Accounting & Bookkeeping & Small Business Forum

[areedy]

I am required to produce a financial statement on a cash basis. As i know it i have to eliminate A/P and A/R as of December 31, correct? and then reverse the entry on January 1? What is the correct adjusting entry for this?

Please help!
Thank you

[stasia2003]

areedy wrote: I am required to produce a financial statement on a cash basis. As i know it i have to eliminate A/P and A/R as of December 31, correct? and then reverse the entry on January 1? What is the correct adjusting entry for this?

Please help!
Thank you

Financial statements really should be produced on an accrual basis at the end of the year(or month). Then you can convert it back to cash basis on January 1.

The entry is:

December 31:

DR Accounts Receivable
CR Adjust Sales-Cash to Accrual

If you have Accounts Payable outstanding:

DR Adjust Cost & Expenses-Cash to Accrual
CR Accounts Payable


Now when January 1 rolls around, just reverse the above entries. Just switch the debits and the credits. I hope this helps. :D

[areedy]

Yes, we do produce them on accrual basis. But for the IRS i am required to prepare them on a cash basis. Do i still have to make those adjusting entries that you wrote for me?

Thank you

[stasia2003]

areedy wrote: Yes, we do produce them on accrual basis. But for the IRS i am required to prepare them on a cash basis. Do i still have to make those adjusting entries that you wrote for me?

Thank you

Well typically, I always thought the IRS preferred the accrual basis for tax purposes at least that's what I was taught at the University. I guess it's a choice then. I would still find out from the IRS which one is preferred by them if you haven't already done so.

[areedy]

For tax purposes they require cash basis.

[stasia2003]

areedy wrote: For tax purposes they require cash basis.

I found out that the accrual method for tax purposes is PREFERRED simply because it gives a more accurate picture of your financial health. If you carry inventory, then you have to use the accrual method for tax purposes.

If you are already on the accrual method of accounting, why would you convert to cash basis for tax purposes? I guess it's your choice but it doesn't make sense to me unless your industry requires it.

Sorry, just curious... :o

[areedy]

I don't know. That is how it has been done in this company, my CFO requires cash basis for preparation of tax returns... All I really want to know are the 2 entries to eliminate A/P and A/R.

Thank you

[stasia2003]

areedy wrote: I don't know. That is how it has been done in this company, my CFO requires cash basis for preparation of tax returns... All I really want to know are the 2 entries to eliminate A/P and A/R.

Thank you

Okay, basically just use the entries I provided above to adjust for cash to accrual basis and rename the adjustment account Accrual to Cash Basis instead. Also, switch the debit and the credit.

[RobJ]

For what it's worth, QuickBooks allows you to prepare reports using "Cash Basis" or "Accrual Basis" on the fly. That makes all this adjusting business a non-event.

Rob