Advantages of Accrual Accounting for Business

Every business is required to maintain books of accounts for keeping a track of its financial transactions.  Accounting and Bookkeeping are crucial to evaluating business performance and it is imperative that these tasks are carried out as per the accepted methods of accounting.  Broadly, globally there are two most prominent forms of accounting methods viz., Accrual method and Cash method.  The simplest differentiator between the two methods is that Cash method is easier compared to Accrual method while recording transactions, apparently because under Cash method the transactions are recorded as and when they actually happen i.e. when Cash is received or paid.  The Accrual method on the contrary caters to recording transactions as and when they are incurred for a particular financial period, irrespective whether they are realized or paid for.  The Accrual method is considered more transparent as it reports actual revenue or expenses for a financial period.  Financial period here means your accounting year.  The Accrual method of accounting clearly depicts the real performance of your business.

So, let’s elaborate briefly on the significant benefits of Accrual method of accounting:

1.     Effective monitoring & management of finances:

A business is able to analyse in real-time its inflow or outflow of cash.

2.     Cash flow evaluations & forecasts:

With the accrual method of accounting adopted, it is possible to generate cash flow statements for a business, which in turn assist in evaluating historical trends of your cash across business activities, as well as help lay out future projections.

3.     Strategic financial decisions:

Accrual basis of accounting results in accurate reporting of finances and in turn assists in evaluating various strategic decisions e.g. use of debt or retained earnings for expansion, managing cash shortage, investment possibilities etc.

Alternatively, cash basis of accounting is more like after-the-fact or post-mortem accounting of financial transactions in a business, since they are only accounted for when cash is received or paid and not when its accrued, thereby skewing the actual financial picture of a business.  The cash method of accounting is general used by very small sized business globally, who generally do not have many regulations governing their business or which generally are not in requirement of more cash, by way of investments or borrowings, usually for expansions or capital management.  However, in the modern era, Accrual method of accounting is adopted by almost every business right from the word go, to be able to take advantage of its resultant reporting for fruitful decision making and stay successful with its operations.

If you are starting your business or already recording your business financial transactions under the cash method of accounting and you wish to understand the accrual method of accounting and its implementation, it would be wise to consult an expert accounting firm such as GJM & Co.  An expert accounting firm such as ours can not only explain the benefits of the accrual system of accounting but also implement the same for your existing business.

We trust this article was helpful to you in understanding in brief how to proceed with planning for your business line of credit.  Should you have any queries or need consultation with your application, Schedule a Call today or write to us at info@gjmco.in.