Accrual Basis Accounting – A Short Tracking Guide
Keywords – Accrual Basis Accounting
At a micro level, businesses are quite different from one another. However, as a collective, what constitutes business can be brought down to a few commonalities.
So, let’s begin by asking a question – When does business actually take place?
- When a customer agrees on a purchase but postpones the purchase until a later day
- Once the produce or service is given
- When cash is exchanged
The option 3) constitutes an accrual; an accumulation of money in a business; constituting the basis for ‘accrual accounting’. On the other hand, options 1) and 2) have further specifications attached.
Businesses that sell a product or service understand that packaging is one of the key elements to sell as it is a visual that positions you in the market.
Similarly, your company accounts is no different because you need employees, clients and suppliers to be on the same page.
So, how you present your accounts, will highlight a business from a different position.
The beginning point is the agreement of doing business together.
The simpler option here is exchange of cash. For this reason, small businesses usually base their account on this exchange of cash.
However, if you are in the manufacturing sector or have a revenue of above £5 million, you are required to present your numbers using the 2nd accrual accounting.
This is when there is an exchange of service but cash may be exchanged later due to invoicing terms.
In such cases, companies are required to acknowledge economic value even when there is no cash involved. This is also the case for expenses to be incurred by a company of the defined magnitude.
The Further Specifics
Businesses try to master their products and services
However, business leaders are not always so hot on their bookkeeping.
Let’s be honest, the chunk of it is the most boring and time consuming. However, the end numbers give a clearer picture of the business. So, keep an eye on the following numbers:
- Cash: More specifically cash receipts.
- Receivables: Payments from customers that are not collected immediately.
- Inventory: Stocked products to sell. Here, inventory is comparable to money sitting on a shelf. Hence, your inventory must be carefully accounted for and tracked.
- Payables: Money you are supposed to pay within a period. Simply, any business has money going in and out. However, keeping a track of payables and accounting for them carefully forms a bigger part of sustaining your business in the long term.
- Sales: Revenue from selling your products and services. Logically, sales are the most important number to demonstrate the standing of your business.
- Retained Earnings: Profits that are reinvested in the business. Luckily, managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how well the company has done over time.
To learn more, get in touch with us today.
And, to learn about other areas around your business accounts, check: