Accrual Accounting

What is Accrual Accounting?

Out of the two Accounting methods, accrual accounting is one, and the other is called as Cash Accounting. The method of accrual accounting helps to evaluate the position and performance of a company by discovering economic events, irrespective of when transactions in cash take place.

The basic idea here is that economic events get recognized by matching expenses and revenues at the time wherein the transaction occurred not when the payment was made or received. This procedure allows the current cash outflows and inflows to be collected with future expected outflows or inflows of cash to provide a precise picture of the financial position of the firm.

How does Accrual Accounting Work?

Accrual accounting is regarded to be the basic accounting practice for a majority of companies with the exception being individuals and small businesses. Although the method does offer the precise picture of the current company’s condition; however, it’s complexity makes the implementation expensive.

The need for applying this method arises when the business is tackling with complex transactions, and the company requires accurate financial data and information.

Under this accounting method, companies get instant feedback on the cash outflow and inflow, which makes it seamless for the company to manage the current resources better and plan the future effectively.

Difference Between Accrual and Cash Accounting

Since accrual accounting is contrary to cash accounting, it discovers transactions only after there is a cash exchange. Also, this method is almost every time required by companies that run their inventory or make sales on credit.

For example, suppose there is a marketing company that offers Rs. 5000 worth of service to a client. The client receives the invoice and makes the cash payment within 25 days of raising the bill. Now, this transaction entry will get recorded differently under the accrual and cash methods. Under the cash method, the revenue generated will be recognized when the company has received the money.

However, accrual accounting considers the cash method to be inaccurate as it is likely that the company is going to receive cash in the future. And, the accrual method recognizes this revenue when the service has been provided even if the cash has not been received.