This is the kick-off to our series on Accrual Accounting, as introduced in our previous blog post.
TL;DR Accrual Accounting
A company's financial statements are meant to, as best as possible, match its real-world activities and outcomes. Accrual accounting is the mechanism through which this alignment is achieved. It's about recognizing revenues and expenses as they occur, even if the cash hasn't exchanged hands yet.
Painting Pictures with Accruals
At Puzzle, we believe in telling stories through numbers. Accrual accounting is the tool we use to create a detailed map that lenders, investors, and other stakeholders can use to navigate your business's economic picture. It's like putting together the pieces of your financial ahem Puzzle. We'll dive right into this concept with Fixed Assets, and a primer on how depreciation expense allows a company to allocate an asset's expense to its financial statements through monthly accruals.
Accrual Accounting Applied: An Appreciation of Depreciation
Every fixed asset, whether a computer, cell phone, or office furniture, must be accounted for in a company's financial records. These fixed assets are added to a company's Balance Sheet; in accounting parlance this is called capitalizing an asset. Once on the balance sheet, these fixed assets are key inputs to a company's accrual accounting picture.
Over time, the cost of the fixed assets are shifting into a company's Profit & Loss statement through an accrual item called depreciation expense. Depreciation expense accruals are mainly a function of two of an asset's attributes, Useful Life and Cost Basis:
- Useful Life: For how many years the company will be able to receive value from this asset. This is usually prescribed by asset type based on universal guidelines.
- Cost Basis: The amount of Fixed Asset related expense that is to be capitalized, and subsequently accrued.
Broadly speaking, depreciation expense is calculated as Useful Life ÷ Cost Basis. While seemingly simple enough, the ongoing tracking of Fixed Assets can get complex and tedious quickly. Take, for example, a company with hundreds of fixed assets: Each asset has its own useful life, initial cost, and set of circumstances surrounding disposal, if they are sold or put out of service permanently. The sheer volume of assets, and underlying calculations, inevitably makes ongoing depreciation tracking a time-consuming and error-prone process.
Check out our release note spotlighting Fixed Asset Depreciation to learn how Puzzle is solving for this.
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Puzzle's Power: Simplifying Accrual Accounting
At Puzzle, our mission is to simplify the complexities of depreciation and accrual accounting. Our platform automates the heavy lifting, freeing up your time to focus on what truly matters – growing your business.
