How to Account for Accounts Receivable When Switching From Cash to Accrual
In accounting, there are two methods for handling revenue and expanses: accrual and cash. Cash accounting records transactions when funds transfer hands from one business to another. With accrual accounting, transactions are recorded when a sale or expense takes place, and not necessarily when funds change hands. Therefore, switching the accounts receivable from cash to accrual requires ledger entries that reflect when a transaction takes place. Because the focus on switching accounting methods is when the transactions take place, the main area of adjustment in ledger entries will be on the dates the accounts receivable are recorded.
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Instructions
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Establish the accounts receivable as an asset class. In cash accounting, accounts receivable is a theory. Because revenue is recorded only when cash changes hands, any outstanding money owed to the small business is not reflected on the ledger as real revenue. In accrual accounting, revenue is recorded when the sale happens, not when the cash changes hands. Therefore, accounts receivable must be established as a real asset class on the books and balance sheets.
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Transfer any unpaid monies owned to the small business for the previous fiscal year to the accounts receivable account and record it as revenue made. For example, a company switches from cash to accrual at the end of the fiscal year with $65,000 in unpaid accounts receivable. At the beginning of the new fiscal year under the accrual accounting method, the company records on the first day of business revenue of $65,000 under the accounts receivable section of the ledger.
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Record all new sales as revenue when the sale takes place. List the sale in the appropriate accounts within the general ledger and record the receivable amount in the accounts receivable. For example, a company sells a contract to maintain the landscape, for one year, for a home owners association for $15,000. The homeowners association pays $2,500 up front. In accrual accounting, the sales account will reflect the $15,000 increase, while the accounts receivable will reflect $12,500 in unpaid monies.
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Tips & Warnings
Because accounts receivable becomes a real asset class in accrual accounting, it can be used on a balance sheet as an asset even if the cash itself has not been received.
