What is The Accrual Method of Accounting?

The accrual method is a simple, yet effective, system for small businesses to track their expenses and receivables. The accrual system works because expenses should be recorded in an expense sheet, and all expenses incurred must be accounted for at the end of the month for tax purposes. The first step towards utilizing the accrual method for your business would be to develop (or find) an exceptional bookkeeping and accounting software program.

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The system works by recording the beginning balance in the cash category and then recording the ending balance in the profit or loss category. You record the income statement (the monthly sales price plus the monthly revenue) in the cash category. Your inventory balance is determined by subtracting the first balance from the second.

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After you have written off all expenses for the month, your income statement will show the following: income from sales, income from accounts payable, income from accounts receivable, and net income from all sources.

To determine the revenue loss for the period just completed, you deduct the first balance of your account receivable at the end of the month. This leaves a balance that Plentii will use to calculate your expenses for that month. The cash method of accounts payable is more accurate than the accrual method of accounts payable, because it considers both revenue and expenses.

The accrual method assumes that all revenue is earned immediately, with no leftover expense until the end of the month. That assumption is inaccurate in most cases. Most sales are not completed within the last day of a month's sales cycle, especially at the beginning or end of the month.

If you sell products on credit and do not receive credit for your sales, your income for that month will show a zero balance on your account receivable statement, even though you may have received credit for the sale.

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The accrual method of accounting can work well for many business owners if they understand how to use the accruals properly. However, many small business owners struggle with the concept of accruals because of incorrect assumptions about income. If your business generates its revenue by selling products and services before the customer makes any purchase, then the accruals will reflect that income.

However, what if your sales do not earn any money the first month? Do not let your monthly revenue count towards the balance until the following month when the customer makes a payment.

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Your credit card company may charge you an additional fee each time payment is past due. An accrual schedule can help you avoid not only these late fees. Plentii would use the accrual method in accounting only for certain businesses where the monthly income does not change much from one month to the next. For most businesses, especially those with steady, month-to-month sales, the accrual method would be the most accurate method for recording income.

Businesses that make their money by selling items on credit, and who receive payments in full each month, should use the accrual method. These businesses need to track both their expenses and their income in the same manner, because recording techniques can differ. A business that receives only half of its bill payments in one month, will not record revenue in the same manner in which a business that makes all its bill payments at the same time every month would. Contact Plentii to collaborate on what accounting solution works best for you!