Modified and accrual accounting processes are the two mostcommon choices that businesses have when choosing how to represent their transactions and expenses. But within the category of accrual accounting, businesses also have to choose between two primary options, known as full accrual (or just accrual) and modified accrual. The differences between the two are primarily focused on how the business records its expenses and how it wants to approach budget planning.
Full accrual is the process of tracking only transactions, not cash flow. In accrual accounting, the point is to actually record all transactions when the action took place, not the actual transfer of money. When the business performs a service, it records the income earned. When a business buys an item or service, it records the expense, regardless of income received and expenses paid. This helps the business properly align when it actually incurred costs or earned income with the property dates involved.
The modified accrual method combines some elements of cash method accounting with the full accrual method. In this case, income earned is primarily recorded the same as the full accrual method, but expenses are only recorded when they are actually paid. This means that a business can decide to buy an asset and actually purchase it, but the expense will only be counted -- and only reduce net income -- in the period in which the check is actually cashed.
The full accrual method is useful when a business wants to record all of its expenses and profit when the operations actually took place and there is little debt involved. The accrual method is often very timely and helps a business keep tighter control over its cash flow. The modified method provides the timeliness of the accrual practice but allows the business more leeway, letting it adjust its budgets more easily in the face of changes and represent costs to executives and directors when they actually occur.
The full accrual method is useful, but it does not easily take into account delays. A cost can be created but not actually paid for months, requiring the business to keep records of both its real and its book values when it comes to income and expenses. Likewise, recording expenses only when they occur can blind executives, making it difficult for them to see what projects they have already approved in the budget if costs are only recorded when checks clear.