What Is Accrual Accounting?

Do you enjoy math? While many people dread anything that has to do with numbers and equations, for others, they come easy. If you're one of the chosen few who understand the principles of mathematics–and enjoy math-related tasks–you may want to consider a career in accounting. Far from being boring, accounting is a dynamic industry with steady job growth potential. There are different methods of accounting that businesses use, including cash basis accounting and accrual basis accounting. Of the two, accrual accounting gives a more accurate picture of how the company is performing.

What is accrual basis accounting? It's the only accounting method recognized under Generally Accepted Accounting Principles (GAAP). If you pursue a degree in accounting, you'll learn more about the differences between the two, including why a business might choose one over the other.

How Does Accrual Accounting Work?

Accrual accounting tracks revenue as earned instead of when it is received. Similarly, it tracks expenses when they are incurred rather than paid out. In this way, the accountant can better track exactly how the business is doing. For example, suppose the company completes work and bills the client in January. Regardless of whether the client pays the bill, the income statement will record the fee 30 days later. Additionally, the expenditure is recorded in the ledger if the company orders supplies in February, even if the client doesn’t pay until the following month. 

One drawback to accrual basis accounting is that it requires taxes to be paid on all revenue recorded as earned, regardless of whether the company received the cash.

Cash Basis vs. Accrual Basis Accounting

Cash basis accounting is a more straightforward method of keeping track of revenue and expenses because the numbers are entered into the books only when cash is received or paid out. Businesses that use this method of accounting do not pay taxes on any revenue that has not yet been received. Usually, smaller companies use the cash basis accounting method because taxes are paid through the business owner's taxes.

Advantages of Accrual Accounting

Accrual basis accounting offers some advantages over cash basis accounting, which is why many larger, more established businesses use this method. It's also why most certified accountants prefer the accrual-based method.

Accrual-Based Accounting Better Reflects Financial Realities

Companies wishing to track expenditures and revenue over a specific period generally prefer the accrual method of accounting because it allows for a more accurate analysis of a company's profits.

Accrual Accounting Facilitates Better Long-Term Planning

Accrual accounting also allows corporations to do more accurate long-range planning. It shows money slated to come in, which is helpful for organizations that issue credit up front and then bill customers. Additionally, it tracks upcoming costs, so companies can predict where and when expenditures will arise.

The Accrual Method Complies with Generally Accepted Accounting Principles (GAAP)

Investors are more likely to trust a company whose accounting methods align with the established GAAP, which is a third benefit. These principles have been specifically designed to provide a clearer and more transparent snapshot of an organization's fiscal processes, including how and where they spend investors' money. It also helps give a clearer picture of a company's financial health.

Accrual Accounting in Various Industries

Businesses often have a choice in which method of accounting they prefer. However, this may change as the company grows. It may also change if the business relocates to a different state or location. The choice may also be dictated by the preferences of the financial institution used by the company.

Small Businesses

Suppose a small business earns less than $25 million annually and is not publicly traded. In that case, the owner can choose which method of accounting they prefer. Many will select cash basis accounting because it's easier to learn. However, some banks require businesses of any size to use accrual basis accounting, which could vary depending on which bank the small business uses. Also, if the company grows exponentially over the coming years, those using cash basis accounting would be required to switch to the more widely accepted method.

Large Corporations

Accrual-based accounting allows for more accurate financial planning for the coming year.

Large corporations use accrual-based accounting because they're required to do so. This method involves more forms, such as financial statements, accounts payable, accounts receivable, and balance sheets.  While this method is a bit more complicated, it provides a company with a clearer picture of when business speeds up and slows down. Accrual-based accounting allows for more accurate financial planning for the coming year.

Non-Profit Organizations

Non-profit organizations may or may not be free to choose their method of accounting. A lot depends on how much money the organization brings in annually and the state they operate in. Non-profits that are required to follow GAAP must use accrual basis accounting.

The Role of Accountants in Accrual Accounting

As the accountant for a company, you'll play an essential role in decision-making processes. Your work will help business managers or owners get a clear picture of the profit the business is bringing in, and you'll help them comply with regulatory measures.

Responsibilities in Implementing Accrual Accounting

As an accountant, you'll make journal adjustments at the end of each accounting period to accurately reflect the company's finances. Additionally, your work will allow managers to do more accurate long-range planning. You'll create forecasts and budgets, invoice clients, record cash flow, and help the company through complicated transactions, such as mergers or acquisitions. You'll ensure the company meets its tax deadlines and help avoid awkward financial situations like overdrafts or bounced checks.

Accrual Accounting and Financial Analysis

As an accountant who uses accrual basis accounting, you'll also be better prepared to help financial officers make informed financial analyses. Your work will drive revenue and expenses more transparently, thus making it easier to forecast and predict what may happen.

Building a Successful Career in Accounting

You could work in just about any industry, from aerospace to zoology. Accounting could be a great way to blend your other interests with the financial sector. 

If this all sounds intriguing, a career as an accountant could be a perfect choice for you. First, earn your accounting degree from a reputable college like Champlain College Online. Before committing to earning your degree, consider whether you’ll take courses online, in-person, or a combination of the two methods. Online degrees are still as rigorous and accredited as many on-campus programs.

There Is a Growing Demand for Accountants

According to the Bureau of Labor Statistics, accounting jobs are expected to grow steadily through 2031, adding roughly 80,000 jobs within that time frame. Any company that handles money will likely need to hire an accountant. Many accountant-related jobs are available to those with the right skills and education. You could work in just about any industry, from aerospace to zoology. Accounting could be a great way to blend your other interests with the financial sector. 

Specialized Skills and Qualities Are Required

To succeed in the accounting world, you should enjoy working with numbers and have a keen eye for details. Communication skills are important, too, because you'll be expected to interact with management, government officials, and representatives from other companies. You must also have a strong understanding of accounting principles and impeccable ethics. After all, you'll be in charge of recording where the company's money goes. Accuracy and honesty are of utmost importance.

Advantages of Pursuing a Bachelor's Degree in Accounting

Earning your bachelor's degree in accounting may set you up for a lifetime of success as an accountant. You'll learn all you need to know to apply for an accounting position. Additionally, an accounting degree may help move your application to the top of the pile when it comes time to apply for your dream job. And you'll continue your education throughout your career as you earn continuing education credits to maintain your CPA standing. Last, earning your degree may set you up with a valuable network of other professionals you can call upon when you need help.

Get Started in Accounting With Champlain

If you want to learn more, we invite you to explore the Online Bachelor of Science in Accounting offered at Champlain College Online. CCO requires no application fee, and classes start six times a year for added convenience. Prospective students can apply online and begin taking classes almost immediately. You can jumpstart your career today by earning your bachelor's degree in accounting from CCO.

Champlain College Online is the online division of Champlain College. It is fully accredited by the New England Commission of Higher Education. We offer students online learning opportunities for flexibility and superior work/life balance. If you'd like to learn more about our online bachelor's degree in accounting or any other online degree offerings, fill out our online form to request more information today.