Accrual accounting - What is accrual accounting?
Accrual accounting is an accounting method that recognises financial events when they occur, regardless of when payment is made
Starting and maintaining solid, professional accounting practices is essential for the growth of a business. Make sure yours are in order with Debitoor.
When a company uses the accrual accounting method, economic events are recognised in their accounts by matching revenues to expenses (the matching principle) at the time in which the transaction occurs (as opposed to when the payment is made or received).
For example, when an expense occurs, but payment is deferred to a later date, the expense is recorded even though cash has not yet changed hands. The expense is recorded regardless of whether payment is expected in that fiscal year or in the next.
The accrual accounting method allows the current cash inflows and outflows to be shown alongside future expected cash inflows and outflows. This method provides an accurate picture of a company's financial situation.
The potential downside of the accrual accounting method is that, because transactions are recorded irrespective of whether payment has been made, businesses may end up paying tax on revenues for which they have not yet received payment.
Two types of accruals
- Revenue: On December 21, Peter’s company sends two vans to help Company A move. The total income for Peter’s company is £600. Under the accrual accounting basis, Peter’s company marks the £600 revenue in their records as accounts receivable on December 10 of the current accounting period, even though they will receive payment in the next accounting period.
- Expense: Jane’s company buys kitchen supplies from Company A on December 14. The supplies are delivered the following week. Company A charges Jane a total of £1200, due within 30 days. Jane marks this as an expense in her records for December 14, even though she will make the payment in the following accounting period.
Accounting in Debitoor
With Debitoor, expenses and revenues are categorised and organised quickly and easily. The system automatically matches transactions with bank statements and balances cash inflow and outflow.