Attn. mla1169 – Need some more help with this Cash to Accrual Conversion

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    Topic
  • #187285

    Thank you for all of your help yesterday but I’m still hitting some major walls with understanding this. I thought it may be more helpful if you could help walk me through a scenario. Journal Entries/T-Accounts would be most helpful.

    From Intermediate Accounting 3rd edition:

    A doctor keeps her books on the cash basis. In 2010, the Dr. received $300,000 from patients and paid $170,000 for operating expenses.

    A/R

    Jan. 1 – $12,000

    Dec. 31 – $9,000

    Unearned Revenue

    Jan. 1 – $0

    Dec. 31 – $4,000

    Accrued Liabilities

    Jan. 1 – $2,000

    Dec. 31 – $5,500

    Prepaid Expenses

    Jan. 1 – $1,800

    Dec. 31 – $2,700

    So, aside from the obvious 4 step equation that will get me there. I really feel that things will begin clicking for me if I can see the actual journal entries / T-Accounts that will get us to the accrual number, and why.

    Please help. I’ve wasted way too much precious study time on this and need to get past it.

    Thank you in advance.

    "If you're going through hell, keep going"
    - Winston Churchill

    "I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
    - Michael Jordan

    BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
    AUD: 78
    REG: (74), 91
    FAR: (71)

Viewing 14 replies - 1 through 14 (of 14 total)
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  • #583242

    I welcome help from anyone. Thank you.

    "If you're going through hell, keep going"
    - Winston Churchill

    "I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
    - Michael Jordan

    BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
    AUD: 78
    REG: (74), 91
    FAR: (71)

    #583243
    M.O.D.
    Member

    With cash vs accrual problems as with deferred taxes and error corrections, you have to keep TWO sets of accounts (books).

    One in cash and one in accrual, one correct, one incorrect, one with GAAP basis, one with IRS basis, etc.

    Then you can see the difference in the totals between the two books.

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

    #583244
    M.O.D.
    Member

    I am not sure what this question is asking. If the doctor keeps the books in cash, she would not have all those other prepaid and accrual and AR accounts.

    There would only be one permanent account: cash

    300-170 = 130 net income

    What is the purpose of all those other accounts?

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

    #583245
    jpowell31
    Participant

    i didn't read the previous threads so sorry if this isn't helpful but when going from cash to accrual I think the easiest way to remember is to do the following with the change in values (difference between beginning and end of year):

    increase in accrual-based assets (prepaids, AR) ADD

    decrease in accrual-based assets (prepaids, AR) SUBTRACT

    increase in accrual-based liabilities (unearned rev, AP) – SUBTRACT

    decrease in accrual-based liabilities (unearned rev, AP) – ADD

    …to the cash basis income

    -__-
    #583246
    jpowell31
    Participant

    Here's a bit more detail:

    You have “cash receipts” (under cash basis), then apply following adjustments:

    – Beginning inventories Gross revenue

    + Ending inventories

    – Beginning accounts receivable

    + Ending accounts receivable

    =gross revenue (under accrual basis)

    “Cash disbursements” (under cash basis), then apply following adjustments:

    – Beginning accounts payable

    + Ending accounts payable

    – Beginning accrued expenses

    + Ending accrued expenses

    + Beginning prepaid expenses

    – Ending prepaid expenses

    = Operating expenses (under accrual basis)

    -__-
    #583247
    jpowell31
    Participant

    that “gross revenue” mistakenly was pasted on the third line

    -__-
    #583248
    waffle_house
    Participant

    cash to accrual

    Increases Decreases

    Assets add deduct

    Liabilities deduct add

    AUD - 80
    BEC - 75
    FAR - 84
    REG - 76
    Exams started Sep 2014 -Exams done Mar 2017

    Texas CPA

    I put in work, it was evident

    #583249
    Anonymous
    Inactive

    Ron – Maybe this will help. I have to see the JE's and T-accounts to make sense of cash to accrual.

    https://docs.google.com/spreadsheets/d/100HES2K3znfffl6giXtZ9pdk6a6R-DNg5CoP2lZVSG0/edit#gid=0

    Let me know if this helps.

    #583250
    mla1169
    Participant

    I think part of the question is missing. But in simplest terms if she received $300k and paid $170k, her income is $130k ($300-$170) because its only the actual cash transactions that are considered.

    The reason why I think part of the question is missing is that to convert from accrual to cash you'd start with the sales and back into it, doesn't appear as though the sales are given in this problem? None of the balances listed would be added or subtracted to the cash receipts or disbursements to arrive at the cash basis income.

