How to do accrual accounting

how to do accrual accounting

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Review your trial balance. If year-end adjustments are necessary, make the adjustments prior to converting from accrual to cash basis.

Examine the accounts receivable account. Accounts receivable, by nature, is an accrual basis account. Every adjustment that is made to convert the accrual basis trial balance to cash basis will involve both a balance sheet account and an income statement account. To adjust the accounts receivable, calculate the net change in the account during the year. For example, if your opening accounts receivable balance was $100,000 and after year-end adjustments the ending balance was $150,000, you would calculate the following formula: $150,000 - $100,000. The resulting $50,000 represents the cash increase in sales during the year. Do not report accounts receivable on your tax return. Instead, the $50,000 cash increase will be included with the reported sales for the year on

a cash basis tax return.

Perform the same calculation for your accounts payable. For example, if your opening accounts payable was $100,000 and ending accounts receivable was $200,000, you would calculate the following formula: $100,000 - $200,000. The resulting negative $100,000 represents the cost of materials, office supplies and other expenses that are accrued before being paid.

Allocate the accrued costs calculated above to the appropriate line items of your income statement. This will report your expenses on the cash basis of accounting by eliminating the accrued expenses reported in accounts payable.

Review other accrual basis accounts on your balance sheet and income statement, and make adjustments similar to the ones made for accounts payable and accounts receivable. For example, if you have a deferred tax liability, calculate the difference between the opening and closing and offset the result against your deferred tax expense.


Category: Forex

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