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What is Accrual Basis Accounting?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 October 2014
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As an example of an accounting method that keeps financial accounting up to the minute, accrual basis accounting is perhaps the most commonly used approach to keeping up with income and expenses. Because accrual basis accounting is simply the posting of income and expenses as they occur, rather than deferring the posting until a later date, this form of accounting is the favored method by most businesses.

As opposed to cash basis accounting, the whole point of accrual basis accounting is to make the recording of the transaction at the time it occurs. This means that sales are recorded immediately, expenses are posted at once, and any other type of transaction goes on the books at the time the event takes place. This is in contrast to some other methods, where the transaction is not actually recorded until payment is made or received.

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One of the immediate benefits to accrual basis accounting is that it is much easier to assess the overall financial health of the company. Because sales made to customers are already posted, it is easy to see how much revenue is due the company, as of today. At the same time, because any outstanding expenses of the company are already posted, it is equally simple to see what payments to vendors are outstanding. Being able to quickly review outstanding vendor payments and compare those totals to revenue that is anticipated by certain due dates makes it a simple task to schedule payments and keep the company on an even keel.

Using the principle of accrual basis accounting also comes in handy when payments from customers are received or when payments are issued to vendors. Because the line items are already posted in the books, it is simply a matter of going into the accounting database and applying the reception of the payments from customers to specific invoices, or noting outgoing funds that are disbursed to cover a specific vendor invoice. This can take a lot of the time out of posting payments and receipts on the back end, allowing time to devote to other important matters.

Accrual basis accounting also makes it possible to take an accurate snapshot of the financial health of the company at any given time. Literally, reports can be pulled that show the status exactly as it stands today. Having this sort of real time information can be extremely helpful when setting short term goals for the company, applying for a business loan, or making plans for some sort of long term project.

Accrual basis accounting is an excellent way to make sure that nothing in the way of income or expenses is able to fall through the cracks. By posting all transactions as they occur, there is always a full and complete record of finances to access.

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