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Transition from Cash Basis to Accrual Basis

Our company has voted to transition from a Cash Basis to an Accrual Basis of Accounting. A couple of questions I'd like to get others' input on.

1) If you are at the end of the fiscal year and trying to finish up the close process, would you start to move items into Accrued expenses so that the new year is reflected properly in the new fiscal year?

For example, a statement for credit card processing fees related to Month 12 transactions is received. The funds are not pulled from the bank until Month 1 of new fiscal year.

I would debit the expense account, credit a liability account dated last day of month of Month 12.

In Month 1 of new fiscal year, debit liability and credit cash when we see the withdrawal from the bank account.

2) Is there a necessity to have an Accrued (Payable) account for each expense that may need to be Accrued or can we have a single account for the more general items.

Credit Card Processing Payable account or a general Accrued Expenses account?
We will set up a specific "payable/accrued" account for Salaries and some other accounts, but it would make our chart of accounts rather lengthy if we had to set up a liability for every possible account we'd be accruing.

Looking forward to hearing others' thoughts and learning what you've done in your own companies.


Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

1) Yep, pretty much. But see below.
2) No, very often it is best to have just one account for "accrued liabilities" and have a huge reversing JE that itemizes what the items are (reflecting the accounts expensed) while avoiding having mirrored accounts.
In the CC example, you could do it your way (and in that case I would call the liability account "Accounts Payable"), or you could run through the JE process. In the CC example, however, it feels a whole lot more like an AP item than an accrued liability.

Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

The most accurate method would require that you continue using the cash method until the very end of the fiscal year (e.g., period 12) and then start recording transactions using the accrual method in the first period of the new fiscal year. Otherwise, you don’t get true and accurate financial statements for the last year you were using the cash method. In your example, accruing the credit card statement expenses in period 12 would violate the cash method rule (although prepare you for the accrual method in the following period).

The easiest way to accomplish this is by doing what you are suggesting in #1 and then adjusting your financial statements to truly reflect the cash method throughout the current year. The adjustments should not be made in the accounting software for the current year. Then in the new fiscal year continue to record transactions using the accrual method. The idea is to make sure that revenue and expenses continue to be reflected in financial statements when payments are received and disbursed respectively. In the new fiscal year you can use a single accrued expenses liability account or several, probably by category (accrued payroll, accrued professional fees, etc.). Having a separate accrued expenses G/L account set up for each vendor would probably be unnecessary.

Another important step in converting to accrual is to adjust your budget for the new year to reflect the new accounting method chosen. If you have a planning and budgeting application that automatically generates financial statements, including a balance sheet and statement of cash flows, you will benefit from having the budgeted financial statement match the actual statement, which will make your analysis of actual vs. budget meaningful.

(unemployed) |

Okay, so if I'm understanding you correctly, I should not have any accrual entries or prepaid expense entries in any period of 2014. I should start with any accruals and prepaid expenses in January of 2015 going forward.

How would I properly reflect insurance premiums, for example that were prepaid in 2014 (either a month in advance or quarterly) that really pertain to 2015 periods? If I don't record the prepaid expense in 2014, am I not starting out 2015 with incorrect beginning balances?

Is there a checklist somewhere that would help in closing out the 2014 year and open up the 2015 year that I might be able to access? A step by step guideline of sorts....

My experience in past employment has always been one where the basis was already in place, not ever a situation where the company decided to change, especially after 30+ years of using the cash basis.

Sean Herbrand
Title: President
Company: TAC Services, Inc
(President, TAC Services, Inc) |

The proper way would be to prepare a Federal Form 3115 to request a change from the cash basis to accrual basis. The form will require you to go back to the beginning of the year to recalculate an accrual basis financial statement. You will then need to take you cash basis statement vs your new restated accrual statement to determine the change in revenue that will need to be recognized on your tax return. If it creates income, the additional income can be recognized over a three year period. If it is a loss, you may recognize it immediately in the year of change. For a company that takes very large deposits from customers, this can save them income taxes in the first year, because they had previously recognized the deposits.

(unemployed) |

We don't file a tax return. We are a non profit charitable organization (religious organization) and are not required to file any returns in relation. Our letter from the IRS states we are not required to file the 990 form, either.

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