The Accrual Method

• In accounting, the accrual method accounts for income when a sale actually occurs. This is in contrast to the cash method of accounting that recognizes income and expenses at the actual time of payment. Thus, under the accrual method of accounting, the legal agreement to pay for something indicates the income and expenses for a given tax year. If the final amounts projected with the accrual method vary from the actual figures, the business must change the recorded amounts within the same year as the actual revenues are received and expenses paid.
  
  

Advantages of the Accrual Method

• Overall, the accrual method of accounting is used by businesses across varied industries because it offers several advantages. First, it allows businesses to abide by generally accepted accounting principles. Additionally, the accrual accounting method can benefit businesses that conduct overseas transactions and larger corporations because these types of companies commonly make sales and incur expenses long before the actual income from the sales is received or expenses paid. The Internal Revenue Service also allows business to use the accrual method of accounting to report financial information for tax purposes.
  
  

Following Trends

• The accrual method of accounting carries the additional benefit of facilitating the identification of business trends. By recording transactions when they occur, rather than when money goes in or comes out, a business can recognize when increases or decreases in sales actually took place instead of simply observing when revenue actually arrived. This analysis can provide the business with valuable information about business trends, across a wide variety of topics.
  
  

Large Construction Projects

• The accrual method of accounting has particular impact on businesses that engage in large construction projects. These projects tend to involve large investments in materials that require outside financing. This means that a company may not actually pay for the materials it uses for a long period following the receipt of the materials. Additionally, revenues from these projects also tend to arrive on a delayed basis. For example, a construction project may not realize actual revenue until the units are rented out or the property is sold. The accrual method, therefore, offers a more accurate picture of a company’s transactions during the construction process.