Does Craftybase use the Cash or Accrual Method of Accounting?
Craftybase uses the Accrual Method for all reporting which is the recommended method for businesses with significant inventory. Significant inventory is defined as the value of inventory relative to your revenue, which is generally the case for most small manufacturers regardless of actual turnover.
The Accrual Method essentially means that the revenue or expense is reported when generated, as opposed to the Cash Method which reports on orders and purchases when they have been paid. For further information on the differences between the two methods, please see our blog post here: What's the difference between accrual and cash based accounting?
Why can't I use the cash method when tracking my inventory?
The IRS expects businesses that report inventory to be using the Accrual method of accounting, other than in exceptional circumstances regardless of turnover.
As part of your tax obligations, all inventoried goods must be accounted for at the start and end of the tax year - without tracking purchases and sales both on an accrual basis, using cash-basis principles can lead to discrepancies between your inventory accounting and your reported expenses and income.
In addition to this, using the cash method doesn't work in conjunction with perpetual tracking as you could be using and costing inventory that has not yet been accounted for to manufacture your goods - a good example of this would be having 90 day payment terms on supplies that have already been consumed in sold goods.