This is a simple guide on how to use the accruals calculator.
1. Enter the start date of your subscription.
2. Enter the date when your subscription ends.
3. Choose the cut off date. Important! The cut off date needs to be before the ending subscription date.
5. Press calculate and the result will appear next to the calculate button.
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If you are a Business owner you can decide between the cash and accrual accounting method. If your business has to follow Generally Accepted Accounting Principles (GAAP) then you are required to apply the accrual method. Compared to the cash basis method, the accrual method shows very different figures on the Profit and Loss statement. Even though you operate your business in the same way despite the accounting method used. The difference between the cash basis method and the accrual method is in how income and expenses are recognised.
The key to accrual accounting is applying the correct recognition rules:
1. Start by calculating all earned revenue. Under the accrual basis earned revenue is recognised as soon as you send an invoice to a customer for goods or services. Once you provide a service or you sell goods to a customer you earn an income. However, under the accrual method income is counted as earned even if you have not yet received payment for goods and services.
2. Then calculate all incurred expenses. As soon as you buy goods or use services and you receive an invoice from the seller, these expenses are recognised even if they are not yet paid.
3. Finally, subtract accrued expenses from accrued income. You will then receive a net profit or loss. Depending how you plan your business, you may receive higher profits or losses under the accrual basis. A good example to show you what clever planning can do is that some businesses may invoice or dispatch orders they receive at the end of the year to customers in the first week of January to reduce taxable income for the previous year. Also, a business owner can purchase additional goods before the year-end to increase expenses that can be deducted from earned income.
You have to be aware of two different accruals. The first accrual is an adjustment for revenues that have been earned but are not yet recorded in the accounts. The second accrual concerns expenses that have been incurred but are not yet recorded in the accounts.
At the end of the accounting period these accruals have to be added by adjusting entries so that the financial statements show the correct figures.
A typical example is your water utility company. The company provides you with water in December but you only pay them once the meter is read and you receive an invoice sometime in the next year. The water utility company needs to have the correct amounts in the financial statements and therefore makes an adjusting entry to increase revenues that were earned in December.
An example of an accrual involving an expense is a bonus for an employee that was earned in 2016 but will only be paid out in 2017. The financial statements for the year 2016 need to show this expense. Therefore, an adjusting entry needs to be made to record this expense accrual in December 2016.