Accrual Method of Accounting

What is an accrual method of accounting?

Accrual accounting allows a company or other entity to record revenue before receiving dues payments and to record expenses as they are incurred. Revenue and expenses are entered regardless of when money exchanges hands. Accrual accounting is contrasted with cash-basis accounting, which, regardless of when goods and services are provided, records revenue when payment is actually received for them. Debts and payments are also entered according to when they are due.

Though typically required for larger companies, accrual accounting also allows smaller entities (particularly those with a regular schedule of receivables and payments, such as homeowner associations) to get an accurate picture of both long-term and current finances.

Why is having an accrual method of accounting important to a self-managed HOA?

Accrual accounting is considered a standard practice in many settings. It incorporates the
“matching principle,” by which revenues and expenses are recorded in the same period. The accrual method is encouraged for public entities by such accounting standards as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). 

Accrual accounting is required for companies with $25 million or more in revenues. Still, it is also required for any entity that makes sales on credit, which would qualify most homeowner associations by their monthly dues and fees. The accrual method requires double-entry accounts, reflecting both when payments are due and when they are actually received, tracking the movement of capital through a business entity, and helping to prepare its financial statements.

How can you use “accrual method of accounting” in a sentence?

The accrual method of accounting allows a company or other business entity, like an HOA, to track both actual and scheduled revenues.