February 9, 2024 | Last Updated on: February 9, 2024
Disclaimer: The information in this article is provided for general information only and does not constitute tax advice.
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Bookkeeping methods have come a long way since double-entry accounting emerged in the late 15th century. Over the years, as the global business landscape has evolved, so has the need for accounting practices that cater to the specific requirements of the times.
One such method is Modified Accrual Accounting. In this article, we will delve into the details of Modified Accrual Accounting, including its features, benefits, and relevance to small businesses.
Before we jump into the modified version, let’s briefly touch on accrual accounting. In traditional accrual accounting, revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.
On the other hand, cash basis accounting records a transaction when cash changes hands.
Modified Accrual Accounting combines cash-based accounting and accrual accounting principles to provide a more accurate representation of a business’s financial position.
In modified accrual accounting, revenue is recognized when it becomes measurable and available. Measurable means the amount can be reasonably estimated, and available means it is collectible within the current period or soon enough to be used to pay liabilities.
Expenses, on the other hand, are recognized when they are incurred, just like with traditional accrual accounting, because expenses are immediately measurable.
To appreciate the difference between modified cash accounting and modified accrual accounting, Kenneth M. Hiltebeitel and Wayne G. Bremser, both professional CPAs, explain in The CPA Journal that, “if modifications are so extensive to the cash basis that the statements more closely resemble accrual basis statements, the accountant should treat them as accrual basis statements and note their departure from GAAP in the audit or review report”. (Modified accrual accounting does not align with GAAP or IFRS, only GASB).
This method is particularly advantageous for businesses that deal with a mix of cash and credit transactions. For instance, if your business provides services to a client on credit, under Modified Accrual Accounting, the revenue is recognized when the service is performed, even if the payment is received at a later date.
One of the key aspects of Modified Accrual Accounting is the timing of revenue recognition. Instead of waiting for the actual cash to be in hand, businesses can recognize revenue when the business earns it.
Thus, Modified Accrual Accounting is particularly beneficial for service-oriented businesses that may complete a project but receive payment at a later date.
On the expenditure side, Modified Accrual Accounting focuses on when payments are made rather than when expenses are incurred.
This simplifies the process for businesses, especially those with limited resources, by aligning with the cash flow realities they face, thereby facilitating easier budgeting and financial planning.
Modified Accrual Accounting is commonly used by governmental entities and non-profit organizations, reflecting its adaptability to the unique financial structures and reporting requirements of these sectors.
This does not mean that small businesses with similar reporting requirements cannot use this principle. With some discretion, your business can use it to manage cash flow effectively.
Modified accrual accounting is easier and more cost effective than full accrual accounting, but provides more insight into your financials and inventory than a cash accrual method.
By recognizing revenue immediately when it comes to the business, you can gain a more accurate picture of your business’s current financial standing, allowing for quicker and more informed decision-making, especially if you are looking to secure a business loan.
As a key player in the small business financing landscape, Biz2Credit offers a variety of financing options for entrepreneurs. One such example is, Jyoti Sharma. Sharma, a seasoned entrepreneur with a passion for Ayurveda, faced a significant hurdle when she sought funding for her dream Ayurvedic day spa.
Despite being in business for 16 years with a successful track record, traditional banks were dragging their feet, estimating a lengthy 2-3 month waiting period for funds.
Sharma discovered Biz2Credit through TV ads while waiting for the bank’s response. Biz2Credit outlined the required documents and provided a clear timeline for funding, offering her access to credit at the same rate as the bank, but without the protracted waiting period and excessive paperwork.
After she received the funding she needed for her business, Sharma opened her spa, repaid the credit in a year, and now plans further expansions with Biz2Credit’s support.
Today, she emphasizes Biz2Credit’s pivotal role in her success, stating that it was “the biggest, biggest part” of her triumph and affirming that she is “looking forward to working together again with Biz2Credit.”
In the world of small business finance, Modified Accrual Accounting stands out as a valuable tool for achieving financial clarity.
To learn more about accounting practices suitable for your business, explore all the insightful content we have for you. You can also contact us directly to speak with a finance expert on securing funding. Your business growth is our priority!
