Accrual Basis vs Cash Basis

This page details the general ledger transactions that are created in Studio Designer and provides an example of journal entries used to convert from accrual to cash basis.

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Entries Created

Example

Accrual to Cash Journal Entry

Office Expenses

 

Entries Created

1. Generate Client Proposal

  • No GL transactions are created

2. Client Deposit on Proposal

  • Debit Cash (Asset)
  • Credit Client Deposits (Liability)

3. Generate Vendor Order

  • No GL transactions are created

4. Vendor Deposit Payment on Order

  • Debit Vendor Deposits (Asset)
  • Credit Cash or Credit Card Account (Asset)

5. Generate Client Invoice

SALES

  • Debit Accounts Receivable (Asset)
  • Credit Income and Sales Tax (Income)

COST OF SALES (Only if an order exists at the time the client invoice is created)

  • Debit Cost of Sales (Expense)
  • Credit Accounts Payable (Liability)

CLIENT DEPOSIT

  • Debit Client Deposits for deposit on Items
  • Credit Accounts Receivable for deposit on Items

VENDOR DEPOSIT

  • Debit Accounts Payable for deposit on Items
  • Credit Vendor Deposits for deposit on Items

6. Client Final Payment on Invoice

  • Debit Cash (Asset)
  • Credit Accounts Receivable (Asset)

7. Vendor Final Payment on Order

  • Debit Accounts Payable (Liability)
  • Credit Cash or Credit Card Account (Asset)

Note: If the vendor order is created after the client invoice, the Cost of Sales will be created at the time the order is created.

 

Example:


Selling Price $2,500
Client Deposit $1,250
Purchase Cost $1,800
Vendor Deposit $900

 

1. Generate Client Proposal

  • No GL transactions are created


2. Client Deposit on Proposal

  • Cash $1,250
  • Accounts Receivable $0
  • Vendor Deposits $0
  • Accounts Payable $0
  • Client Deposits -$1,250
  • Income $0
  • Cost of Sales $0


3. Generate Vendor Order

  • No GL transactions are created


4. Vendor Deposit Payment on Order

  • Cash -$900
  • Accounts Receivable $0
  • Vendor Deposits $900
  • Accounts Payable $0
  • Client Deposits 0
  • Income $0
  • Cost of Sales $0


5. Generate Client Invoice

SALES JOURNAL

  • Accounts Receivable $1250.00
  • Client Deposits $1,250
  • Income -$2,500

PURCHASES JOURNAL

  • Vendor Deposits -$900
  • Accounts Payable -$900
  • Cost of Sales $1,800

6. Client Final Payment on Invoice

  • Cash $1,250
  • Accounts Receivable -$1,250

7. Vendor Final Payment on Order

  • Cash -900.00
  • Accounts Payable $900.00

Note: For inventory: when the vendor invoice is entered and the inventory is received, the system debits inventory and credits Accounts Payable.  When the inventory is sold, the system reduces inventory and posts cost of sales. (as well as income, etc).

 

Entries to convert Accrual Basis to Cash Basis

Although the transactions in Studio Webware are created on an Accrual basis (other than office expenses), it is not uncommon for small designers to file income taxes on a cash basis.

If this is the case, you can make a simple journal entry at the end of your year or reporting period.  Below are instructions to make this entry.

Note: Because you can't post entries to reserved accounts, we suggest creating sub-accounts for the sub-ledger accounts. 


For example, create Accounts Receivable Adj and make it a sub-account of Accounts Receivable.  Make sure that the reference# is directly in line with the one for Accounts Receivable.

If your chart of accounts is standard, this would mean the Accounts Receivable would be 1110 and you might make Accounts Receivable Adj be 1111.

Debit: Income

Credit: Accounts Receivable Adj

Debit: Cost of Sales

Credit: Vendor Deposits Adj

Debit: Cost of Sales

Credit: Inventory

Debit: Accounts Payable Adj

Credit: Cost of Sales

Debit: Client Deposits Adj

Credit: Income

There are many exceptions to this, but this would be a totally cash basis conversion.  Some accountants prefer to leave Client Deposits and/or Vendor Deposits on the balance sheet.

These entries would be posted as of 12/31 of the current year, then reversed as of 1/1 of the next year (or more frequently if required).

Note: The accounts used above are only for demonstration purposes, you may or may not have these exact accounts.  We recommend to post the entries to income/expense accounts that are not used for other purposes.  In some instances, you may consider creating one account in the Income section of your chart of accounts for "Accrual to Cash Income Adjustments" and one for "Accrual to Cash Expense Adjustments". 

 

Office Expenses

Office expenses posted through Accounting | Money Out | Office Payments are all recorded on a cash basis.

When you post the entries they are posted to the general ledger in the disbursements journal.

If you file your income taxes on an accrual basis, we recommend making a journal entry at the end of your tax year or reporting period to accrue the liability and post the expenses.

There are three steps:

  1. Create an account named "Accounts Payable Office"
  2. Create and post the journal entry as of the last day of your fiscal year

EXAMPLE

I have an open office payable at 12/31:

Office Max for office supplies $285.12

  • Debit Office Supplies $285.12
  • Credit Accounts Payable Office $-285.12



Note: The images above are for demonstration purposes only.  You can name your accounts whatever you like and use any kind of detail and/or references that fit your purpose.