What Are the Benefits of Using an Accrual-Basis Income Statement?

What Are the Benefits of Using an Accrual-Basis Income Statement?

What Are the Benefits of Using an Accrual-Basis Income Statement?

An income statement that uses accrual-basis accounting methods recognizes losses more quickly, avoiding the distortion that sometimes occurs with cash-basis accounting, delaying the recognition of losses for several years. For some businesses, this method provides a more accurate picture of profitability.

Under cash-basis accounting, revenue is not recognized until actual payment is made. A business can fulfill an order but can't recognize the sale until the customer pays the bill, even if that payment is made months later. Under accrual-basis accounting, businesses count sales as revenue when the order is placed. Generating an income statement using accrual-basis accounting makes it easier to match sales with the expenses incurred to generate those sales in the same time period, so the business owner can more accurately track profitability and make adjustments.