1. Back to HA Learn
  2. »
  3. Accounting
  4. »
  5. Cash basis to Accrual..
Convert cash basis books to accrual basis books

Cash basis to Accrual basis Accounting: A complete guide

Mar 24, 2022

Official HA Logo

HA TAX

World’s Best Accounts Outsourcing Platform

Know More

Cash basis Accounting is popular and quite common practice among small businesses when it comes to maintaining books. Cash basis accounting is very simple and easy to follow. Income Tax does not accept cash basis and requires an accrual basis of accounting. If you are required to file Income Tax Returns, do not stress out as there is a way. You don’t need to maintain a separate set of books for Income Tax purposes. Let’s look at how you can convert your Cash basis to Accrual basis books.

Point of difference between Cash basis to Accrual basis

The Cash basis of accounting is flexible and simple to understand for anyone. You record how much revenue is generated and how many payments you made. The difference would be your profit or net revenue or whatever you call it. 

The Accrual basis of accounting is much more complicated than just recoding incoming and outgoing cash flows. You need to record Income when it is “earned” and not “received”. You need to book payments when they are “due/ incurred” not “paid”. 

The following accounts are where differences arise and should be accounted for when using the Accrual basis of accounting.

 

From Business Registrations to Tax filings, HA Experts will take care of all your compliances.
Call: 7788993390
Email: letstalk@hafintax.com
  1. Accounts Receivable: The Debtors who owe you money for goods/services you have already delivered.
  2. Accounts Payable: The Creditors to who you owe money for goods/services that you have received or consumed.
  3. Unearned(Deferred) Revenue: Money that is received prior to provision of service/goods. This money is received but is not earned yet.
  4. Prepaid Expenses: Expenses that are paid in advance but not yet due. In this situation, money is flowing out as an expense but in reality, it is not yet an expense that needs to be paid.
  5. Accrued Expenses: These represent the expenses and costs that are due but not billed yet by the recipient. For example, utilities or interest on outstanding loans that are incurred and due but not yet billed.

Income Tax Department gives flexibility to businesses when it comes to choosing the Accounting method. But the majority of businesses choose Cash basis accounting because it is simpler and easy to use.

HA Courses
HA Practical Training Courses.
          Online Live/ In-Office

HA TAX offers Online live or in-office practical training courses for those who are looking to learn Accounting & Taxation courses. These courses are aimed at students, working professionals and business owners who are looking forward to practising on their own.

How to convert Cash basis to Accrual basis Accounting

Under the cash basis of accounting, transactions are only recorded when cash is actually flowed in or out of the company. In such a case, a sale is only recorded as a sale when an organization receives cash from its customers and not when it issues goods or sends invoices.

Cash basis may be followed by businesses because of the simplicity involved but it may be needed to convert from a cash basis to an accrual basis of Accounting. There may be several reasons as to why it is mandatory to convert the books from a Cash basis to Accrual basis. Some instances include a sale of the company, a plan to go public, or obtaining a loan.

Accrual basis accounting record revenues and expenses in the period when they are earned and not paid. To convert the books from a cash basis to an accrual basis, the following steps need to be followed.

  1. Add Accrued Expenses: Add all the expenses that the company has received benefits for but had not paid. These represent expenses that need to be accounted for on an Accrual basis but not on a Cash basis.
  2. Deduct Cash Payments: Subtract payments that are to be accounted for in the previous year but are actually paid in the current year. Remember, on the Accrual basis of accounting, expenses are recognized when incurred, not paid.
  3. Add Prepaid Expenses: Some payments that may relate to an asset or expense that has not yet been consumed but are paid. Such expenses are not recognized as expenses until they are actually consumed and due. Examples of such payments include prepaid rent, prepaid insurance, any unused portion of an asset.
  4. Add Accounts Receivable: Record Accounts Receivable. Recognize them as debtors even though no cash has been received after the sale of goods/ provision of services.
  5. Deduct Receipts: Revenues related to the prior period need to be deducted. The prior period sale/service that is incurred in the last year but the amount related to that sale/service received in the current period needs to be accounted for in Accrual basis Accounting.
  6. Deduct Customer Prepaid amounts: Customer advances have to be reduced. Any such prepaid amounts need to be recorded as short-term liabilities until the goods are sent or services are provided.

 

Basis of accounting

    Challenges in converting Cash basis to Accrual basis

    Conversion of Cash basis to an Accrual basis is very challenging and time taking. No accounting software in the world has the ability to convert Cash basis to Accrual basis. It means all the adjustments and conversions have to be done manually. While doing so, a complete set of accounting records would be needed. Some use spreadsheets to achieve the same function. But it is not to be included as a formal accounting record. The biggest challenge while converting Cash basis to Accrual basis would be the missing records. Unfortunately, we cannot check the accuracy using software and it has to be done manually. The only way to be absolutely sure of a complete and accurate conversion is to examine all the records, transactions for the particular year and quarter. Hence the conversion of Cash basis to Accrual basis books is both tedious and labor-intensive. 

    Due to the challenges and complexity involved in the conversion of Cash basis to Accrual basis books, business owners often seek the help of an expert.

    HA Tax Experts are well trained and well organized when it comes to dealing in complex situations. Get connected with HA TAX and our HA’s will take care of every single detail with unmatched precision.

    Use HA TAX chat-based Mobile and Desktop applications to avail services at an affordable price.

     

    HA TAX
    Join HA TAX. The perfect destination for all your needs.

    HA TAX takes care of a wide range of services ranging from accounting, taxation, payroll, audit support, business registrations, food licenses, trade licenses, and much more. Get connected with experts at a price that is affordable like never before.

    About

    HITAKSH LLP is a service-providing platform aimed at modernizing the way financial services are provided. Our mission is to provide taxation & accounting services at an affordable price and with the utmost integrity. With the same level of dedication & effort, we tend to the needs of individuals, businesses, companies, and enterprises. HA TAX App is a product of HITAKSH LLP. Use our Chat-based Mobile and desktop application for processing, tracking, and chatting with your Dedicated CA right from your mobile or laptop. HITAKSH is now providing country specific accounting needs to over 10 countries.

    Join HA TAX.