Accruals

Finance a la shmoop... what is accrual accounting? well there are two

religions in the way in which beans get counted the first is cash accounting [Cash accounting building]

which just tracks cash in the door and cash out the door in any given period [Cash enters door and exits]

the second is accrual accounting which tries to guess or impute the values

coming in and going out in a given firm hoping to give a true picture of how

well or poorly a company is performing financially and you might ask how cash

and accrual accounting can be different like aren't beans just beans that you

count well stay tuned here in accrual accounting you might have an obligation

like an employee bonus which you think is highly likely to be paid at the end [Employee happy at getting a bonus]

of the year almost treated like debt the employee makes 6 grand a month and is

very likely due 10 grand in bonus money at the end of the year it's payable on

December 31 that's when the cash would go out the door of the company but given [Cash exiting the door]

that it's highly likely to be paid or earned by the employee so they'd have a

legal claim on that 10 grand the company using accrual accounting would accrue

the liability labeled something like bonuses or or is it bony well something

like that bonus is payable.. and would accrue the

value of 10 grand divided by 12 because that's the number of months in a year in

California anyway or about 833 dollars a month throughout the year that's how you [Employee bonus divided by 12 months calculation]

would accrue for that likely bonus now promising an employee a bonus and not

giving it to them after they've earned it well that would be a cruel accounting [Person holds out cash to employee and takes it away]

a totally different thing and much more mean-spirited