Converting Cash to Accrual

Video Transcript

"In this clip we're going to talk about converting cash to acrrual basis accounting. And essentially what that means is that you've been recording things on your books, based on when you bought them, not based on when you should be realizing those items. In this example we're going to pretend we're a wedding cake maker. In January we paid fifty dollars for some supplies for a cake we were going to make in March. So because we're cash basis, what we do is we record that item on our books in January when we paid for it, and then when we get paid for making the cake, we record the two hundred and fifty dollars we made for making the cake in March. That's cash basis accounting. So if we wanted to convert that to accrual accounting, we would then have to reverse this fifty dollar entry that was essentially a debit to expense and a credit to cash, and we would have to change it to a debit to prepaid and a credit to cash. So that we could change it to accrual where we recognize the expense for the fifty dollars in the month of March, along with the payment that we received for making that cake and delivering that cake in the month of March. This top one is cash basis accounting, and the bottom one is accrual basis accounting."