If you have to keep accounting record of your organisation, you have to follow any one method out of two main method of accounting, one is accrual basis accounting and second is cash basis accounting. In accrual basis accounting, we record both income received in cash and income receivable but still not received in cash. In this method, we also record all expenses which has been paid in cash and all the expenses which are payable. Other side, in cash accounting, we record only incomes which received in cash and expenses which have been paid in cash.
Sometime, there is big need to convert accrual basis accounting to cash basis accounting because
Sometime, there is big need to convert accrual basis accounting to cash basis accounting because
- Business organisation has to fill tax return on the cash basis accounting.
- They also need to reconcile accrual basis accounting with cash basis accounting.
Following are its main steps :
1st Step : Deduct Outstanding Expenses Accounts from Financial Statements
First of all you have to deduct outstanding expenses account from financial statements. First of all see which expenses have not been paid. Deduct it from total expenses in income statement and balance sheet's total current liabilities.
2nd Step : Deduct Outstanding Incomes Account from Financial Statements
All the incomes which we have to receive but not received in cash should be deducted from respective income accounts in income statement. After this, it will deducted from balance sheet's current assets.
3rd Step : Deduct Account Receivable and Credit Sales from Financial Statements
In income statement, you have total sales in credit side. You have to deduct credit sales from it. You also deduct whole account receivable accounts from balance sheet's current asset because in cash basis account, we need not show account receivable accounts in balance sheet.
4th Step : Deduct Account Payable and Credit Purchase from Financial Statements
In income statement, you have the total purchase in its debit side. You have to deduct credit purchase from it. You also deduct whole account payable accounts from balance sheet's liabilities account.
5th Step : Add Advance Incomes in Financial Statements
In income statement, you have to include all the cash which you have received from customer as advance for selling our products. Like this, all other incomes which we have to receive in advance will include in income statement. With this, income statement will convert from accrual to cash basis accounting. We also deduct advance incomes from liabilities side of balance sheet. With this, our balance sheet will convert from accrual to cash basis.
6th Step : Add Advance Expenses in Financial Statements
In income statement, we have to include advance paid expenses in expenses. If you have paid advance for purchasing goods, it will also include in total purchase in income statement. In balance sheet, we deduct advance expenses from asset side.
Other Short Cut Method
Instead of deducting or adding from each items of financial statement, we just take the net income, total assets and total liabilities and adjust for conversion accrual basis accounting to cash basis accounting.
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