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Accrual to cash conversion for multiple years

Asked on Aug. 14, 2020

Hello Everyone,

I have a problem I've been trying to figure out for a week now; i'm sure there is an easy answer but i just can't see it.

Background:
We a small company that keeps financials in the accrual method. But for our tax return, we file on the cash basis.

Problem:
I normally convert the accrual financials to cash basis by reversing out end of year balances in our payables/accruals accounts.
This of course affects net income and what rolls into retained earnings.

Assuming I did this for the year 2018, and now I have to do it for 2019, how do I factor in the cash/accrual adjustments made in 2018 for 2019 so that the retained earnings in my balance sheet properly rolls forward on the cash basis?

I'm sure there is a simple answer but I just can't see it....

Thanks in advance

Answers

Sam Otto's headshot
Sam Otto CPA • August 26, 2020

With anything like this someone would really need to look at your books and tell you exactly. So question, the adjustments you made in 2018. After your tax return was complete did you reverse the journal entries back so that your books were again on the accrual basis or did you leave it?

If you did properly reverse it so the books were on accrual basis what you need to do is figure difference between this year and last on the balance sheet accounts and then reverse out the differences temporarily.

For example let's say year end A/R for 2018 is $20,000 and for 2019 is $28,000. You need to figure out how much cash was collected for revenue in 2019? All you need to do is take the difference between the A/R which in this case is $8,000 ($20,000-$28,000). So you would credit A/R $8,000 and then debit revenue for $8,000 to convert to cash. Be sure to obviously reverse then to bring back to the accrual basis.

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