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Financing a business can be a difficult puzzle to solve. The revenues are received, costs are incurred but the cash may not necessarily be received instantly. Accrual Accounting becomes a necessity to the businesses that want to have a clear and accurate picture of the financial health of their businesses. This process can be greatly simplified by selecting the best accounting software in Saudi Arabia, especially to the organizations in Saudi Arabia. The latest tools, such as the Quickdice ERP, facilitate accrual accounting and are more efficient in providing real-time information and facilitate financial management seamlessly.
We will discuss the basics of accrual accounting, its significance, and the different accruals in accounting, the accrual accounting and cash accounting, and how the use of modern tools such as Quickdice ERP can help boost your financial processes.
Fundamentally, accrual accounting is a type of accounting in which the transactions are reported as they are earned or incurred, and not the time when money is changed hands. This method complies with matching principle where revenues and associated expenses are to be recorded during the same accounting period.
Example: There is a consulting firm which finishes a project in December and gets paid in January. In accrual accounting, revenues are recognized when the work is finished within a month of December instead of being recognized in January when cash is collected. On the same note, when the company pays the electricity bills in the month of December and is paid in January, the cost is charged in December.
Under this approach, the financial statements would provide the actual performance of business and not a mere flow of cash. Through accrual based accounting, companies will be in a better position to make a better decision and present relevant financial information to the stakeholders.
It is important to learn about the significance of accrual accounting as a business leader. The accrual accounting is a more realistic way of identifying the financial position of a company because it shows a balance between revenues and expenses. This is especially useful in businesses whose payments are delayed or where the project has a long duration of operation, or one with a complicated nature of operations.
Key Benefits:
Pro-tip: In order to avoid misstatements of income and expenses due to scale, it is better to implement accrual accounting at a very early stage of operation, even in a small business.
The accrual accounting operates under several basic principles:
The recognition of revenues is done at the time of delivery of goods or fulfilling of services, even without receiving the money. This will guarantee good financial reporting and prevent misleading income statements.
The expenses are accrued at the time when they are incurred to give birth to revenue and not when they are paid. An example of this is shown in the salaries that are paid at the end of the month but which actually may be paid later.
The matching principle is used to have the revenues and expenses recorded within the same period. To illustrate, when a business sells on credit in March, and the payment to the suppliers is made in April, the revenue and the corresponding cost of goods sold are reported in March.
Adjusting entries play a significant role in recording the unrecorded revenues and expenses. These are accrued revenues, accrued expenses, and prepayments, which guarantees financial statements to be correct.
Pro- Tip: Recurring Accounts Reconciling removes misstatements and enhances decision-making.
Accrual accounting has a number of accruals to reflect all the financial activities. Here’s a breakdown:
1. Accrued Expenses: The expenses which have been incurred but not paid yet e.g. utility bills or invoices of suppliers.
2. Accrued Revenues: An amount received in the form of consultancy or service fee, but has not been received yet.
3. Accrued Interest: Interest Gross interest on loans or investments that have not been paid or received.
4. Accrued Salaries: Salaries of the employees which are earned but have not been paid.
5. Accrued Taxes: Taxes that were charged during one period and paid in another period e.g. VAT or income taxes.
Such accruals guarantee that the accrual based accounting reflects each financial obligation and revenue earned giving a complete view of the performance of such a company.
Companies tend to question the accrual vs cash accounting. Revenues are also recognized when they are earned and expenses are recorded at the time they are incurred in accrual accounting giving a very precise picture of the financial performance of a company. Such an approach is needed to ensure that larger businesses are in accordance with the GAAP requirements and enables them to see the true picture of the financial performance of the organization in real-time.
On the other hand, cash accounting only records revenues and expenses when received or paid to cash. Although it is easier, this method can be inaccurate and underrepresent the actual financial state of a business, is slow to give information and can be more applicable in small businesses with simple transactions.
Scenario: A construction firm which finishes working on a project in December and receives payment in January would be showing revenue in December based on accrual accounting since it is actually accurate since the performance of the period is also represented. With cash accounting, the same revenue would not be recorded till January, and this might present an inaccurate representation of the December results.
Pro-tip: Accrual accounting should be used with businesses that have many clients, delayed payments or long-term projects in order to have a clear and practical financial picture.
There are many benefits attached to adopting accrual based accounting by the business management:
1. Improved Forecasting: Accrual records give a forward-looking view, which assists the management to forecast the cash flows, expenses, and revenue patterns.
2. Proper Performance Analysis: The managers are able to analyze the true profitability per period by comparing expenses to the revenues.
3. Tax Planning: The accrual accounting allows taking more control over the tax liability and the future taxes planning.
4. Business Valuation: Banks and investors use the accrual-based financial statements in determining the value of the company.
Example accelerated accruals A retail chain which operates on the accrual basis can observe the total revenue that it has made during the month, although some of the customers may not have paid yet, which helps in inventory management and pricing strategy.
Pro-tip: Accuracy in decision-making maximization can be achieved by combining accrual accounting with best practices in financial management.
The process of accrual accounting may be complicated and simplified with the help of modern accounting software. An example of these is Quickdice ERP, which offers a solution of accrual based accounting.
Key Features:
Case scenario: With Quickdice ERP, a service business will be able to accrue salaries automatically at the end of each month, create financial reports, and get real-time feedback on the total payroll liability. This does away with manual accounting and removes compliance.
Pro-tip: Use Quickdice ERP together with your bank feeds to balance accounts effortlessly at the expense of less time spent on manual audits.
It is crucial to manage the accrued expenses and revenues to do proper reporting. Consider this example:
Such a practice makes financial statements comprehensive and business can make decisions based on actual performance other than the timing of cash.
Pro-tip: You should go through all recurring accruals once every month to confirm that they conform with invoices, contracts, and agreements.
Although it may be easier to use cash accounting, accrual accounting provides a more advanced perspective as strategic planning. Accrual accounting is advantageous to businesses that have a variety of clients, delayed payments or long term projects since accrual accounting gives real time information and accurate analysis of the business performance.
Cash accounting may be adequate in small businesses where there are few transactions. Nonetheless, with the increase in operations, accrual accounting is required to comply, value and do financial forecasts.
To the contemporary business, Accrual Accounting is not merely a bookkeeping technique, it is a business strategy tool of proper financial reporting, improved planning, and decision making. Accrual accounting, as opposed to the fair value accounting, offers a real picture of performance of a company based on the knowledge of accrued revenues and expenses to match the revenues and expenses of a business.
It is now easier to use accrual based accounting with the help of such tools as Quickdice ERP. The automated entries, real-time insights, and audit ready financial statements make the processes simpler and enable businesses to concentrate on growth and not administration.
Adoption of accrual accounting will guarantee adherence, better financial transparency, and ability of business in Saudi Arabia and other countries to make sound data-driven decisions. Using the appropriate ERP solutions, businesses are in a position to maximize the accrual accounting benefits and have reliable and actionable financial documents.
Pro-tip: This is something you should regularly review and the accruals reconcile with cash flows in order to sustain financial balance and prevent unexpectedness.
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