How Does This Accounting Method Work?
If we use a flower shop as an example that utilizes the accrual method, an example of how items are posted to the accounting system might be as follows:
Inventory such as flowers, plants, vases, and other items are ordered from your wholesaler. In most cases, if you have a vendor agreement, you are responsible to pay your supplier within 30 days of the receipt of said inventory. In the accrual method, you would record or post to your journal a transaction such as this even though you haven’t paid for the inventory.
- Debit your inventory account and credit your accounts payable account.
When it’s time to pay your supplier, even if you do it 10, 15, or 30 days later, you would debit your accounts payable account to clear the charge and credit your bank account showing the cash payment to your vendor.
Sales Revenues Example
An example of an accrual post for sales revenues might be if you have a contract with a local restaurant to supply flower arrangements for the tables. In this case you are the supplier and the restaurant has the 30 day payment timeline.
- Credit your sales inventory account and debit your accounts receivable account.
When the restaurant pays you, you would then credit your accounts receivable account to clear the outstanding debt and debit your cash in bank account when you receive the cash.