There are two leading accounting methods observed in the association of accounting world and Accrual accounting is one of them. Companies that seek an accurate picture of their financial position prefer to use the accrual accounting method. However, before you decide on the accounting method for your business and the accurate picture of your financial position, you must understand the basics of what is accrual accounting. This accounting method has the ability to identify the revenue of a business and the matching expenses at the time when revenue was generated. It is better to do it at the earliest rather than doing it when the money changes hands.
This further explains that the companies should record the revenue at the moment of earning rather than the moment of collecting the amount. Also, the company should recognise the expenses just before the point comes to pay them so that the business stays prepared financially for any kind of business expenses. Further, this comprehensive guide will help you to gather information about what is accrual accounting, how it works in the UK, how is it different from cash accounting, and a few relevant examples.
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What is Accrual Accounting?
There are two key principles of accrual basis accounting. These are known as the revenue recognition principle and the matching principle. According to the revenue recognition principle, it should be recognised at the hour when the amount is earned in form of revenue. On the other hand, according to the matching principle, the business expenses must come into the limelight of recognition in the same period when the revenue is generated.
Several businesses fail because they do not understand the relationship between revenue and expenses, however, with the help of accrual basis accounting principles, they become very clear. This will further help to provide a clear insight into the profit-earning ways in business. The appearance of a company’s liabilities and assets becomes more clear on the spreadsheet with the help of this accounting method. This makes accrual basis accounting the only acceptable method under GAAP.
How Does Accrual Accounting Work in the UK?
The major role of accrual basis accounting comes into the limelight when it is the time for a company to recognise the revenue and it is to be done in the same period when they are earned. Also, the case is the same when the expenses are to be recognised when they are incurred. The main style of working with this accounting method is that the accruals are part of the balance sheet records. This will work as a placeholder when it comes to cash events.
We can take the example of the accounts receivable and the accounts payable here. This will further help to reflect the financial position of the company and know the revenues when they are earned and the expenses are identified when they are incurred.
What are the Key Differences Between Accrual and Cash Accounting?
Cash accounting is known as the alternative to accrual basis accounting. Now the question comes here is what is cash accounting and how it is different from accrual basis accounting? Cash accounting is appreciated to be used by small organisations and small-scale businesses. This is because the business tends to pay the tax through the personal tax returns of the owner. Cash flow is considered at the time of recording the revenue and the business expenses with cash accounting. The method used in cash basis accounting is quite simple because the bookkeeping method becomes straightforward.
Moreover, there is a certain key difference when it comes to the tax implications. We will take the example of the potential tax consequence of accrual accounting, this may explain a due payment of tax on the revenues of the business which is recognised also. In such cases, the companies have not received any sort of cash yet.
The Bottom Line
Now that you have gathered a fair amount of information about accrual accounting in the UK, we can bring the discussion towards wrapping up. Accrual basis accounting is one of the most adorable and preferred accounting methods for small businesses and large-scale businesses as well. However, there are a few protocols and principles that you will have to follow to get the maximum benefit from using this method of accounting. We hope these few minutes of reading have helped you to develop a better understanding of accrual accounting and how it is beneficial in the UK.
Accrual accounting becomes tricky when you have a higher chance of making an error in your accounts. Our professional and detail-oriented accountants can help you! Get in touch with us.
Disclaimer: All the information provided in this article on accrual accounting in the UK, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.