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Five easy steps for cash to accrual conversion

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Discover the five easiest steps for cash to accrual conversion! Clear your confusion fro conversion. Transtutors presents five steps to follow to convert cash accounting into accrual accounting.
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Five easy steps for cash to accrual conversion

  1. 1. A conversion from Cash basis of Accounting to Accrual Basis of Accounting is definitely backbreaking for most of the students. They say every problem has a solution. So, what is the solution to this exasperating problem? FIVE EASY STEPS FOR CASH TO ACCRUAL CONVERSION!
  2. 2. We will start with an introduction the two terms: Accrual basis of accounting and cash basis of accounting. WELL, THERE SHOULD BE SOME SOLUTION FOR SURE. LET US DIG IT WITH TRANSTUTORS.
  3. 3. This is the most commonly used method of accounting. Most of the entities use this accounting practice. In this method, income is reported when earned and expenses are reported when incurred. It is just opposite to the cash basis system. Under the accrual basis, companies can decide when to recognize revenue and expenses, but there are certain rules and principles governing the recognition. In accrual basis, companies are required to make estimation against the revenue that are recorded but may not receive. ACCRUAL BASIS OF ACCOUNTING
  4. 4.  Accrual accounting is considered to be a standardized method of accounting; it provides a more accurate picture of company’s current operations.  The need of this method arises due to the complexities faced by the company in terms of depicting true picture of the business.  Selling items on credit provides revenue over a long period of time and thus reporting such events on financial statements in the same reporting period is necessary.  Accrual basis should be used when the business is flourishing with sales of more than $ 5 million per year or when business stocks an inventory of items.
  5. 5. SO THAT WAS ACCRUAL ACCOUNTING. LET’S SEE WHAT CASH BASIS OF ACCOUNTING IS.
  6. 6. This is the simplest method of maintaining books of accounts as transactions are recorded only on the actual flow of cash in or out of business. In cash basis, revenue is recognized only when cash is received from the customer while expenses are recorded when cash is paid. CASH BASIS OF ACCOUNTING
  7. 7.  In this method of accounting, there is no match of the revenue against expenses in an accounting period.  This method is mostly used by sole proprietors or business with no inventory.  Cash basis is considered beneficial from the taxation point of view as recording income can be put off to the next year and expenses can be booked immediately.
  8. 8. CASH VERSUS ACCRUAL
  9. 9. Now, you must have gained some knowledge about the cash method vs. accrual method to be able to convert cash to accrual accounting. Cash basis provides more accurate picture of how much cash the business has while accrual basis leaves one in a dark as to what cash reserves are available. Cash basis depicts misleading picture of long term profitability while accrual basis provides true picture of profitability.
  10. 10. After this quick view at the difference between accrual and cash basis accounting, let us now move to the main point, i.e. Cash to Accrual Basis Conversion
  11. 11. CASH TO ACCRUAL BASIS CONVERSION How to convert cash basis to accrual basis?
  12. 12. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS:
  13. 13. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash.
  14. 14. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash. Subtract all the cash payments which pertain to previous accounting period.
  15. 15. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash. Subtract all the cash payments which pertain to previous accounting period. Adding all the prepaid expenses for which cash has been paid and which relates to next accounting period
  16. 16. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash. Subtract all the cash payments which pertain to previous accounting period. Adding all the prepaid expenses for which cash has been paid and which relates to next accounting period Increase in assets is added while decrease in asset is deducted.
  17. 17. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash. Subtract all the cash payments which pertain to previous accounting period. Adding all the prepaid expenses for which cash has been paid and which relates to next accounting period Increase in assets is added while decrease in asset is deducted. Increase in liability is deducted and decrease in current liability is added.
  18. 18. SIMPLE! JUST FOLLOW THE STEPS FOR CONVERTING CASH BASIS TO ACCRUAL BASIS: Add all accrued expenses for which company has not paid cash. Subtract all the cash payments which pertain to previous accounting period. Adding all the prepaid expenses for which cash has been paid and which relates to next accounting period Increase in assets is added while decrease in asset is deducted.
  19. 19. FORMULA FOR CONVERSION
  20. 20. LET US APPLY THE FORMULA TO A CASH BASIS TO ACCRUAL BASIS EXAMPLE Accounts receivable at the beginning of the year is $45000 and closing balance is $ 40000, Cash collected from debtors is $150000. Calculate Sales as per accrual basis “Sales = Cash Collection from Debtors + Closing Balance of Receivables - Opening Balance of Receivables”
  21. 21. LET US APPLY THE FORMULA TO A CASH BASIS TO ACCRUAL BASIS EXAMPLE Accounts receivable at the beginning of the year is $45000 and closing balance is $ 40000, Cash collected from debtors is $150000. Calculate Sales as per accrual basis “Sales = Cash Collection from Debtors + Closing Balance of Receivables - Opening Balance of Receivables”
  22. 22. SO, WHAT DO YOU THINK ABOUT CASH BASIS- ACCRUAL BASIS CONFUSION NOW?
  23. 23. IF YOU ARE STILL LOOKING FOR FURTHER CLARIFICATION, TRY THE VIDEO BELOW BY ALLEN MURSAU. http://www.youtube.com/watch?v=9MkE9Dl2aiU
  24. 24. There may still arise many questions on the conversion while working on actual problems. But is there anything to worry about? The best experts from the world are available 24*7 at a very nominal price, then why should you worry about your assignments? Submitting your question to Transtutors gets you instant accounting homework help. So start practicing accrual and cash basis accounting and post your questions at Transtutors!
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