Impact of Accrual Accounting On Business Reporting and Decision-Making

Businesses often ask why we emphasize accrual accounting for bookkeeping, so today we demonstrate how it impacts your business finance reporting and helps you make informed decisions that aim at growth. Most small and large companies use accrual-based accounting to determine the company’s expenditures, income, and payable taxes. Accrued is a vital term used explicitly in business accounting. Do you know why?

Having an excellent knowledge of accrual accounting is beneficial to run your business successfully in ways more than one. The necessity for accrual accounting would be abolished if firms were allowed to receive cash payments for the profits simultaneously with the time they generated those sales, but considering the preponderance of businesses that made some money throughout the year, such as when they provided goods or rendered services, reimbursement was not received for those earnings; the firms are still required to account for such profits.

The same strategy is implemented in your business expenses. When organizations incur costs like buying products or services but haven’t yet made cash payments for them, accrual accounting of expenditure is required. Compared to the timeliness of the actual cash flows, accrual basis accounting aims to match revenue and cost to the periods they were acknowledged and accrued. 

Before you go by our word, let us show why you should.

Accrual accounting is reporting and recording your business’s financial transactions to help in the long run. The most crucial impact of this accounting method on your business will reflect on your income statement. Recording business financial operations on an accrual basis can significantly change a company’s reported net income or loss.

You can check a business’s cash flow report to understand how cash flows have affected the company in the past and continue to do so. Accrual accounting can lead to significant variances from the results presented under the cash foundation of accounting.

For instance, IT Biz provided IT services to its customer, Tom Computers, worth $4,000 in February. When IT Biz raised the monthly invoice on February 28, they sent the bill to Tom Computers. According to IT Biz’s terms and conditions, their clients have to pay them within 30 days. Therefore, Tom Computers sent them a check on March 10 which was deposited on the same day by IT Biz. 

If IT Biz uses an accrual accounting system, the revenue will be recognized when the transaction occurred i.e, Feb 28, and a corresponding receivable will be recorded. As soon as the payment is received in cash or bank, it will recognize the amount and reduce the receivable.

Accrual accounting helps accountants discover and monitor potential problems with cash flow or revenue problems and find and implement a viable solution for such problems. They help with the procedures above to do this. Here are some ways in which accrual accounting can impact your business reporting and decision-making:

1. Improved Financial Reporting: Accrual accounting provides a more accurate picture of a company’s financial performance and position by recognizing your revenue when earned and expenses when you incur rather than when cash is received or paid.
2. Better Decision Making: Accrual accounting enables business management to make better decisions by providing a clearer knowledge of the company’s financial performance and position. For instance, when your company is using accrual accounting, management can see the impact of current and future transactions on its financial statements and make decisions accordingly.
3. Improved Cash Management: Accrual accounting helps your company manage cash flow more effectively by providing information on when accounts receivable and accounts payable are due. This financial information is extremely useful in managing cash flow. Moreover, it helps in making decisions about investments you do in business.
4. Better Budgeting: Accrual accounting provides information on future cash flows, which is useful in preparing budgets and making decisions about investments and financing. For example, if a company knows when it will receive payment for services rendered, it can plan its cash flows more effectively and make decisions accordingly.
5. Better Insight into Future Performance: Accrual accounting provides a better understanding of a company’s future financial performance, including information on commitments and contingencies, such as outstanding contracts, potential liabilities, and a lot more.

Now you might be thinking about when and why your business firm should use accrual accounting for better results.

Many businesses maintain their accounts on a cash basis without being required to follow generally recognized accounting standards. While business owners continue to enhance their accounting skills, using the cash foundation of accounting might look more straightforward and manageable in the present system. However, the timing of a firm’s costs and profits is not always precisely represented in the cash-basis income statement. Hence, understanding the company’s financial situation and predicting future financial activities might be more complex. To streamline numbers, accrual accounting for business firms is recommended, and we’d be happy to help. 

For more information on how to improve your business financial reporting or get started with accrual accounting for your business, reach out to our team here