Cash to Accrual Adjustment

How is it calculated?

The accrual adjustments are determined by factoring in the net changes in balance sheet items such as Inventory, Accounts Receivable and Accounts Payable.  

Goal of the Calculation

The goal of the Accrual Adjustment to Cash Accounting is to effectively convert cash accounting into accrual accounting.  Cash accounting can be highly skewed due to the timing of when expenses are paid or revenue is received, but accrual accounting is not influenced by these items and a better view of true profitability is received.  

Why does it matter

Accrual adjustments should be used whenever possible when working with a cash basis income statement.  The items needed to complete these adjustments are as follows:

• Income Statement
• Beginning Balance Sheet (includes items like Inventory, AR & AP)
• Ending Balance Sheet

We will walk through the impact Accounts Receivable has on accrual adjusted revenue.  Let’s say we have a business with a cash basis income statement showing $1,000,000 in revenue.  Their beginning balance sheet lists $200,000 in AR and their ending balance sheet lists $100,000 in AR.  Their accrual adjusted revenue will start with the $1,000,000 in revenue.  From their the beginning balance sheet AR will be SUBTRACTED out because that revenue although collected in this year was actually “earned” in the prior year.  That reduces our revenue from $1,000,000 to $800,000.  To that number, we will then add the $100,000 in ending AR because even though we haven’t collected that money, since it is in the form of AR, it again means we have “earned” that revenue.  The result would be our accrual adjusted revenue of $900,000 ($1,000,000 - $200,000 + $100,000 = $900,000).

Other Relevant Terms

• Accrual Accounting
• Cash Accounting
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