What is Accrual Accounting?
Accrual accounting is a method of recording financial transactions when they happen, rather than when money changes hands. This approach helps businesses gain a more accurate picture of their financial health by tracking income and expenses as they occur, regardless of when they receive or make payments.
How Accrual Accounting Works
Accrual accounting focuses on recognising income and expenses as soon as the transaction happens. This means that when a company delivers goods or services, they record the income right away, even if they haven’t received the payment yet. The same applies to expenses; if a business incurs an expense but hasn’t received the bill yet, it still records the expense.
How to Record Accruals
Typically, businesses record accruals by making adjusting entries at the end of the accounting period. For example: If a company owes wages but hasn’t paid them yet, they would record an accrued expense by debiting the wage expense account and crediting an accrued liability account.
The business reverses the journal entry once it makes the payment to prevent double-counting. This process ensures the business records expenses and revenues accurately and provides a complete picture of its performance in the financial statements.
Why Choose Accrual Accounting?
Accrual accounting offers a clear, accurate view of your company’s financial performance. By recognising income and expenses when they occur, you can easily see how your business is doing in a specific period.
One major benefit is the ability to spot trends. You can see which months tend to have higher sales, allowing you to plan accordingly. Similarly, you’ll be able to identify if certain clients are slower to pay than others.
This method is particularly useful for businesses that deal with long-term projects or have significant stock. It’s also a legal requirement for companies with an annual turnover above £150,000.
Accrual Accounting vs Cash Accounting
Accrual accounting records transactions as they happen, whereas cash accounting tracks them only when money changes hands. While this method may be easier to manage for small businesses or those with few transactions, it can be misleading.
A business may appear financially stable in one period but could be ignoring the large amount of money owed from unpaid invoices. Accrual accounting helps businesses track these unpaid invoices and provides a more realistic view of cash flow and profitability.
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us