What is accrual accounting?

As an example of an accounting method that keeps financial accounting up-to-date, accrual accounting is perhaps the most commonly used approach to tracking income and expenses. Because accrual accounting is simply accounting for income and expenses as they occur, rather than deferring accounting to a later date, this form of accounting is the method preferred by most companies. Here are some of the benefits of using accrual accounting as your standard way of managing your finances.

Unlike cash-based accounting, the whole point of accrual-based accounting is to record the transaction as it occurs. This means that sales are posted immediately, expenses are posted immediately, and any other transaction types are posted at the time the event occurs. This is in contrast to some other methods where the transaction is not actually recorded until payment is made or received.

One of the immediate benefits of accrual accounting is that it is much easier to assess the overall financial health of the business. Since sales made to customers are already posted, it's easy to see how much revenue is owed to the company, starting today. At the same time, since the company's outstanding expenses are already accounted for, it is equally simple to see which supplier payments are due. Being able to quickly review outstanding vendor payments and compare those totals to forecast revenue at certain due dates makes it a simple task to schedule payments and keep business at a steady level.

Using the accrual accounting principle is also useful when receiving payments from customers or when issuing payments to suppliers. Since the line items have already been posted to the books, you can simply access the accounting database and apply incoming customer payments to specific invoices or note the outgoing funds that are disbursed to cover a specific supplier invoice. This can take a lot of time to post payments and receipts on the backend, freeing up time for other important matters.

Accrual accounting also allows you to take an accurate snapshot of the company's financial health at any given time. Reports can literally be pulled to show the state exactly as it is today. Having this kind of information in real time can be extremely helpful when setting short-term goals for the business, applying for a business loan, or making plans for some kind of long-term project.

Accrual accounting is a great way to ensure that nothing in the form of income or expenses goes unnoticed. By posting all transactions as they happen, there is always a complete and comprehensive record of finances to access.