Accrual accounting can help you save money and improve cash flow

Keeping track of your financial situation is one of the keys to a successful business – accrual accounting can not only help your business save money, it can improve cash flow. Find out how you can use this method to plan expenses, prepare monthly and yearly budgets and meet your tax obligations.

What is accrual accounting?

Accrual accounting involves recording transactions, either cash coming in or expenses going out, when they occur, regardless of when the cash arrives or departs, whereas cash accounting records income as it’s received and expenses when they are paid. Accrual accounting gives a more accurate indication of the position and performance of your business.

Is accrual accounting appropriate for your business needs?

The simple answer is: ask an expert. Business owners or managers should seek advice from an accountant about whether accrual accounting is right for their specific industry and type of business. There could be variations within the industry that might make the business suited to one form of accounting over another, but it requires advice from a professional who understands your business.

Accounting for size

The Australian Taxation Office will also help you with the decision. If your annual turnover exceeds $2 million, tax rules stipulate you must use accrual accounting.

If you use a cash accounting system and later surpass the threshold, the ATO may consider a request to continue using this method, but approval is on a case-by-case basis.

As a general rule, however, cash accounting will suit smaller operations, while accrual accounting will suit larger, more complex businesses.

Why use accrual accounting?

Accrual accounting will give your business a better understanding of when the cash is coming in. Money is as important a profit in smaller businesses, which don’t always have access to adequate lending, so knowing your cash position helps you make sound decisions across every aspect of your business.

Accrual accounting features

• provides a clear picture of stock, assets and liabilities, and the true value of your business
• allows for timely management of debts
• is suited to tracking large volumes of transactions
• gives a clear picture of profitability by matching income to expenses (known as the ‘matching principle’)
• provides an accurate valuation of your inventory
• allows development of detailed profit and loss statements and balance sheets - key documents for any business

Accounting for growth

Ask an accountant today to advise you on the best accounting system for your business. With the right systems in place, you’ll not only get a better picture of your finances, you’ll avoid those nasty shocks at the end of the month and around tax time.

To find out more on accrual accounting for your business, contact an accountant in your area: