What's one exam topic CPA candidates ask me about the most? Cash to accrual conversions.
How to convert between cash basis and accrual basis financial statements is tested on the FAR section of the CPA exam. It can show up as a MCQ asking if you should add or subtract prepaids and accruals. It can also be a simulation where you're given cash basis financials with some additional transactions and you have to convert them to accrual basis. It sounds simple but CPA candidates find it soooooo hard!
After reading this post you'll have a simpler way to understand this topic that you need to know for the FAR section of the CPA exam.
Cash Basis Accounting
Cash basis accounting is just what it sounds like: recording revenues as cash is received and recording expenses when they're paid. The cash basis of accounting is often what small businesses and "mom and pop" shops use to simplify their accounting. There's nothing record unless cash is exchanged.
Let's say you own an online store and a customer buys $50 worth of home decor items in June. Back in March, you paid $20 for the items that sold. Under the cash basis, you'd record a $50 revenue entry in June because that's the month you made the sale. A few months ago in March, you would have recorded a $20 expense because March is when the cash exchanged hands for the items you bought.
Journal entries would look like this:
DR Inventory 20