Cash comes in from business income. Cash goes out for business expenses. Pretty simple, right? But as a business owner, you can handle that profit-loss scenario differently depending on which accounting method you choose. Most large companies, especially those that are publicly traded, use accrual basis accounting. In fact, accrual basis accounting is the most common accounting method used. Some business accountants say that the accrual basis accounting method gives a more precise look into a business's financial data than other methods. Consider the following key terms.

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Accrual-basis accounting

Accrual-basis accounting is the method used when income and expenses are reported before they are actually received or paid.

I recommend: Check out a solid definition of accrual basis accounting from Investor Words.

Cash-basis accounting method

Cash-basis accounting counts revenues when they are received and expenses when they are paid. Businesses that aren't using the accrual accounting method are most likely using cash-basis accounting methods. Each has its own advantages.

I recommend: Explanations and examples of the cash-basis method, along with comparisons with accrual-basis accounting, can be found at nfp Accounting Technologies, as well as at CPA Stephen L. Nelson.

Modified accrual-basis accounting

When income and expenses become available, they are recognized under modified accrual-basis accounting. Most government agencies use this method of accounting which takes a little bit of both the cash-basis accounting method and accrual-basis accounting.

I recommend: Check out the glossary definition at Venture Line.

Rate of return

It may be helpful to estimate your standing using a rate of return analysis. You can easily compare how different sectors of your business are doing because you can calculate your end net worth.

I recommend: Check out the math at Toolkit Media Group.

Matching principle

The basis of accrual accounting lies in the matching principle. This involves aligning expenses with income stemming from those expenses. That way, you can see exactly your income-to-expense ratio.

I recommend: Money Instructor explains the matching principle and how to adjust entries in an accrual accounting system.

Bad-debt expense

There is always going to be a certain amount of debt that will never be collected. That's a part of doing business. Setting up a bad-debt expense account can help you track that debt, making your accounting more thorough.

I recommend: Find Law gives an example of bad-debt expense and also lists other key terms that will help you more fully understand the concept.

Accrual basis accounting recognizes revenue only when products or services are delivered and payment is received or if it is reasonable to expect payment in the near future. Therefore in accrual basis accounting, revenue is reported in the fiscal period in which it is earned, not received, and expenses are deducted within the fiscal period they are incurred, which is not necessarily the time at which expenses are paid.

Business owners can choose the best accounting method, cash basis or accrual basis accounting, for their businesses. In general, these two primary forms of accounting vary primarily on when transactions are credited to or deducted from business accounts. Consider the following resources to help you benefit from accrual basis accounting:

1. Evaluate the benefits of accrual basis accounting for your business transactions.

2. Get accrual basis accounting advice.

3. Automate your accounting procedures.

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Compare cash basis and accrual basis accounting methods to determine the best for your business

With the accrual basis accounting method, you can count a transaction before the funds are actually credited to or debited from your account. Alternatively with the cash basis accounting method, transactions are not recorded until payment is actually received or expenses are paid. Most small businesses making less than $5 million per year are eligible to choose either form of accounting.

I recommend: Stephen L. Nelson counsels business owners on accounting methods and helps companies convert from cash basis accounting to accrual accounting. nfpAccounting Technologies offers online advice on the differences between cash basis accounting and accrual accounting and helps you in determining the best method for your business.

Consult with an accrual basis accounting expert

While the accrual basis accounting method gives you a clear view of business expenses and credits, you will have difficulty realizing cash reserves with this method. Because transactions are counted before funds are actually received, your account could show a high balance even though you may not have any actual cash. The cash method demonstrates the amount of actual cash, but lacks in its ability to accurately show long-term profits.

I recommend: Haskins & Associates provides accrual basis accounting information and advises on the best accounting strategies for a specific business type. Get free accounting advice from Beir Accounting, a professional association of accountants offering a range of bookkeeping and accounting services to small business owners.

Purchase accrual basis accounting software

Modified accrual basis accounting is a form of accrual accounting that includes elements of both accrual and cash accounting. Purchasing software will help you accurately use standard or modified accrual accounting and automate manual, time-consuming accounting processes.

I recommend: Logos Accounting offers a module that lets you create accrual basis accounting reports or cash basis reports. QuickBooks is a leading small business financial software company that helps you easily record business transactions using the accrual basis accounting method.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Be sure to notify the Internal Revenue Service which of the primary accounting methods--either cash accounting or accrual accounting you decide to use. You can change your accounting method by filing a special tax form--IRS Form 3115 within 180 days before the end of the year in which you want to switch your accounting method.

Accrual basis accounting is a common method of tracking income and expenses used by many businesses, and as such you may be interested in having a bookkeeping staff that is knowledgeable about the principles and techniques of accrual accounting. Unlike cash accounting, which is more often used by businesses recovering from bankruptcy, accrual accounting tracks all types of inflow and outflow of revenues.

Because it is the most common type of business cost accounting used today, accrual basis accounting education and training is highly important to businesses of any size. While having an accounting staff that is highly educated and degree certified is useful, you can also find training in accrual accounting through online resources, courses and seminars.

When searching for accrual basis accounting education and training, consider the following sources:

1. Take advantage of online instructional resources for cost accounting;
2. Get access to complete courses and seminars for accrual basis accounting online;
3. Pursue an accounting degree for in-depth knowledge of accounting methods.
   

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Find online learning tools for accrual basis accounting

Because accrual basis accounting is so commonly used in the United States, a number of basic online instructional resources exist for becoming more familiar with the concept. These tools will help you or your employees obtain a basic understanding of accrual accounting and its features and uses.

I recommend: CPAClass.com provides a comprehensive accounting study guide covering accrual basis accounting, and AccountingAide.com offers a similar informational page with examples of accrual based methods. Wisc-Online also provides an accrual basis accounting overview in the form of an online slideshow.

Learn more about accrual accounting from online courses and seminars

A number of organizations provide more detailed training in accrual basis accounting through complete courses and seminars. These training options allow you to receive in-depth knowledge of accrual accounting, while also providing the flexibility of a timeline that works for your business.

I recommend: TrainUp.com and the American Bankers Association both offer online courses for training in accrual basis accounting. For a condensed version of this type of training and education, consider seminars like those offered by the American Management Association.

Obtain an online degree for more comprehensive coverage of accrual accounting

The most intensive type of accrual basis accounting education and training available is to obtain a four-year degree in accounting, which includes individual courses on accrual basis accounting and integrates accrual methods into instruction in broader cost accounting. While accounting degrees require a significant time commitment, many colleges and universities now offer degree programs that can be completed entirely online.

I recommend: Consider online options for accounting degrees to obtain a more advanced education in accrual basis accounting. Both Linfield College and Western Governors University offer fully online degrees in accounting.