Why Do Companies Use an Accrual Basis of Accounting?

Business owners can use accrual basis accounting to record financial transactions in a practical manner for current and historical use. Using accrual basis accounting, business owners must record financial transactions as they take place in business.

Facts

Using accrual basis accounting, business owners must record financial transactions as they take place in business. Accrual accounting does not consider when cash changes hands, unlike cash basis accounting.

Requirements

As a general rule, businesses must use accrual accounting if they have $5 million in annual sales or $1 million in annual sales from physical inventory.

Function

Accrual basis accounting presents financial accounting in a manner where creating historical trends is much easier than other accounting methods. It is also easier to compare internal financial statements for analysis under the accrual accounting method.

Benefits

Accrual basis accounting offers a better opportunity to compare a company’s financial information to industry standards. Most companies in the business environment use accrual basis accounting,

Warnings

Small business owners may struggle to use accrual basis accounting in their business. Accrual basis accounting requires more journal entries and reconciliations to maintain financial information.

References

• Entrepreneur: Accrual Accounting