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5 Reasons Why Accrual Accounting Is Beneficial

Tulsa Accounting Services

Accrual Accounting is Used Because of Its Benefits

As a business owner, experiencing growth can be a double-edged sword. Why? When your business growth experiences an increase in revenue and profits, your bookkeeping can quickly become complicated. You may need to consider changing the way you handle your money.

Most small or start-up businesses typically set up their books using a cash accounting system. However, if your business incurs, for example, new revenue streams and expense categories along with new investment strategies, a cash method may not be adequate in handling the complexity of your business activities.

Accrual Accounting: Definition

According to Entrepreneur Magazine, accrual accounting “…is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term “accrual” refers to any individual entry recording revenue or expense in the absence of a cash transaction.”

In other words, you get to count your eggs before they hatch – but you also have to go collect the eggs!

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Why Would a Business Switch to Accrual Accounting?

Making the switch from cash-based accounting to accrual accounting may not be easy for some. It may mean bringing in experienced, outside help to assist with the transition or verify changes for accuracy. However, there are 5 simple reasons experts say accrual accounting is used because of its benefits:

1. Improving Your Financial Picture

Getting MoneyWise states, “Accrual accounting easily allows the business owner to see at a glance if the company is profitable, where the profit is coming from, and where expenses are going.  Accrual accounting also matches revenues with the expenses the company incurred to produce it.”

2. Staying GAAP Compliant

In the United States, GAAP (generally accepted accounting principles) is the industry standard for preparing financial statements. In fact, companies in the United States with $5 million in annual sales or $1 million in annual inventory sales are legally required to use the accrual accounting method as part of GAAP to report their financial information and for income tax preparation. Meeting GAAP allows a company’s financial picture to be easily accessed by investors and other financial institutions. (Getting MoneyWise)

3. Improving Accuracy

Accrual accounting gives companies a truer depiction of their resources and financial responsibilities. This serves as a company advantage because according to Inc.com, it allows businesses to properly manage the ebb and flow of financial activity. Professionals can assess income and debts more accurately with accrual accounting. (smallbusiness.chron.com)

4. Planning for Growth

Cash accounting is an “after the fact” accounting style, while accrual accounting is accounting in real-time. According to World Bank, accrual accounting makes it easy for business managers to plan the future. 

They do not have to wait to receive the cash to see what their profits are. Because of this, professionals can strategize ways to improve sales or generate more revenue as they spot financial plateaus. This keeps a company progressive, which is crucial to viability. (smallbusiness.chron.com)

5. Obtaining Credit

To expand, or even to survive, most businesses will depend on credit.  Accrual accounting allows companies to record and measure credit – both credit owing as well as owed. (Getting MoneyWise)

Entrepreneur Magazine makes this valid point: “The accrual method is required if your business’s annual sales exceed $5 million and your venture is structured as a corporation. In addition, businesses with inventory must also use the accrual method. It’s also highly recommended for any business that sells on credit, as it more accurately matches income and expenses during a given time period.”

Is There Another Method Besides Cash Accounting?

Between the two types of accounting, it is important to note that a third option exists that is an additional component – but not for every business. “The hybrid method of accounting allows your business to use any combination of cash, accrual, and special methods of accounting. Generally, the IRS allows businesses to use this method as long as they calculate and report consistently. However, you cannot use the hybrid method if you use cash accounting to report income or accrual accounting to report expenses. See IRS.gov for more exceptions.” (SBA.gov)

Be sure you are confident about the type of bookkeeping you pick to handle your business’ finances. If you have any doubts, find a local accounting group or outsourcing firm that can give you a fair assessment of your books. This can keep you in compliance with IRS guidelines and federal accounting regulations.

 

LUXA Enterprises specializes in HR services, outsource accounting, bookkeeping, and payroll services. We match up with ideal candidates for services by allowing small to midsize businesses to increase focus on their growth through outsourcing. If you want to know how we can help you, contact us today!

REQUEST ONLINE PRESENTATION

We’ll demonstrate how you can save money while improving your efficiency and accuracy when you outsource your back office services to TEAM LUXA.
Let Us Present A Plan →
LUXA Enterprises download brochure

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