Accrual accounting is something that firms like the removing reviews from Google company use quite frequently. Accrual accounting is a system in which the accountant records a transaction when it occurs, without waiting until cash is paid out or received. When it comes to accrual accounting there are a few basic principles such as a sale is recognized on the income statement when it takes place regardless of when cash is collected. An expense is recognized on the income statement when it’s incurred, regardless of when the payment was made. An item manufactured and stored for later use or even bought for resale becomes part of inventory and will appear on the balance sheet until it is actually sold, when it is sold, it goes into the income statement under cost of goods sold. A long-term asset that will be used for several years will appear on the balance sheet. The cost gets spread over its useful life and its annual allocated cost will appear on the income statement as depreciated expense.
When it comes to a balance sheet, the cash, loans and owner’s equity appear on here. There are two types of current assets that appear on the balance sheet which include the current assets such as cash and other assets you can sell within a year, there are long-term assets, which are assets you intend to hold for more than a year. Current assets are usually your cash and inventory and your long-term assets will be furniture and equipment. Liabilities are also grouped similar. You have current liabilities, which are the liabilities you plan on paying off this year, and then the long-term liabilities are liabilities that don’t become due for more than a year. The income statement on the other hand contains sales, cost of goods sold, gross profit, all expenses, operating income, net income before taxes and less income taxes which gives you your net income. Finally you have your statement of cash flows which involves all operating activities (day-to-day operations of your main line of business), investing activities (buying or selling long-term assets) and financing activities (paying back funds to finance your business).