How to Convert Accrual Financial Statements to Cash

All business owners should periodically assess the benefits and drawbacks of the accounting methods they use. Businesses that experience high default rates on customer accounts receivable may find it is in their best interest to recognize income only when the payment is received. Also, if the business has switched from buying on credit to paying immediately for all services and supplies, there is no benefit to using the accrual method. Converting from accrual to cash-basis accounting requires reversing the way in which accrued items were recorded in the general ledger.

Things You'll Need

• General ledger

Instructions

1. Reverse all accounts payable expenses that have been accrued but not yet paid. On the general ledger, all expenses posted to a payables account should be removed from the expense account they were originally posted to and removed from accounts payable. For example, an expense accrued for copy paper would reduce office supplies expense and reduce accounts payable. Continue this process for every expense you have accrued on the general ledger until the payables accounts are zero.

2. Reverse all accounts receivable that have been accrued but not yet received. On the general ledger, all income posted to a receivables account should be reversed against the income account it was originally posted to and removed from accounts receivable. Remove each income type from accrued receivables until the receivables accounts are zero.

3. Expense the remainder of amortized items. For example, if you prepaid an insurance policy for an entire year and were expensing 1/12 of that amount each month, expense the entire amount remaining in the prepaid insurance account to reduce that account to zero.

Tips & Warnings

• If you are changing your accounting method for tax purposes, you need to notify the IRS of your intention to change accounting methods.

• If you are uncertain how to properly make the changes to your accounting records, consider hiring a professional to assist you with the transition.

References

• "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991