What Is Accrual Accounting?
The accrual basis of accounting is basically the complete opposite of the cash method. Income and expenses are recorded when they’re billed and earned, regardless of when the money is actually received.
Using the example from above, and applying the accrual basis of accounting, you would record the $1,000 as income in March’s bookkeeping versus in April when you actually received the funds.
The upside to using the accrual method is it gives small business owners a more realistic idea of income and expenses during a certain period of time. This can provide you (and your accountant) with a better overall picture of how your business is doing and where it’s headed in the future.
One drawback to the accrual method is that it doesn’t account for cash flow or funds that are available in your bank account. If you don’t have careful bookkeeping practices, the accrual-based accounting method could be financially devastating for a small business owner, as your books could represent a large amount of revenue while your bank account is completely empty.
For more information about the accrual accounting method, see our full article here.