What is Accrual Accounting?

By Richard T. Tyler

If you're starting your own business, it's important to decide how you're going to be keeping your accounts. One method would be the Accrual Accounting Method. In this article we will explain the accrual accounting method in a way that you can understand.

I bet you never knew that you had to virtually be an accounting major to start a business. No matter what kind of business you are going start, you will have to pick a method of accounting your money. Right now there are either the accrual method or the cash method.

Here we will explain the accrual method of business accounting. In any business there will be money coming in and money going out. Ideally we want more money to come in than is going out. But regardless what happens, our books have to show where the money is located.

If you plan to use the accrual method, there are a few things you should know. Firstly, with this method, money is counted as either coming or going when the deal is made, rather than when the money comes or leaves your account. For example, if you own a shoe company. A store wants to order 100 pairs of your shoes. If the order is placed in June, the amount of that order is recorded in your books for June. The shoes haven't been shipped out yet, but the order has been placed.

The same applies when your money is spent. Let's use the same example. The 100 pairs of shoes are ready. You ship them out to the store in July. On the books, the price of the shoes, $9,000, is recorded as paid in July. The payment hasn't been received yet but according to the accrual method, the money is recorded in the company ledger when the items are shipped out to their destination.

The accrual method of accounting allows a business to count and deduct money before transactions are finalized. It is not always easy to tell which date the sale happened on as most businesses are used to dealing with dates on checks and shipping invoices.

The date that the agreement was made may or may not get written down. Whichever way you choose to determine the date, it is important to keep a uniform system. One thing to remember is that the items have to be shipped and if you are receiving a service, it has to be completed before logging it down.

The accrual method lets you see at a glance how much business is done in any given month. This will help when budgeting for the coming year, hiring employees, and deciding on discretionary funds. However on the downside, recording profits can leave you with a slanted picture. For example, the books may show that you made $100,000 in June because that is when your inventory shipped out. However, the money may not have been received until a later date, say on the 30th of August.

There are good and bad points about the accrual method. However, as long as you keep a sober head about the way to review your books when using accrual accounting, your business will do just fine.

Richard Tyler is a happily retired investment guru who ran several successful businesses during his earlier years. He now shows his wealth of knowledge on investment, business and strategic wealth management at Invest Money Stocks For more free useful articles on business management please visit his site now.

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