Year-End Tax Guide: Adjusting Accrual Books to Cash Basis

Finaloop supports both cash basis and accrual basis accounting. Learn more in Does Finaloop use accrual or cash 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 (for example, 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:

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.

All COGS tracking methods in Finaloop can work for both cash and accrual basis taxpayers. See How to choose your COGS tracking method in Finaloop.

However, under IRS rules, inventory and cost of goods sold (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 (for example, stockpiling purchases just to reduce taxable income). There is an exception to this rule called the small business taxpayer exception, under the final regulations of IRC §471 (26 CFR 1.471-1(b), current text on eCFR).

The small business exception can apply to businesses whose average annual gross receipts for the 3 prior tax years don't exceed the small business threshold ($31 million for tax years beginning in 2025, $32 million for 2026) and which don't track the value of their unsold inventory. The same gross receipts test generally decides whether a business that holds inventory can file on the cash method at all, so your tax preparer should confirm eligibility first.

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. Learn more in the "Exception for small business taxpayers" section of Purchase based COGS: Everything you need to know.

Use the steps below to convert year-end accrual-based books to a cash-basis format for tax filing.

You'll find the year-end balance of each account below in the Balance Sheet and Trial Balance in the Report center. For a list of unpaid bills, open the Accounts Payable (AP) Aging Report there.

Remove unpaid expenses (payables 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.

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.

If it's not practical to adjust individual expense accounts, debit a "Year-End P&L Adjustment" account instead.

About the credit side:

Remove unpaid income (receivables still open at year end). Exclude any open receivables (including general accounts receivable and Shopify A/R) that were accrued but not yet collected as of the last day of the tax year, and reduce the relevant income account.

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.

Remove interest expenses not yet paid as of the last day of the tax year.

Add back prior-year accrued interest paid in the current year.

Finaloop books interest on loans from related parties whether or not it was paid. See section 7 of Accounting policies and important notes for Finaloop tax customers.

Exclude payroll amounts not yet paid as of the last day of the tax year.

Add back prior-year payroll liabilities paid in the current year.

Under the cash method, income counts in the year the cash is received, even if the goods or services are delivered later. Include amounts customers paid by the last day of the tax year for orders not yet delivered (Deferred revenue) and gift cards sold but not yet redeemed (Gift card liability).

Remove prior-year balances that were taxed last year when received but recognized as revenue in the current year's books.

Exclude taxes that are owed but not yet paid.

Finaloop records federal and state income taxes when they're paid and doesn't accrue them, so in most cases there's nothing to adjust here. See section 10 of Accounting policies and important notes for Finaloop tax customers.

Deduct prepaid expenses that were paid during the year but not yet expensed in the books.

Under the IRS 12-month rule, a prepayment whose benefit extends beyond 12 months after the benefit starts, or beyond the end of the following tax year, may still need to be capitalized on the cash method.

Remove prior-year prepaid expenses that were deducted last year when paid but expensed in the current year's books.

Remove accruals not yet paid.

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.

If it's not practical to adjust individual expense accounts, debit a "Year-End P&L Adjustment" account instead.

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.

Questions about these adjustments? Email us at [email protected].