How choosing the right accounting method can help your business grow

Accrual accounting method helps…

1. Improve the financial picture

   – Using the accrual accounting method entrepreneurs can get a quick glance at their company’s financials, to see whether their business is profitable, what the source of the profit is and where most of the money is being spent. 

2. Stay GAAP compliant

   – In the U.S., “generally accepted accounting principles” is considered the industry standard for putting together financial statements. In fact, businesses with $1 million in annual inventory sales or $5 million in annual sales are legally required to use the accrual accounting method as part of GAAP to report their finances and for income tax preparation. Meeting GAAP requirements allows an organization to be easily assessed by investors and other financial institutions. 

3. Improve accuracy

   – Accrual-based accounting provides businesses a more realistic picture of their resources and financial responsibilities. This allows them to more accurately manage the ups and downs (such as the income and debts) of financial activity. 

4. Plan for growth

   – Accrual accounting makes it easier to plan the future, because it is accounting in real time. Business owners do not have to wait to receive payment to know how much profit they have made. This allows them to come up with ways to generate more revenue or improve sales to keep progressing.

5. Access credit

   – To survive or to expand, most companies depend on credit. The accrual accounting method allows them to record and measure credit – both owed as well as owing credit. 

But, accrual-based accounting can be...

1. Quite resource-intensive

   – Accrual accounting adds paperwork and complexity to a company’s financial reporting system, so entrepreneurs tend to view it as more expensive and laborious to implement. Because a firm records revenues before they actually receive the payment, cash flow needs to be tracked separately.

2. Inaccurate in terms of the short term

   – Even though accrual-based accounting gives a better long-term view of a business’s finances, the cash-based method provides a better picture of funds in the bank account. This is because accrual accounting accounts for cash that is yet to come in.

Takeaway

Author

Neha De

Neha De is a writer and editor with more than 10 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.