Accrual convertion to cash

[Gretel]

OK, I have exhausted my resources and never done a conversion, either way, nor much experience in accrual accounting.

Does anyone know of a good source that deals with accrual to cash conversion?

Thank you.

[Corduroy Frog]

Which Way Does It Go?

A couple of things before you get started ---

1. Does the conversion benefit or penalize the client? Usually a conversion from accrual to cash works in a clients' favor, but not always.
2. Is there a return historically that has been filed on the accrual basis? If so, you must get the approval of the IRS to change. See Form 3115, Sch. A and related instructions.
3. You may have a number of years to absorb the difference in taxation. See Form 3115.

Having observed all of the above, I haven't touched on the nuts and bolts of accrual vs. cash accounting. That is too extensive for discussion here, but although it may be extensive, it is not technically that difficult for one as intelligent as yourself. A first-year college Accounting textbook may be the best study material.

Good luck, Ron J.

[Gretel]

Thank you, Ron, also for your confidence in my intelligence. I have checked my college accounting book to no avail. I wasn't clear enough. My intention is not to convert the clients books for good just to convert the accrual bookkeeping records to cash for the tax return.

Accrual bookkeeping is required for this taxpayer's business for reasons beyond IRS requirements but since this is a SMLLC reporting needs to go on 1040, which of course is on cash tax basis.

[WhiteOleander]

I don't keep books. But, isn't there an option in QB to change any report, etc from accural to cash and vice versa?
(assuming you are using QBs)

[Gretel]

Thanks, you are right. But it is not QB and it's not me doing the books either.

[Maribeth]

Start with the trial balance.

Go through every balance sheet account and looks for items that have been accrued.

For instance, accounts receivable. I create a deferred revenue account in the liability section. I credit that account for the entire amount of accounts receivable and I debit a contra-income account called "change in a/r balance". That will effectively eliminate accts receivable from your balance sheet and adjust the income section the amount of a/r reflected in it.

For your liabilities, you will have to look at a/p and determine what is included in a/p at the end of the year. You will need to create a entry eliminating those amounts from a/p and reducing the respective expenses.

Look at all your accrued taxes. You will need to adjust the tax liabilites by the amounts of accrued taxes.

If you do not have access to the client's software, then I would prepare the trial balance in excel and make the adjusting journal entries on it.

This is a very simple explanation of converting to cash. Two last things: You must make sure that your retained earnings at the beg of the year is on the cash basis. If the prior year books were on an accrual basis and were converted to cash for tax purposes, then you have entries at the beginning of the year to convert the books back to a cash basis.

And, there is nothing that says a SMLLC cannot have an accrual basis Schedule C.

Maribeth

[taxcraft]

Acrual to Cash

I might as well try my hand at this.
To make the change you need the Income Statement accounts and the beginning and ending Balance Sheet accounts.
You need to know which Balance Sheet accounts are related to the Income Statement accounts....ie...Sales and Accounts Receivable, Insurance Expense and Prepaid Insurance or Insurance Expense and Insurance Payable, Rent Expense and Rent Payable, etc.

There are two basic rules to follow depending on if the Balance Sheet account usually has a debit balance or a credit balance. Debit means left hand side and nothing else.

1)If the corresponding Balance Sheet account normally has a Debit balance here is the rule to convert:
Cash applied=Income Statement balance + Ending Balance Sheet account balance - Beginning Balance Sheet account balance.

2)If the corresponding Balance Sheet account normally has a credit balance here is the rule to convert:
Cash applied=Income Statement account balance+Beginning Balance Sheet account balance-Ending Balance Sheet account balance.

For example:
Lets say we have Accrual Sales like the following:
Jan...$1000
Feb...$1000
Mar...$1000
Aprl...$1000
May...$1000
Jun....$1000
July...$1000
Aug...$1000
Sept...$1000
Oct...$1000
Nov...$1000
Dec...$1000
Beginning Accounts Receivable is $500
Ending Accounts Receivable is $1500.
The accrual Sales account shows 12 months of $1000/mon or $12000.

Now the beginning AR was paid early during the year....cash Sales of $500....add it on.
The ending AR will be paid next year but was recorded as Sales this year. So...Cash Sales is too high by $1500.
Cash Sales=Income Statement account balance($12000)+Beginning AR balance($500) -
Ending AR balance($1500). $12000+$500-$1500=$11000. Cash Sales

This example followed Rule # 2 because AR usually has a Debit(left side) balance.
This was an easy example but it can get more involved, ie, payroll.

One final word, the IRS has some selective rules concerning advance payments and how they affect the tax return....I don't remember them off hand but maybe someone else does.
They may be mentioned in the Business Tax Book.

I hope this helps.

__________________________________________________ __________________
This post is for discussion purposes only and is not meant to be authoritative.

[Gretel]

Thanks, Maribet and Taxcraft.

It helps to have some basic formula to go by. I do understand the principles but get confused once it gets a little more complicated. F.e. if an expense (Real Estate taxes) is a prepaid expense as well as an accrual.

Maribet, my t/p doesn't file Sch. C but Sch. E since this is a rather complicated real estate venture. The question that arises in my mind now is if Sch. E has to be cash basis or if it doesn't matter as long as you don't change accounting methods.

[Snaggletooth]

Call Me

Gretel, call me for a telecon if you can do so prior to 6:00 P.M. Wednesday the 25th.
I'm sending you a PM with my phone number. Have your client's financials ready.