Accrual basis accounting is a way of recording financial transactions that focuses on when the transactions occur, rather than when the money actually changes hands.
In other words, under accrual basis accounting, revenues and expenses are recorded when they are earned or incurred, regardless of when the money is actually received or paid. This method allows for a more accurate representation of a company's financial position over time, as it takes into account all transactions that have taken place, whether or not cash has been exchanged.
It's a little like the way credit cards work. Accrual basis accounting records your transactions when you swipe the card, even though you may not pay your balance to the credit card company until later.
Or maybe it’s like getting engaged…you’re a real couple now, loyal and promised, but the official consummation (right?) comes later, when the vows are exchanged. Maybe the credit card example was better, but hopefully you get the idea.
Accrual basis accounting is often used by larger companies and organizations, as it provides a more complete picture of their financial situation over time, and it allows for better planning and decision-making based on a more accurate understanding of their financial performance.
Your small business may not be required to record transactions this way for your tax returns or for your financial statements – cash basis is the most common and easily understood basis used by sole proprietors and small businesses. But it’s good to understand how the different reporting methods and accounting bases work. And you can get more insight into the reporting and accounting options you have for your business by discussing them with your accountant or CPA. I know a good one if you don’t have one, by the way.😉