Accrual concept is an accounting method that requires you to record both expenses and revenues in the when they occur regardless of whether you have received the cash or not. The primary benefit of using the accrual accounting method is that your business financial statements will reflect every expense associated with the recorded revenue for that accounting period (Also see Should You Outsource Accounting Function?).
Generally, accrual accounting approach allows you to recognize economic events and match each revenue you have received to the corresponding expense (matching principle) when the transaction occurs rather than when you receive the payment. With that, you will be able to combine your business’s current cash flow and the expected cash flow to get a clearer picture of your business’s financial condition.
For instance, when you sell a laptop to a client who uses credit card, accrual accounting method and cash accounting approach will have different perspectives regarding this transaction. Cash accounting will require you to recognize the revenue when it’s received even if you will receive payment for the laptop after 6 months. On the other hand, accrual basis of accounting allows you to record the revenue at the point of transaction.
Most businesses, both big and small, consider accrual accounting to the standard accounting method with exception of a few operations. This is because it offers a more accurate image of any business’s current financial position. However, its relative complexity makes it hard for some businesses to implement it. For instance, if you don’t understand account in accrual basis, then, you will need to hire a professional accounting to help with the numbers.
Keep in mind that accrual concept of accounting is the exact opposite of cash accounting. While accrual accounting concept requires you to recognize revenue and expenses as they occur, cash accounting concept requires you to recognize revenues and expenses when you receive the payment.
This accounting concept (Also see Monetary Unit Assumption and Accounting Principle – Business Entity Concept) has become very popular due to the increasing complexity of any business transactions and the fact that most business owners desire accurate financial information. Besides, projects that can’t provide revenue within a short time affect the business’s financial condition at the point of transaction. Thus, it will make sense to have such events reflect on the business’s financial statements during the same accounting period when these events and transactions occurred.
Your choice of the accounting method depends on the requirements set by the Financial Reporting Standards. Therefore, it’s advisable to understand the FRS so that you can make the right choice.
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