[I'm, Ron Burgundy?]

I’m having a very hard time understanding this concept. Anyone can memorize a formula however, I’m having roadblocks with understanding the “why” of it all. I think I need to see this J/E’d or T-Accounted.

From my understanding, on Cash Basis there should be no Accruals so items are coming off the balance sheet and moved to the income statement (to accrue for them). Am I at least correct on that concept?

Can someone please provide me with a good explanation? I’ve read about the topic in Wiley, Becker and my Intermediate Accounting books but it just isn’t clicking. I feel like I’ve spent my entire weekend of studying just trying to tackle this one topic – not an effective use of study time.

Please, no formulas. I understand that you begin with Cash Net Income and deduct beginning A/R and add Ending A/R. But why?

"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)

[waffle_house]

I am also having trouble understanding this. This and tax basis. Someone please help 🙂

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

[mla1169]

No such thing as A/R in cash basis. You don't recognize revenue until you get paid. You don't recognize an expense until you write a check.

So if you make a sale on 12/31/14 you get to recognize as income in 2014 even if your customer pays in January 2015. In cash accounting it's not a sale until January 2015.

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

Massachusetts CPA (non reporting) since 3/12.

[I'm, Ron Burgundy?]

@mla – so is that the reason why you subtract beginning A/R from the equation? Also, if hypothetically there is no such thing as “A/R” and “A/P” in cash – then why the heck is it on the balance sheet in the first place?

"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)

[LKD CPA]

Honestly I have a hard time with this as well. I find it easier to go from accrual basis to cash basis (such as for the SCFs). There are few account increases/decreases that I understand better than others. I have an easier time understanding accounts receivable for example.

Accounts receivable JE's are:

Dr. A/R

Cr. Sales

*This will increase the A/R account AND the sales account – which is on the Income Statement showing an increase in net income. BUT….the BIG but….is that cash hasn't really come in. We are just accruing it because we are due this cash. So we have to take net income and subtract this increase in accounts receivable.

Now for accounts payable, because the accounts payable JE is a Dr. to COGS it will show on our income statement and decrease net income, but the cash didn't really go out yet. We just know it will be going out within the current cash flow time frame. The JE for A/P is:

Dr. COGS

CR. Accounts Payable

*This entry is essentially accruing this payment for goods. But until we do the Dr. to AP and the Cr. to Cash to actually pay for it the cash hasn't gone out yet. So taking our accrual basis (the net income amount) to the cash basis, we have to add back any increase in accounts payable because that means we showed it as coming out (in the COGS) but it hasn't really been an outflow of cash yet.

In ALL of the accounts I really have to think long and hard. I write EVERY SINGLE JE out….all the way to the point of cash to try and fully understand this concept. But, I do have to admit, the more I work on it the faster I am getting. Stick with and you'll get to the point you can do it in your sleep!!!

FAR: 74, 83
REG: 76
BEC: 77
AUD: 89

[mla1169]

Exactly. Nothing happens in cash basis until cash trades hands, so A/R has to be subtracted since it's now considered a fictitious transaction.

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

Massachusetts CPA (non reporting) since 3/12.

[I'm, Ron Burgundy?]

@mla – so then why do you add back the ending?

"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)

[mla1169]

Think about the difference between beginning AR and ending AR. It's the current period sales that haven't been paid for in the current period. So it's a way to get to this years' sales that don't count using the cash basis.

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

Massachusetts CPA (non reporting) since 3/12.

[Whopper Warrior]

In yr 1 cash corp performed services on credit for example co. No cash was received until year 2.

Yr 1

Cash: No journal entry

Accrual:

Dr: Accounts Receivable

Cr: Sales

Yr 2:

Cash Basis:

Dr. Cash 100

Cr. Sales 100

Accrual Basis

Dr. Cash 100

Cr. A/R 100

Lets recap:

Cash Income:

Yr 1: 0

Yr 2: 100

Accrual Income

Yr 1: 100

Yr 2: 0

So to get from cash to accrusl we add ending ar because these are valix sales made that we have not collected. We subtracf beginning AR because under accrual we would have already accrued for them. Lets say in Yr 2 cash basis makes 200 sales on account:

Cash: No entry

Accrual:

(Dr.) AR 200

Cr. Sales 200

Lets recap again. From entry from above in year 2 wd had 100 cash income and 0 accrual. If we were to add the ending ar to cash income we woulx have 300 income. However 100 of that 300 was accrued in yr 1 so we subtract beginning ar to get to 200 which is an accurate representation of the transactions.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[I'm, Ron Burgundy?]

@mla – so how about payables and deferred revenue?

"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)

[Anonymous]

this was very helpful https://www.another71.com/cpa-exam-forum/topic/accrual-basis-cash-basis

[Anonymous]

Funny, I got on here to ask a similar question as this is a topic I can't seem to get right in my mind either. See the WTB explanation below:

The requirement is to determine the difference between accrual-basis income and cash-basis income. Because accounts receivable decreased by $20,000, the cash received was $20,000 more than the accrual-basis sales.

This sentence from WTB doesn't add up to me..what am I missing? AR Decreases $20K how is it in essence any different than cash? To me it seems like under both you actually got $20K in hand that came through your collections…I know my thinking is all jacked up on this.

[Anonymous]

@ adam

Some of the receivables that were realized during the year were already booked in the prior period as the accrual-period sales. Hence, you back out the negative difference (i.e. add back $20K) from the current year to get from accrual to cash.

[Anonymous]

acome – thanks, i stepped back from studying for a few minutes and then i realized i wasn't thinking about the period difference….gots it now!

[Anonymous]

I edited my post above slightly for clarification, hope I didn't accidentally make it more confusing lol

[Author]

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