    FAR- 77
    AUD -49, 71, 84
    REG -56,75!
    BEC -75

    Massachusetts CPA (non reporting) since 3/12.

    #583251
    Anonymous
    Inactive

    If the doctor kept her books under the cash basis you have to assume that all cash collections were booked to sales and all cash payments were booked to expense:

    300,000 = Sales

    170,000 = Expenses

    130,000 = Cash Basis Net Income

    To get to Accrual Basis you have to back out a few things:

    1. The first $12,000 she received in cash was for services rendered last year.

    2. She performed services for $9,000 but hasn't been paid so no entry has been made under the cash basis.

    3. She received cash of $4,000 for services not yet performed so they aren't sales yet.

    Accrual Basis Sales

    300,000

    -12,000

    +9,000

    -4,000

    =

    $293,000

    4. She owes $3,500 vendors for goods/services not yet paid but they should be expenses.

    5. Prepaid expenses of $1,800 are used up and expensed

    6. She paid $900 to vendors for goods/services not received but expensed.

    Accrual Basis Expenses

    170,000

    +3,500

    +1,800

    -900

    =

    $174,400

    Accrual Income

    293,000 = Sales

    174,400 = Expenses

    118,600 = Accrual Basis Net Income

    Check my math because I'm kind of in a rush this morning.

    #583252

    @ Kricket – Thank you for this. It's the exact type of clarification I was looking for. This started clicking this morning for me actually. As for your calculations:

    You are spot on with the Accrual Basis Revenue.

    However, you are off on your Expenses:

    J/E's For Accrual Liabilities:

    1. To back out payroll expense incurred in previous period.

    (Dr) Accrued Liabilities – $2,000

    (Cr) Payroll Expense (hypothetically) – $2,000

    2. To record payroll expense in current period payable in next period

    (Dr) Payroll Expense – $5,500

    (Cr) Accrued Liabilities – $5,500

    J/E's for Prepaid Expenses:

    3. To recognize prepaid expenses to be incurred in current period

    (Dr) Expenses – $1,800

    (Cr) Pre-Paid Expenses – $1,800

    4. To remove expenses paid in advance to be recognized in future periods

    (Dr) Prepaid Expenses – $2,700

    (Cr) Expenses – $2,700

    Cash Basis Expenses – $170,000

    Less J/E # 1 (2,000)

    Add J/E # 2 5,500

    Add J/E # 3 1,800

    Less J/E # 4 (2,700)

    Accrual Basis Expenses = $172,600

    Accrual Revenue – 293,000

    Accrual Expense – 172,600

    Accrual Net Income – 120,400

    "If you're going through hell, keep going"
    - Winston Churchill

    "I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
    - Michael Jordan

    BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
    AUD: 78
    REG: (74), 91
    FAR: (71)

    #583253
    Anonymous
    Inactive

    I was in the doctor's office trying to do this, so I don't doubt that I missed something. I'm just glad I could help.

    #583254
    Anonymous
    Inactive

    I saw someone post this the other day and it really seemed to help things click for me regarding converting between cash and accrual. Rather than make journal entries to the extent you did, it focuses on the changes in accounts. For this particular example those entries would look as follows:

    DR Cash Received – Patients 300,000

    DR Prepaid Exp 900

    CR A/R 3,000

    CR Unearned Rev 4,000

    CR Accrued Liab. 3,500

    CR Op Exp Cash Paid 170,000

    CR PLUG – Accrual Basis NI 120,400

    The only real key to this process is knowing the actual balance that accounts have and what needs to be done (DR or CR) to increase or decrease them. It seems incredibly simple, but I after coming across the thread I have yet to find one of these types of problems that I am unable to tackle at a fairly quick speed. Hope this helps!

    #1804571
    Ramana
    Participant

    I've spent more hours than I'd like to admit on this topic. The most helpful answers were from Kricket and Ron Burgundy.

    I've also been trying to do this the shortcut way which is the way Ehendrickson showed it but it just doesnt work for the following problem because of the write-off (30,000)- I just can't seem to get it on the right side of the equation. The answer is 250,000

    ————————————————————————————————————————-
    Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, year 2. Additional information is as follows:

    Rents receivable – November 30, year 2 $ 1,060,000
    Rents receivable – November 30, year 1 800,000
    Uncollectible rents written off during the fiscal year 30,000
    Under the accrual basis, Marr should report rental revenue of

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