Accruals and Deferrals

Business performance may seem undervalued or overvalued if accruals and deferrals are not used correctly in the accounting.

Accruals and deferrals occur only when a business uses accrual-based accounting methods. If accruals and deferrals are not used correctly in the accounting cycle, certain accounts may seem undervalued or overvalued.

Under the accruals, conditions are satisfied to record a revenue or expense, but money has not changed hands yet. An accrual occurs before a payment or receipt.

Under the deferrals, money has changed hands, but conditions are not yet satisfied to record a revenue or expense. A deferral occurs after a payment or receipt. Read full article "Accruals and Deferrals"

Is cash or accrual accounting better for your business?

The cash method and the accrual method are the two principal methods of keeping track of a business's income and expenses. In most cases, you can choose which method to use.

These methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts.

Advantages and disadvantages of the accrual method.
While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.

Advantages and disadvantages of the cash method.
And though the cash method provides a more accurate picture of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month. Read full article "Accounting Methods"