Finance: What is Accrual Accounting?

What is Accrual Accounting? Accrual accounting is used to determine how well a company is doing by looking at the present and the future. It takes into account purchases that are made and debts that are owed as soon as the transaction is made, rather than when the money is received or paid.

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Transcript

00:27

well or poorly a company is performing financially and you might ask how cash

00:32

and accrual accounting can be different like aren't beans just beans that you

00:36

count well stay tuned here in accrual accounting you might have an obligation

00:41

like an employee bonus which you think is highly likely to be paid at the end [Employee happy at getting a bonus]

00:47

of the year almost treated like debt the employee makes 6 grand a month and is

00:52

very likely due 10 grand in bonus money at the end of the year it's payable on

00:56

December 31 that's when the cash would go out the door of the company but given [Cash exiting the door]

01:01

that it's highly likely to be paid or earned by the employee so they'd have a

01:06

legal claim on that 10 grand the company using accrual accounting would accrue

01:12

the liability labeled something like bonuses or or is it bony well something

01:18

like that bonus is payable.. and would accrue the

01:22

value of 10 grand divided by 12 because that's the number of months in a year in

01:26

California anyway or about 833 dollars a month throughout the year that's how you [Employee bonus divided by 12 months calculation]

01:31

would accrue for that likely bonus now promising an employee a bonus and not

01:35

giving it to them after they've earned it well that would be a cruel accounting [Person holds out cash to employee and takes it away]

01:40

a totally different thing and much more mean-spirited