The accrual concept of accounting is the only method that is recognized within GAAP principles, the generally accepted accounting principles that are used by professional accounting firms most SMBs and larger businesses. While a sole proprietorship can get away with using the cash based accounting method, as your business grows it may be time to make the jump to accrual concepts.
What are the two methods?
The cash concept of accounting calculates income when it is actually collected and expenses as they are spent.
The accrual concept records income when it’s earned (before it may be received) and its related expenses at the time they are incurred. This method permits more accurate financial forecasting, since it takes taxes into consideration for income that is expected and also permits companies to look at their income and expenses as a cohesive whole.
Making the Jump to the Accrual Concept and GAAP Principles
You may be ready to make the jump to accrual accounting if you’re a small but growing business that has either recently:
- Incorporated (not as an LLC, but as a corporation)
- Begun searching for outside investors or VCs
- A company going public for the first time
- Decided that your bookkeeping has gotten too big and complex to handle yourself.
If this is the case, it’s important to find professional bookkeeping services with knowledge, expertise and training in accrual accounting concepts. Accrual based accounting typically goes hand-in-hand with other GAAP principles of accounting, making it easy for investment firms, stockholders, members of your board of directors and potential lenders to understand your financial statements at a glance.
Is it time for your company to make the switch? If so, give AccountingDepartment.com a call to see how we can help you.