Accrual accounting is an important concept in the field of accounting, strategic for businesses. This method is not merely a method of recording of financial transactions, which is also effective approach to construct a solid financial foundation. So accrual accounting is what? Let's Accnet explore deeper in the article below.
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1. Accrual accounting is what?
Accrual accounting is a method in financial accounting, recognition of revenue/expenses in the accounting period based on the time arises, does not depend on the time of cash payment. This method allows the business to have more comprehensive overview about the financial situation and business performance.
2. Basic principles of accrual accounting
2.1. Recognize revenue when incurred
Methods recognize revenue in the accounting period when the business transaction arises, regardless of whether the customer can pay immediately or not, make sure that financial statements accurately reflect the amount of revenue that the business has created in the accounting period, is not affected by the time of payment of the customer.
2.2. Accrual accounting recognition of expenses when incurred
Method recognized at cost in the accounting period when incurred, not dependent on time, cash payments to help businesses be more accurate view on the cost spent in the process of production/business. This principle supports leaders strategic decisions, forecast financial efficiency.
2.3. Do not depend on the time of payment
One of the key principles of accrual accounting is not dependent on the time of cash payment. This is completely different compared with the method of accounting for cash, where the revenue/expense is recorded only when cash has been paid/earned.
3. Application of accrual accounting in practice
3.1. Financial reporting accuracy
Financial statements true about the business situation of enterprises. Instead of just reflecting the cash transactions have been made, this method provides more comprehensive view of revenue generated, the cost was borne in an accounting period certain.
3.2. Manage cash flow effectively
Accrual accounting to help businesses manage cash flow efficiently thanks to the ability to forecast/cash flow management short term correctly, minimize risk, optimize the use of capital.
3.3. Support strategic decisions
Through the analysis of the data on financial reporting, business managers can take out the strategic decisions such as investments in production expansion, new product development or market expansion potential.
3.4. Accrual accounting financial forecast for business
Information about revenue/expenses are recorded timely and accurately will support the budget planning, management of financial risks of the business.
3.5. Deal with economic fluctuations
This accounting method to help businesses better cope with the fluctuations of the market economy because there are clear insight about the ability to forecast accurate financial, business can adjust the business strategy to adapt when the business environment changes.
3.6. Accrual accounting regulatory compliance legal
The information provided correct, complete, financially that will help the business comply with the provisions of the agency management economic/tax under current law, the latest
4. Compare accrual accounting and cash accounting
The comparison table to help businesses understand the differences and advantages of each method of accounting. Below is the comparison table, in particular:
| Characteristics | Accrual accounting | Cash accounting |
| Definition | Recorded revenue/expenses when incurred | Recorded revenue/expenses when cash payments |
| Time recorded | When the transaction arises | When payment or cash collection |
| Flexibility | Has high flexibility in the recognition of assets/liabilities | Little more flexible because depending on the time of payment |
| Financial information | Provide detailed information, exactly on the financial situation | May cause false financial information due not recorded timely transactions |
| Financial forecast | Support financial forecasting easier | Financial forecasting more difficult due to not fully reflect the transactions |
| Cash flow management | Manage your cash flow more effectively | Difficulties in the management of cash flow do not have a comprehensive view |
| Compliance with laws | To comply with the laws and regulations financial statements | Difficult to comply with regulations on financial statements due to the method recorded |
| Applicable objects | Suitable for businesses with large-scale, complex operations | Apply for the small business, simple operation |
5. Specific examples
5.1. Example of accrual accounting for business automobile manufacturing
Business automobile manufacturer A have time accounting from January 1 to march 12 every year. In year 3, company A has received orders from a major customer to produce 100 cars. According to the contract, the customer will pay the full amount after received the goods on march 5.
Business A will recognize revenue from this order on the financial statements of September 3, immediately after the contract signing, committed to producing. Even if the money has not been paid, the revenue will be recorded according to the time of the transaction arises.
5.2. Example of accrual accounting for construction business
Business X specialized construction works. On January 7, the business receives the contract to build an office building from a major customer. Execution time expected is 9 months, the customer will pay 30% contract value as soon as signed, the rest after the completion of the project in months 4 years later.
First, on December 7, company X will recorded 30% of the revenue from the contract value on the financial statements of that month, although only receive part of the money of the initial payment. The expenses related to the project are also recorded when incurred, including the cost of materials, labor, equipment.
Applying the method of accrual accounting brings many benefits, but also create challenges for businesses in the monitor, monitoring, accurately record the revenues and expenses incurred. This requires the accountant to constantly collated data, ensuring all transactions are recorded the right time, avoid errors affect the financial statements, ability to make decisions.
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Accrual accounting is what have you see this is a tool to manage important financial help businesses have more complete view of business performance. The application of this method helps to optimize the management of cash flow, minimize business risk. To achieve high efficiency, businesses need to follow the system. I wish you success!
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