How I can change an accounting method from Cash to Accrual for Amazon Seller

I have a client who is Amazon FBA seller and he is operating two Amazon seller accounts under One LLC, Yesterday he asked me how we can change our accounting method from Cash to Accrual as my tax consultant is suggesting this change.
I have integrated his qbo with linkmybooks to automate the recording of settlements in qbo and I believe it is already on an accrual basis but my Question is What else I workflow I need to change for this client to shift him from Cash to Accrual basis?
Secondly, we are in October already so do I need to change historical transacction as well if we change his accounting method?

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  1. 74 Answers

    Hi there are a few changes you will need to make in how you are recording the transactions in order to move from Cash to Accrual accounting. First, this change should be effective January 1 for amazon sales. You will need to create an “Amazon Clearing” other asset account. This account will typically carry a debit balance as you will be recording Amazon sales (Debit) and Revenue (Credit) using the Amazon FBA reports. You want to make a Journal entry that can be done monthly using the sales report from the Amazon Seller Central Website. You would record the sales at gross and then any deductions such as shipping, FBA fees, other fees, etc. The deposit comes into the bank account they will be recorded to Cash (DR) and the Amazon clearing account (CR). Theoretically, the sales entry minus fees would clear against the deposits. Due to timing, the balance in the clearing account will never be zero but you should be able to reconcile the account. Any historical deposits that have been recorded to sales should be reclassed to the clearing account. You can then go back and record a Journal entry to book the sales based on the Amazon seller central monthly report.

    Because you are switching from cash to accrual there will be a variance carry over from last year. You will need an experienced Amazon Seller accountant to make an adjusting entry to correct this. If your client’s sales are not massive then the adjustment may not be material and not needed. However, if your client is selling millions on Amazon this adjustment may be material. In your linkmybooks you will need to change the G/L account where the settlement deposits are now being posted to “Amazon Clearing” rather than the sales account.

    Converting expenses to accrual is an easier process. You will need to ask your client for copies of all unpaid bills and enter them in the system as payable. This can be effective in October and moving forward to ensure all bills are accounted for in the period incurred. However, I would examine the January and perhaps February general ledger to identify any transactions that were paid for in 2020 that were related to 2019 business operations. Again these entries can be quite complex so I would consult with a CPA before making these entries. Hope this helps!

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  2. 6 Answers

    I am currently recording COGS for this client as per cash basis like when he pays for inventory I simply record it in Cost of Sales and at month-end, I adjust it as per actual Cost of Sales which is provided by the client. Please confirm Is it the correct treatment on a cash basis? Secondly please also confirm what would be the most appropriate treatment for this seller as per accrual basis?

  3. 74 Answers

    Good morning, that is the correct method per cash basis. However, if you are changing this client over to accrual basis accounting then you will need to adjust the balance based on the items sold (not items purchased). I am not sure if your client is using Amazon as the only avenue for sales however, using the FBA report you should be able to see what the COGS is for the month (if your client has everything set up correctly in Amazon). To correct the COGS account at this point there are two methods you can use. You can either run a year to date sales report from Amazon and make an entry to adjust the COGS based on the FBA seller reports. The alternative method is to reclass all COGS for the year to inventory on the balance sheet, then as I mentioned in the first post make monthly entries starting in January to record the sales, COGS, FBA fees, etc each month January – September.

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