Carlos Hank Rhon Explains Accrual Accounting

Accounting is the process that all companies use to keep track of their spending and organize their finances so that they can have an optimal cash flow, explains Carlos Hank Rhon. Accrual cost accounting is a combination of two accounting methods into one. Accrual accounting is a method of recording all of the transactions for a business while cost accounting focuses on just the company’s production costs. Accrual accounting helps to record all of the financial transactions as they occur and improves business decision making. The only method that is not considered in this process is cash changing hands. Cost accounting records and reports all figures that are associated with raw materials within the company, production labor and all of the company overhead. This information is very important because it can assist the company in pricing their consumer goods and services. 

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The purpose of accrual accounting is that by using it, you are helping to create a better overall flow of financial information which can make your company’s financial statements much easier to comprehend, notes Carlos Hank Rhon. All types of business owners can look over and review their financial information from the past to the present and see for themselves when the costs have gone up or went down based on the volume, on the consumer demand for the products or services and based on various other economic factors that may have an impact on your company’s cash flow.

Cost accounting is considered to be a part of management accounting and therefore it doesn’t necessarily need to go along with all of the national accounting standards in order for you to be able to calculate your company’s overall production costs. This means that companies are allowed to be more flexible when it comes to tracking this type of financial information.

 

Accrual accounting is considered to be the standard accounting practice for many companies in the United States with the exception of some very small operations who do not require this extensive financial solution, notes Carlos Hank Rhon. This type of accounting method can help to provide company owners with a more accurate picture of their current financial condition however the complexity of accrual accounting can make it more expensive to implement. This form of accounting is the opposite of cash accounting which only recognizes transactions when there is an exchange of actual cash from one individual to another.

The need for this type of accounting method came to be due to the increase of complex business transactions as well as the desire for a more accurate way for businesses to manage their finances over time and allow themselves a larger cash flow to work with. Having the ability to sell on credit and business projects that will provide revenue in the future allows a company’s financial condition to improve dramatically. Therefore it makes more sense for many companies to use this method of accounting to help them to precisely organize their financial situation.

 

Accrual accounting is used to primarily measure the performance and position of a company simply by recognizing the economic events that take place regardless of when the actual cash transaction occurs. This may seem like a very inaccurate form of accounting at first but once you see this method at work you will notice that your company will have more financial freedom to work with in the end.