Advantages of Accrued Expenses
1. Compliance with Accounting Standards: Accounting regulations like the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Regulations (IFRS) frequently demand that expenses be accrued. By complying with these regulations, a company can ensure that its financial statements are by the regulatory requirements.
2. Better Expenditure Control: By monitoring incurred expenses, companies may better control their cash flow and plan for future expenditures. This helps in avoiding cash shortages and ensures that funds are available when needed to meet the accrued expenses.
3. Better Decision-Making: Accrued expenses offer more detailed financial information, allowing management to make decisions based on actual expenses with greater understanding. They are, therefore, able to plan effectively for operations and allocate resources, contributing to the success of the business as a whole.
4. Better View of Financial Situation: By recording all the accrued expenses, a company can ensure that its financial statements are correct. This in turn makes it easy to gain the trust of the involved parties, such as investors, creditors, regulators, etc., as they can get a more accurate view of the company’s financial situation.
5. Reflects Economic Reality: It records expenses at the time they are used even if payment has not been made yet. By doing so, the company can better understand its financial status regarding the accrued expenses that have occurred.