Accrual accounting is an essential pillar of corporate financial management. This accounting system provides a precise and accurate view of an organization’s economic situation. Let’s discover together the fundamental principles, advantages and methods of implementing this essential accounting method.
Principles and definition of accrual accounting
Accrual accounting is a system that records all financial transactions from the inception of the commitment, regardless of cash flow. This method makes it possible to enter all of a company’s receivables and payables, thus providing a true and fair view of its activity and assets. Unlike cash accounting, which focuses solely on cash movements, accrual accounting takes into account:
Invoices issued and received
- Contracts signed
- Commitments made to suppliers and customers
- This approach makes it possible to
accurately monitor the evolution of trade receivables and supplier payables . It also facilitates the closing of accounts at the end of the financial year, by providing an overview of outstanding commitments.The principle of accrual accounting is based on a two-stage recording:
The invoicing date or date of the commitment
- The effective payment date
- This method requires the use of third-party accounts to track the evolution of receivables and payables. It applies to all of the company’s accounting documents, thus ensuring overall consistency in financial management.
Advantages and disadvantages of accrual accounting
Accrual accounting has many advantages for companies, but it also has some disadvantages that it is recommended to take into account.
Advantages:
Accurate view of the company’s activity and assets
- Accurate monitoring of customer receivables and supplier debts
- Facilitating the closing of accounts at the end of the financial year
- Better anticipation of future cash flows
- This method allows managers to make informed decisions based on a real picture of the financial situation of their company. It also promotes a
proactive management of customer and supplier relationships .Disadvantages:
Increased complexity compared to cash accounting
- Time and rigor required for implementation
- Need suitable software and accounting expertise
- Accrual accounting requires a greater investment in terms of time and resources. It requires a
adequate training of accounting staff and implementing rigorous processes to ensure the accuracy of records. Criteria
| Accrual accounting | Cash Accounting | Registration |
|---|---|---|
| From the birth of the commitment | At the time of cash flow | Complexity |
| High | Weak | Precision |
| High | Average | Receivables/debts management |
| Made easy | Limited | Accrual accounting: principles, advantages and implementation for effective financial management |
Accrual accounting is not mandatory for all businesses. However, it is imposed by law for certain structures depending on their legal status and their turnover.
Companies subject to the obligation:
Commercial companies (BIC/IS)
- BIC individual businesses (excluding micro-enterprises)
- Liberal practice companies (SEL)
- Turnover thresholds have been set to determine the obligation to keep accrual accounting:
€238,000 for service companies
- €788,000 for trading companies
- For companies not subject to this obligation, it is possible to opt for accrual or cash accounting depending on their needs and their organization.
There
implementation of accrual accounting requires a methodical approach and the use of suitable tools: Choosing efficient accounting software
- Training of staff in the principles of accrual accounting
- Implementation of entry and entry procedures
- Regular monitoring of third party accounts (customers and suppliers)
- Carrying out frequent bank reconciliations
- It is strongly recommended to
call on an accountant to support the company in setting up and monitoring its accrual accounting. This professional will be able to provide his expertise and guarantee compliance of accounting practices with current standards. Optimize financial management using accrual accounting
Accrual accounting offers many opportunities for
improve financial management of a company. By providing an accurate picture of the economic situation, it allows managers to make informed decisions and optimize their resources. Here are some ways to get the most out of this accounting method:
Regularly analyze customer receivables to anticipate the risks of non-payment
- Optimize the management of supplier debts by negotiating advantageous payment terms
- Establish reliable cash flow forecasts based on current commitments
- Identify the biggest expense items and look for ways to reduce them
- Measure the real profitability of each project or activity of the company
- Accrual accounting also makes it possible to
facilitate relations with financial partners of the company. Banks and investors appreciate the transparency and precision offered by this method, which can help obtain financing or improve credit conditions. In summary, accrual accounting has emerged as an essential tool for companies concerned with rigorous and efficient financial management. Although more complex to implement than cash accounting, it offers a clear and faithful vision of the economic situation, thus allowing informed decision-making and optimization of financial resources.