Accrual basis accounting is the most accurate way for businesses to track income and expenses. Under accrual basis accounting, revenue and expenses are recognized at the time of the transaction. You record the revenue and expense immediately and then you record a separate entry for when the cash is received or spent.
Unlike cash basis accounting, your company will utilize Accounts Payable and Accounts Receivable to track revenue and expenses. This means expenses will be recorded on income statements when the expenses match revenues. So if you have not been paid for an expense, a liability account will be recorded as well. Your accounting will be adjusted when you do receive payment.
This method of accounting focuses on what revenues are earned and what expenses are incurred. Accrual accounting can help you focus on your profitability during an accounting period as well as on your assets and liabilities at the end of each accounting period. However, revenues aren’t cash. Which means accrual accounting can make your company appear more profitable than you are. That’s where we come in. As your bookkeepers, it is our job to make sure you have accurate financials and understand what your financials are telling you. Including your profitability.
How We Report Revenues Under Accrual Basis Accounting
Under accrual basis accounting, we report revenues when the service is rendered. If you provide $20,000 of services in March, your income statement for March will list the $20,000 of services provided.
Depending on when you require payment, your income statement for March may not record payment. If you require payment within 30 days, and you’re paid for the $20,000 of services provided within the 30 days, we will report the accounts receivable on the March 31st balance sheet.
How We Report Expenses Under Accrual Basis Accounting
Let’s say your bills incurred during the month of March include $1,500 for rent and another $300 in internet and utility costs. Even though the internet and utility meters won’t be read until April, those estimated expenses will show up on your March balance sheet. We will create a liability on your March 31st balance sheet so it more accurately reflects your obligations as of March 31st. Your rent is paid in March, so that $1,500 expense will show up on your March balance sheet as well.
Using the above transactions, your revenues for March would be $20,000. Your March expenses would be $1,800 for a net income of $18,200.
Alternatively, under cash basis accounting, your income statement for March would show $0 for revenues and $1,500 in expenses for a net loss of $18,500.
Is Accrual Basis Accounting Right for my Business?
Accrual basis accounting may or may not be the right option for your business. Many of our clients with established businesses will already use either accrual or cash basis accounting and will continue with their chosen system. Businesses change. As do your accounting needs. So we take your accounting system and business needs into consideration during our reviews to ensure you’re using the best system for your business.
For new business setups, we help you choose the right system for your new company. And we help you set up your system, help you make the best choice about any software you may need, and onboard you and your team so you’re ready to go from day 1.
Get bookkeeping that works for you. Bookkeeping Unlimited offers affordable, full-service, and fully outsourced bookkeeping to businesses across the United States. Call 281-316-2220 or contact us today to schedule your FREE consultation.