Cash to Accrual Conversion

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
Cash Accruals
Revenue Received Earned
Expenses Paid Incurred

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 cash to accrual conversion.

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.

Revenue recorded on a cash basis
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.

Revenue accrual basis adjustment
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.

Expenses recorded on a cash basis
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.

Expenses accrual basis adjustment
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.

Revenue = Receipts + Ending AR – Beginning AR

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.

Expense = Payments + Ending AE – Beginning AE

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

Revenue = Receipts + Ending AR – Beginning AR + Beginning unearned revenue – Ending unearned revenue

2. Revenue Cash to Accrual Conversion – Adjusted for Accounts Receivable Written Off

Revenue = Receipts + Ending AR – Beginning AR + AR written off

3. Expenses Cash to Accruals Conversion – Adjusted for Prepayments

Expense = Payments + Ending AE – Beginning AE + Beginning prepayments – Ending prepayments

4. Purchases Cash to Accruals Conversion

Purchases = Payments + Ending AP – Beginning AP

5. Cost of Goods Sold Cash to Accruals Conversion

Cost of goods sold = Payments + Ending AP – Beginning AP + Beginning inventory – Ending inventory
Cash to Accrual Conversion May 9th, 2017Team

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