How To Decipher Accrual Accounting
accrual accounting is a system used by companies to record their financial transactions regardless of whether a cash transfer has been made. unlike cash accounting where a business transaction is valid only when cash is received for goods or services, accrual accounting reports all cash and credit transactions. for example, in april joe buys a car from a local dealership for $20,000. the purchase is made on credit with a loan from joe's bank. the dealership will mark the sale for april even though the bank doesn't send him a check for joe's purchase until june. bank loans, credit card sales and long term credit projects are usually paid within a reasonable amount of time. accrual accounting gives businesses the opportunity to list credit and cash sales in the same reporting period that sales occur, showing all sales made for a set period. basically, accrual accounting recognizes when an expense is incurred, not when that expense is paid. for example, an other dealer purchases a car rift for $10,000 in may and has 90 days to pay it off. the dealer will know the expense in may when he or she purchases the car lift, so that the expense is recorded when that occurs not when it's paid. the accrual accounting method ? descriptive financial picture of a business' income and expenses. accrual accounting is more financially accurate than many other systems which can lead to better ? for businesses, making the company more enticing to investors.