What is the accrual method?
There are two main accounting methods: a monetary base and an acrual basis. The use of the cash base method is recorded in the hands at a time when the exchange of money, regardless of when the income was obtained or was a debt. In a strict method, income and debt are recorded at a time when it is earned or arises, regardless of when it is paid. Some small businesses can also use a hybrid form that combines these two methods.
Most self -employed and unconnected small businesses use cash base for its simplicity. If the supplier completes the work of 20 December but does not get paid until January 20, it includes revenue in January. The preparation of the balance statement and the tax return is relatively simple because they simply have to look at their deposits and their paid accounts to determine profit or loss per year. If someone does not pay what they owe, they do not have to adjust the balance sheet next year with the wrong debt because Never includedthe money they owed to him in his accounts. Although this method does not provide an exact picture of monthly expenses and profitability, it made you know exactly how much cash they had at hand at all times.
The accrual method may be slightly more difficult, but the generally accepted accounting principles require all corporations to use the accrual method. Expenditure and revenue are recorded at a time when they are spent or earned. For example, if the timber is delivered for the construction project in July, the costs will be recorded in July, although the bill does not pay until August or later. If the project is completed in December, but the terms of the agreement allow the customer to delay the payment for 30 days, then the project revenues are counted in December and includes a tax return of this year, provided that the company uses the calendar year as its fiscal year.
Other debts that may be paidNY quarterly, they are also assigned to accounts for each month of liability when using the incremental method, not only if the debt is paid. For example, if the company pays an annual bonus of $ 1200 USD (USD) for real estate insurance, an account that records $ 100 insurance for insurance is set up every month. In this way, the strict method has the advantage of providing a much more accurate picture of monthly operating costs than the cash method. The annual profit statement and loss based on accrual accounting also provide a more precise image of the total profitability of the organization.
There are some disadvantages of any accounting method and the accrual method does not differ. The company can look very good on paper, yet there is poor cash and in their debts, especially if customers no longer pay their invoices in time. The acrual method assumes that all accounts are in good condition but if the customer is delinquent or by default, then spolTheness may not be able to pay your debts. If the customer fails on the debt, the company must calculate and record the deduction of the wrong debt to correct the records and obtain any tax paid from the income that has never been actually received.