Accrual Accounting: 5 Things You Need to Know

Have you heard of the accrual accounting method? It involves recording revenue and expenses when the respective transactions occur. If your business sells services, for instance, revenue-generating transactions may occur before customers actually pay you. With the accrual accounting method, you can record revenue and expenses before money is exchanged. Here are five things you need to know about the accrual accounting method.

#1) Opposite of Cash Accounting

The accrual accounting method is the opposite of the cash accounting method. The U.S. Internal Revenue Service (IRS) supports both types of accounting methods. The cash accounting method involves recording revenue and expenses at the time when money is exchanged. The accrual accounting method, conversely, involves recording revenue and expenses when the transactions occur.

#2) Preferred Method By Medium and Large Businesses

While the IRS supports the cash accounting method and the accrual accounting method, medium and large businesses typically prefer the latter method. Individuals and small businesses typically prefer the cash accounting method. You can typically use either accounting method; just remember to stick with a single accounting method.

#3) Involve Double-Entry Bookkeeping

The accrual accounting method involves double-entry bookkeeping. Double-entry bookkeeping is an accounting technique in which you record transactions twice. If you sell a service for $10,000, you will record a debit of $10,000 when the transaction occurs. Once you receive payment from the customer, you would record a credit of $10,000 to the same accounts receivable and then another $10,000 for a revenue account.

#4) There’s a Hybrid Method

When most people think of accounting methods, they envision the accrual accounting method and the cash accounting method. But there’s another accounting method available: the hybrid method. As you may have guessed, the hybrid method combines elements of both the accrual accounting method and the cash accounting method.

#5) Offers Real-Time Insight Into Financial Health

You’ll have a better understanding of your business’s financial health if you use the accrual accounting method. The accrual accounting method offers real-time insight into your business’s financial health. With the cash accounting method, you won’t realize revenue and expenses until money is exchanged. The accrual accounting method takes a different approach by realizing them when the transactions occur.

There are different methods that you can use to track and record your business’s financial transactions, some of which include the cash accounting method, the accrual accounting method and the hybrid accounting method. The accrual account method is the opposite of the cash accounting. It’s preferred by medium and large businesses, involves double-entry bookkeeping and offers real-time insight into financial health.

What are your thoughts on the accrual accounting method? Let us know in the comments section below!

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