Cash to accrual conversion refers to the process of adjusting records prepared under the cash basis of accounting to produce accounts which reflect the accruals basis of accounting.
Many small businesses use the much simpler cash basis of bookkeeping where transactions are recorded when cash is received or paid, and then adjust the records to an accruals basis at the end of an accounting period when financial statements need to be produced.
Under the cash basis of accounting revenue is recorded when cash is received, and expenses are recorded when cash is paid. In contrast, under the accruals basis revenue is recorded when earned and expenses are recorded when incurred. This is summarized in the table below.
Cash to Accrual Conversion Example
If a business has maintained it’s bookkeeping records on a cash basis, at the end of the accounting period the balances on each ledger account will reflect cash received and paid during the accounting period. The business will need to adjust both the revenue and expense accounts to reflect the conversion from a cash to an accruals basis.
Revenue Cash to Accrual Conversion
Suppose for example during the accounting period a business makes sales to an account customer amounting to 1,700 and in the same period receives 400 from the customer.
The business will record the following entry in respect of the sales.
| Account | Debit | Credit |
|---|---|---|
| Cash | 400 | |
| Revenue | 400 | |
| Total | 400 | 400 |
As the accounting is done on a cash basis, the business only records the 400 cash received from the customer. The balance of 1,300 is not reflected in the bookkeeping records as the cash has not been received.
At the end of the accounting period the conversion from the cash basis to the accrual basis will require the following journal entry to be made.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 1,300 | |
| Revenue | 1,300 | |
| Total | 1,300 | 1,300 |
The cash to accrual conversion entry corrects the accounts receivable account to show the 1,300 still outstanding from the customer, and also increases the revenue account from the previous balance of 400 to 1,700, thereby reflecting the total sales for the period.
Expenses Cash to Accrual Conversion
If during the accounting period the business incurs expenses with an account supplier amounting to 900, and in the same period makes a cash payment of 200 to the supplier, the business will record the following entry in respect of the expenses.
| Account | Debit | Credit |
|---|---|---|
| Expenses | 200 | |
| Cash | 200 | |
| Total | 200 | 200 |
Again, the accounting is done on a cash basis, the business only records the 200 cash paid to the supplier. The balance of 700 is not reflected in the bookkeeping records as the cash has not been paid.
At the end of the accounting period the cash to accrual conversion will require the following journal entry to be made.
| Account | Debit | Credit |
|---|---|---|
| Expenses | 700 | |
| Accrued expenses payable | 700 | |
| Total | 700 | 700 |
The cash to accrual conversion entry corrects the accrued expenses payable account to show the 700 still outstanding to the supplier, and also increases the expenses account from the previous balance of 200 to 900, thereby reflecting the total expenses for the period.
Cash to Accrual Basis Conversion Formula
In general the following cash to accrual conversion formulas can be used to convert each revenue and expense income statement account from the cash basis to the accrual basis of accounting.
In each formula AR means accounts receivable, and AP means inventory accounts payable, and AE means accrued expenses payable
Calculating Revenue on an Accruals Basis
The revenue on an accruals basis is given by the following cash to accrual conversion formula.
In the example above revenue can be calculated as follows.
Receipts = 400 Ending accounts receivable = 1,300 Beginning accounts receivable = 0 Revenue = Receipts + Ending AR - Beginning AR Revenue = 400 + 1,300 - 0 = 1,700
Calculating Expenses on an Accruals Basis
The expense on an accruals basis is given by the following cash to accrual conversion formula.
In the example above expenses can be calculated as follows.
Payments = 200 Ending accrued expenses payable = 700 Beginning accrued expenses payable = 0 Expense = Payments + Ending AE - Beginning AE Expense = 200 + 700 - 0 = 900
Other Useful Cash to Accrual Conversion Formulas
The formulas used above deal with the most frequently encountered situations when converting revenue and expenses cash based accounting to accruals based accounting.
The cash to accrual formulas below allow for additional complications where the business has for example to deal with inventory, prepaid expenses and unearned revenue.
In each case the formula shows how to calculate the accruals basis of accounting revenue or expense based on cash accounting information.
1. Revenue Cash to Accrual Conversion – Adjusted for Unearned Revenue
2. Revenue Cash to Accrual Conversion – Adjusted for Accounts Receivable Written Off
3. Expenses Cash to Accruals Conversion – Adjusted for Prepayments
4. Purchases Cash to Accruals Conversion
5. Cost of Goods Sold Cash to Accruals Conversion
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.