The Principles of Accrual Accounting

Posted on Mar 25, 2014 | 0 comments

Accrual accounting is a little different that the type of accounting that most people know, in that this type of accounting measures performance of a company by the economic events that occur, rather than when cash, revenues or expenses occur.

This process allows current cash flow items to be combined with the cash flow of the future expected revenues to get a more accurate look at the current financial condition of a company.

Accrual accounting is thought to be the standard practice for accounting for most companies except for very small companies. The need for this type of accounting came about because of business transactions that have become increasingly complicated, and a desire to keep track of them more accurately. Most business is now done by credit and different projects that create streams of revenue that affect a company over a long period of time, need a way to take into account what is actually happening before any cash is actually received.

For example if a company buys a dump truck, the truck is sold on credit and the accrual method show the revenue as having been received, even though it hasn’t and won’t be fully collected for some time in the future. If the accounting is done on the cash method, the revenue will only be recognise when the cash is actually fully collected sometime down the road.

It is also important to understand the difference between cash flow and cash received. Cash flow is a more accurate measure of how much cash you have to work with at any given time. Cash received is more reflective of cash received at the end of a credit transaction. You have to know your cash flow at all times in order to be able to work today with what you have. And that is the real difference.

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