Have you ever heard of the accrual method of accounting? It is one of the many types of accounting out there, and it allows you to keep track of your income and expenses in real time. Many businesses use the accrual method of accounting because it allows them to keep track of money coming in and going out as it occurs. This makes life easier for many businesses. Here is an overview of the accrual method of accounting and how it could possibly help you. Plus, it is also compared to other methods of accounting, so you can compare them and see which will work best.
What Is the Accrual Method of Accounting in Layman’s Terms?
Basically, the accrual method of accounting is adding things to your books as they occur. This means that all of your expenses go on the book as they come up. Plus, payments that come into your business go into the books as you receive them. Even if you do not pay out the expense, or get the money from the sale right now, it is added to the books right now. A great example of this is extending credit to your customers. The sale gets marked as taking place immediately, even if it takes three months to fully get paid for the sale.
How Does the Accrual Method of Accounting Work?
Consider the month of December and your business. Let’s say you sold $10,000 in products and services, for an easy number. Using the accrual method of accounting, you would put that amount into your books. During December, you also had $1,000 in expenses like utilities. This would also get marked down on the day it was used or billed. However, neither of these amounts would actually be changing hands just yet.
For the work you completed in December, your income may not come until January (or later when credit got used). Plus, you may not pay those bills until January, or maybe even February. They would still be written down for December, as that is when they took place. Even though you may not see the money or spend the money until another month, or another year in the example case, it still goes into the books when it originally took place. This can prove to be very accurate, but also very confusing at times.
What Perks Are There for Using the Accrual Method of Accounting?
The biggest perk to the accrual method of accounting is that you can keep track of everything as it occurs. This lets you have the most accurate information possible. Most bookkeepers and accountants prefer the accrual method of accounting because of its accuracy. However, it can lead to some estimation now and again since the cash flow in and out is not done at the time the transactions are put in the books.
Another benefit to using the accrual method of accounting is that it gives you a very solid idea of how your company is performing. You can see how much is incoming and outgoing at any point in time. This lets you know if sales are where they should be, or slumping, before a problem occurs. It also lets you see specific times, dates, months, or seasons where your sales climb or dip. Since everything is put in, in real time, it is easy to see when a potential struggle may come up.
Finding a Professional Bookkeeper Who Uses the Accrual Method of Accounting
Knowing what method of accounting is best for your business can be difficult. There are a lot of things you must consider, including things like how many sales you have, how often you extend credit to customers, and how many expenses your business has. There are pros and cons to the accrual method of accounting. It is best to leave this decision up to someone who can look over your books and see what is best.
By turning to a professional bookkeeping company, they can show you how all types of accounting methods could hurt or benefit your company. Once you can see the benefits and drawbacks of each, you can make an educated choice. Turn to the experienced professionals here at Marlandale today. We can show you if the accrual method of accounting is best, or if you should consider another method. Our goal is to help make tracking expenses for you and your company easier. Let us show you how to accomplish that goal.