Why are accruals necessary

Is this another piece of information that […]. Is this another piece of information that goes into the black hole of a spreadsheet, never to be seen again? Accruals, especially at this time of year, are critical to good accounting. They help to ensure you have good information about the financial health of your company.

At its core, accrual accounting is fairly simple: the numbers in financial statements should reflect the work and activities that occurred in the time period of those statements. So, if the income statement is for December, then the revenue and expenses in that statement are for the revenue that was earned for example, was the product delivered in December?

A related and important accounting principle here is the matching principle: match expenses to the revenue the expenses helped to bring in. Say an invoice comes in for something that happened a month ago.

Another example of accruals is when we pay for something in one month, but we get the benefit for more than just that one month. Accrual accounting allows companies to record and measure credit — both credit owing as well as owed. In addition, businesses with inventory must also use the accrual method. Between the two types of accounting, it is important to note that a third option exists that is an additional component — but not for every business. Generally, the IRS allows businesses to use this method as long as they calculate and report consistently.

However, you cannot use the hybrid method if you use cash accounting to report income or accrual accounting to report expenses. See IRS. If you have any doubts, find a local accounting group or outsourcing firm that can give you a fair assessment of your books. This can keep you in compliance with IRS guidelines and federal accounting regulations. We match up with ideal candidates for services by allowing small to midsize businesses to increase focus on their growth through outsourcing.

If you want to know how we can help you, contact us today! Accrual Accounting is Used Because of Its Benefits As a business owner, experiencing growth can be a double-edged sword. However, there are 5 simple reasons experts say accrual accounting is used because of its benefits: 1.

With cash basis accounting, wage expense is recorded to the company's books when wages are paid, not at the time they are incurred. This will cause the company's total wages to be reported at less than what was actually incurred on September's income statement, which in turn causes the company's profit to appear higher than actual.

Using the accrual basis of accounting, however, a journal entry will be made to recognize, or expense, the wages in the period that they have occurred and to increase the company's liability account for the amount that is owed to its employees. Keela Helstrom began writing in She is a Certified Public Accountant with over 10 years of accounting and finance experience. Though working as a consultant, most of her career has been spent in corporate finance.

By Keela Helstrom. Accrued Expenses An expense may be accrued on both operating and non-operating expenses that occur in one period but are paid in a future period.