An accountant often meets cash basis transactions which need to be converted to accrual basis for presentation to a banker or audit. The conversion of cash payments for expenses to the accrual basis can be seen as below
# Receipts in cash basis minus beginning accounts receivable plus ending accounts receivable, to get net sales in accrual basis.
# Receipts in cash basis plus ending accounts receivable minus beginning accounts receivable and ending unearned revenue, to get revenue in accrual basis.
# Rent receipts in cash basis plus beginning unearned rent minus ending unearned rent and beginning rent receivable, its results plus ending rent receivable to get rent revenue in accrual basis.
# Payment for goods in cash basis plus beginning inventory minus ending inventory and beginning accounts payable, its results plus ending accounts payable to get cost of goods sold in accrual basis.
# Payment for expenses in cash basis plus beginning prepaid expenses minus ending prepaid expenses and beginning accrued expenses, its results plus ending accrued expenses to get operating expenses in accrual basis.
# Payments for property, plant and equipment in cash basis minus cash payments for property, plant and equipment plus periodic write off of the asset cost to get depreciation or amortization expenses.
How to convert cash receipts from customer to gross sales.
Cash receipts from customer plus cash discount and sales returns and accounts write off and ending accounts receivable. The results minus beginning accounts receivable to get gross sales.
Cash receipts from customers plus increase in accounts receivable or minus decrease in accounts receivable, to get net sales.
Cash payments for goods plus increase in accounts payable or decrease in accounts payable, to get net purchases.
Net purchases plus decrease in inventory or minus increase in inventory, to get cost of goods sold.
Wages paid during the year plus ending accrued wages minus beginning accrued wages, to get wages expense for the year.
Insurance premiums paid during the year minus ending prepaid insurance plus beginning prepaid insurance, to get insurance expense for the year.
Selling on capital stock or paying off long term debt are increases and decreases in cash, they are not revenue or expenses under either cash basis or the accrual basis. They are non-operating items.
To illustrate the use of this topic, assume Mr. Smith collected $160,000 during the year 2000 from his client and paid $60,000 for all operating expenses during the year 2000 in cash basis. According to a cash basis, net income during the year 2000 is $100,000 ($160,000 - $60,000).
On the beginning of the year 2000
Accounts receivable $24,000
Accrued expenses or liabilities $7,600
Prepaid expenses as assets $4,000
At the end of the year 2000
Accounts receivable $10,000
Unearned revenue $2,000
Accrued expenses or liabilities $13,600
Prepaid expenses as assets $6,000
To get Mr. Smith’s revenue in accrual basis $144,000 as follow
Collected in cash $160,000 plus ending accounts receivable $10,000 minus beginning accounts receivable $24,000 and ending unearned revenue $2,000
To get operating expenses in accrual basis $64,000 during the year 2000
Payment on all operating expenses $60,000 plus beginning prepaid expenses $4,000 minus ending prepaid expenses $6,000 and beginning accrued expenses $7,600 plus ending accrued expenses $13,600
To get net income in accrual basis $80,000 for the year 2000
Revenue in accrual basis $144,000 minus operating expenses in accrual basis $64,000
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