
Exclude any outstanding payables as of the last day of the tax year that were accrued but not yet paid and reduce the relevant expense accounts.
Dr Accounts Payable
Cr Relevant expense account (e.g., COGS, G&A, S&M, etc.)
If it’s not practical to adjust individual expense accounts, credit a “Year-End P&L Adjustment” account instead.
Add-back prior-year payables paid in the current year:
Add back expenses for payables from the last day of the prior tax year that were paid in the current year.
Dr Relevant expense account (e.g., COGS, G&A, S&M, etc.)
If it’s not practical to adjust individual expense accounts, credit a “Year-End P&L Adjustment” account instead.
Cr Retained earnings or “Prior year P&L adjustment” account
If your Retained Earnings in Finaloop differs from your prior-year tax return, you can record the entry against Retained Earnings to align balances.
If you prefer not to amend Retained Earning, credit a “Prior-year P&L adjustment” account instead.
In most cases, this simply reverses timing differences from last year’s accrual-to-cash conversion.
For more context on potential opening-balance or retained-earnings differences, see: Year-End Clarification for 3rd-Party Tax Preparers (Opening Balance Reconstruction at Finaloop)
2. Accounts Receivable
2. Accounts Receivable
Remove unpaid income (receivables still open at year end):
Exclude any open receivables (including general Accounts Receivables and Shopify A/R) that was accrued but not yet collected as of the last day of the tax year and reduce the relevant income account.
Dr Revenue
Cr Accounts receivable
Add-back prior-year receivables collected in the current year:
Add back income for open receivables from the last day of the prior tax year that were collected during the current year.
Dr Retained Earnings or “Prior year P&L adjustment” account (see note above)
Cr Revenue
3. Accrued Interest
3. Accrued Interest
Remove interest expenses not yet paid.
Dr Interest expense
Cr Accrued Liabilities
4. Payroll Liabilities
4. Payroll Liabilities
Exclude unpaid payroll amounts.
Dr Payroll expense
Cr Payroll liabilities
5. Deferred Revenue & Gift Card Liability
5. Deferred Revenue & Gift Card Liability
Include only amounts for which cash was received and goods/services delivered by 12/31.
Dr Revenue
Cr Deferred Revenue
6. Income Taxes Payable
6. Income Taxes Payable
Exclude taxes that are owed but not yet paid.
Dr Income tax expense
Cr Income tax payable
7. Prepaid Expenses
7. Prepaid Expenses
Remove prepaid expenses not yet paid.
Dr Relevant expense account
Cr Prepaid expense
8. Accruals
8. Accruals
Remove accruals not yet paid.
Dr Accrued liability expense account
Cr Relevant expense account (e.g., COGS, G&A, S&M, etc.)
If it’s not practical to adjust individual expense accounts, credit a “Year-End P&L Adjustment” account instead.
Add back any prior-year accruals paid in the current year.
Dr Relevant expense account (e.g., COGS, G&A, S&M, etc.)
If it’s not practical to adjust individual expense accounts, credit a “Year-End P&L Adjustment” account instead.
Cr Retained Earnings or “Prior year P&L adjustment” account (see note above)
Final Tip
Finaloop is built to keep your books consistent and accurate all year long. By sticking to accrual accounting during the year and making tax-only adjustments outside Finaloop, you get the best of both worlds: real-time visibility and accurate tax filings.
Feel free to share this guide directly with your CPA or tax preparer.