Accounting Treatment for Multi-Year Conversion from Accrual Basis to Cash Basis
A small business using accrual accounting, when filing taxes on a cash basis, needs to adjust payables and accrued items annually. This article provides professional analysis on how to link the prior year's adjustments in 2019 after the 2018 adjustments, to avoid errors in the carryforward of retained earnings.
Dear colleagues:
I have encountered a problem that has troubled me for a week. I believe the answer is not complicated, but I have not been able to figure it out.
Background
We are a small business and maintain our daily books on the accrual basis. However, for tax filing, we need to submit on the cash basis.
Problem Description
I typically convert accrual-basis financial statements to cash basis by reversing the year-end balances of accounts payable and accrued items. This operation naturally affects net income and, in turn, the carryforward of retained earnings.
Suppose I have completed the above conversion for 2018 and now need to handle 2019. How should I incorporate the cash/accrual adjustments made in 2018 into the 2019 calculation to ensure that retained earnings on the balance sheet roll forward correctly on a cash basis?
I am sure there is a simple solution that I have not yet discovered.
Thank you in advance for your guidance.