What is Accrual Accounting?

Jill Gonzalez

Accrual accounting is a method of financial record-keeping that measures a company's position as well as its performance. It recognizes all the economic events for a business — not just the basic cash transactions. On an accrual accounting basis, revenues are matched to expenses when specific transactions occur.

Accrual accounting provides a snapshot in time of a company's financial performance.
Accrual accounting provides a snapshot in time of a company's financial performance.

This particular accounting method permits current cash flow, including incoming and outgoing, to be combined with future cash flows that are expected to occur. Accrual accounting, therefore, provides companies with a more realistic and generally accurate snapshot of their present financial state. Companies that of any size usually have some type of accrual method for tracking purchases and expenditures, to keep up with the bottom line in terms of overall performance.

Many companies consider accrual accounting to be a standard practice. An exception to this is typically found in companies that are extremely small and do not employ traditional accounting personnel due to the cost. Accrual accounting is actually quite a complex process, and many companies that only have one or two employees simply cannot afford to hire one or more people to take on these demanding tasks on a daily or weekly basis. Instead, these much smaller businesses usually hire accounting firms to handle their accounts on a monthly or quarterly schedule.

Companies that sell or purchase items on credit, or that become involved in projects that require a continuous stream of funds over an extended period of time, are the most likely to benefit from having an accrual accounting system. Accounting personnel who specialize in this area are generally required to produce financial statements at regular intervals for company owners or executives, as it is very important that all financial transactions are accounted for in a timely fashion. This is essential in providing businesses with accurate figures for each reporting period.

As a general rule, accrual accounting methods provide companies with a greater revenue on paper than some other methods of accounting, such as the cash method. Accrual accounting allows companies to generate an accounts receivable report. Accounts receivable is a collection of monies that are owed to a company, regardless of whether any of the cash has been collected yet. As a result, any monies that are owed to a company are displayed on these reports, which will, in turn, show that a company has earned more money than it actually has in the bank. This methodology is desirable for many small and large businesses, which makes it a popular choice for businesses throughout the world.

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