Consider these 5 things before making a shift to accrual accounting

What is Accrual Accounting? 

Accrual means recording every entry of revenue and expenses without cash transactions. In the accrual accounting method, a company records revenue before receiving the payment and records expenses when incurred. In simple words, regardless of the money exchange, the revenue earned, or expenses incurred are entered in the company’s journal. 

Why should you choose accrual accounting? 

Changing cash-based accounting to accrual accounting can yield several benefits to your company. Following are the benefits accrual accounting offers you: 

1. Accrual accounting helps in understanding the financial picture of a firm at a glance. It matches all the revenues produced by incurring specific expenses. As a result, you can know if a business is profitable or not. 
2. Generally Accepted Accounting Principles (GAAP) is an industry-standard for preparing financial statements in the United States and many other countries. Moreover, companies making $5 million annual sales or $1 million yearly inventory sales should follow accrual accounting to prepare financial statements. Following GAAP allows investors and other financial institutions to access these statements easily. 
3.  Accrual accounting depicts your resources and financial responsibilities. It benefits the company by managing the ebb and flow of financial activity. Plus, it helps you accurately assess the income and debts of the company.
4. Accrual accounting helps the company grow by real-time accounting for expenses and revenues. It doesn’t require a cash transaction. Eventually, the business owner can assess their profits and strategize a financial budget. As a result, you can find ways to improve sales and generate more profit. At last, all this small financial data helps in better financial planning.

Read here: How does accrual accounting work?

What should you consider before making a shift to accrual accounting? 

• Fill 3115 form with Internal Revenue Service (IRS)

Besides starting to follow the double-entry accounting, a company needs to fill out a 3115 IRS form. The form is submitted to the IRS to inform the authority of this change before the tax season. It is common to let the IRS know of any accounting method change in your business. Also, ensure your accountant or CFO is well aware of this shift. 

• Understand the ASC 606 standard

In December 2020, FASB announced all private companies have to comply with the ASC 606. It is a new requirement for GAAP compliance. To achieve compliance, a company needs to fulfil the following 5 conditions:

1. Identify the contract with the customer
2. Identify the performance obligations in the conduct
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue as a performance obligation are satisfied
   
   

• Smoothen the shift with financial operation platform

The shift from cash to accrual accounting revenue recognition is challenging. But you can subscribe to a virtual accounting platform like QuickBooks to automate revenue recognition and schedule invoices at one dashboard. On QuickBooks, you can quickly generate financial statements and reports. Eventually, the information will help you assess the profitability and identify the scope of growth for your business. Quickbooks are not only cost and time effective but also help you excel in the accounting game. 

• Consider hiring an accounting professional

Sometimes, small business owners manage cash-based accounting alone, or a bookkeeper does the same. However, you both may be unable to understand the intricacies of accrual accounting. You can either develop or hire an in-house accounting team in this case. However, the cost of an in-house team is higher, So you may consider hiring a virtual CFO. 

Read: 10 REASONS WHY YOU SHOULD USE QUICKBOOKS

• A robust Revenue Recognition Policy

The fifth thing you must consider is making a solid revenue recognition policy. In the rev rec policy, you state the rules that govern the consistent application of the ASC 606 framework at your company. A revenue recognition policy will eliminate ambiguity and reduce the possibility of error. As a result, the shift of accrual accounting makes auditing easier.

Conclusion

Stepping towards accrual accounting from cash-based accounting is a drastic change. In the process of this shift, you may require an accounting expert’s assistance. As an accounting professional, assist in the transaction or verify the accuracy of the change.  Schedule a meeting with us now if you want to make the shift to accrual accounting smooth and efficient—our virtual CFO and accounting team back you with the latest technology and industry experience.