Business transactions are recorded when the cash related to the item is issued or received under the cash basis of accounting. You need to register a sale on a cash basis when your company gets cash from the clients. It is not when it issues invoices to them. The cash basis is generally used in small companies as it requires only a small amount of accounting expertise. It might be essential to convert to an accrual basis of accounting but to have the company’s books audited in preparation for its sale or to go public. The accrual basis is mainly used to record income and expenses in the given timeline when they are earned. You must follow the steps mentioned below to convert from cash to accrual.
Add your accrued expenses:-
You need to add all the expenses for which your company has received a benefit but has not yet paid the supplier or the employee. It means that you should virtually accrue for all types of expenses like wages earned but unpaid direct materials unpaid but received, office supplies unpaid but received, etc.
Subtract all your cash payments:-
It would be best if you subtracted the cash expenses made for expenses that should have been recorded in the last accounting term. It also means you are reducing the beginning retained earnings balance by including these expenses in the earlier period.
Add some prepaid expenses:-
Some cash payments might relate to assets that have not been consumed yet, like a rent deposit. The review expenditure should be during the accounting term to check if there is any prepaid expense. You should adjust the beginning retained earnings balance if you do the same for costs. It will help in removing the expenses which are shifted now into the prepaid expense asset account.
Add the account receivable :-
You have to record accounts receivable and sales for all the buildings issued to your clients and for which no cash has been received yet.
Subtract the cash receipts :-
Some sales coming from a previous term might have been recorded within the current accounting term based on the cash receipt in that term. It is then reversed the sales transaction and recorded instead as a sale or account receivable in the preceding term. It will help require an adjustment to the starting retained earning history.
Subtract the customer prepayment:-
Customers might have paid money in advance for orders which would have been recorded as sales under the cash basis of accounting. You need to register them as short-term liabilities unless you have shipped the related goods or provided the service indicated.
The conversion from cash basis to accrual basis can be challenging for any accounting software configured for the cash basis and has not been specially designed to handle the accrual basis accounting. It means that all the conversion adjustments should be made manually with your journal entry. It would be easier for you to manage the conversion on a different spreadsheet.