The accrual principle is one of the top concepts every business owner must understand. Accrual is a term that entrepreneurs would often encounter in business. However, many beginners still lack an understanding of the proper implementation of this standard method. Here is a quick guide to using the accrual accounting method in the business.
Under the accrual method, revenues are recorded in the period realized and earned, irrespective of when cash is received. Therefore, whether the product sale is made through cash or credit (payable at a later date), the company must record the revenue in the period or date of the transaction. In service businesses, the company must have fully or essentially rendered the revenue-generating activity to record the income.
Similarly, the company must have fully incurred or consumed an asset to recognize it as an expense. For example, an advanced payment of rent is not considered an expense until the month for which it applies has elapsed.
Accrual expense recognition also rationalizes why equipment acquisition (e.g., photocopying machine) is initially recorded as an asset, then expensed through the years through depreciation. Because even if the asset has been fully paid, it has not yet served its purpose to the establishment. The total cost of the equipment is expensed over the life of the equipment with depreciation expense that represents the equipment wear, tear, or usage.
Accounting Tools in Adopting the Accrual Method
The application of the accrual method is now much easier with KIPPIN small business accounting software. As the best accounting software for small business, the KIPPIN solution enables automated and simplified recordkeeping, with financial reports that adhere to the Generally Accepted Accounting Principles (GAAP).
KIPPIN is also offering accounting, bookkeeping, payroll, and tax guidance service to independent contractors and small businesses. To learn more about whether the accrual accounting method is suitable for your business, contact KIPPIN to address your queries and concerns. You may also reach out to learn more about KIPPIN accounting software packages for your small business.