Accrual Accounting is an Accounting method that involves recording revenues and expenses when they are incurred, regardless of when cash is exchanged.The term "accrual" refers to any single entry recording revenues or expenses in the absence of a cash transaction
ALSO READ: Accounting principles, concepts and conventions
Most businesses often use one of two basic accounting methods in their bookkeeping systems: cash basis or accrual basis. While most businesses use the accrual basis, the most appropriate method for your company depends on your sales volume, whether or not you sell on credit and your business structure.
The cash method of recording is the most simple in that the books are kept based on the actual flow of cash in and out of the business. As soon as Income is received, it will be recorded, and expenses are reported when they're actually paid. The cash method is used by many entrepreneurs, sole proprietors and businesses with no inventory. From a tax point of view, there are some advantages for a new business to use the cash method of accounting. With that, recording income can be put on hold until the next tax year, while expenses are counted immediately.
ALSO READ: Meaning and types of Accounting Ratio
With the accrual method, income and expenses are recorded as they occur, regardless of whether there was cash payments or not. An excellent example is a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected. Again, any expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the check is actually written. The main disadvantage of this method is that you pay income taxes on revenue before you've actually received it.
Do you think you Should you use the cash or accrual method in your business? The accrual method is required if your business's annual sales is above $5 million and your venture is structured as a corporation. Furthermore, businesses with inventory must also use the accrual method of accounting. I will recommend accrual method for any business that sells on credit, as it more accurately matches income and expenses during a given time period.
The cash method of accounting may be very good and convenience for a small, cash-based business or a small service company. Always make sure You should consult your accountant when deciding on an accounting method to use.