# Cash to Accrual clarification

#### Accounts Playable

I am having some issues with converting the cash basis of accounting to accrual basis of accounting. I will give a homework question as an example, but this just seems to be tricking me. I need to convert a cash basis income statement to accrual.

Cash receipts from customers.......\$450,000
Cash Payments:
Salaries and wages..\$170,000
Income taxes...........65,000
Insurance...............40,000
Interest..................25,000
Net Income.............................\$150,000

Additional Info - Balances at 12/31
Accounts Receivable 2014: \$50,000 - 2013: \$30,000
Salaries and wages payable: 2014: \$10,000 - 2013: \$20,000

So basically, Accounts Receivable increased by \$20,000. This would essentially increase net income by 20k, because we now recognize the earned revenue for accounts receivable.

I am confused on the salaries and wages. This is what I think is going on:

So because they are now switching to the accrual basis, that 20k was already on the books at year end of 2013. So instead of recognizing it when paid/received, they are now recognizing it when it was earned/incurred. Because it was already on the books in 2013 (and a payable), their 10k dollar payment is no longer written down as an expense for 2014. Instead, it is now them paying off a current liability with current assets (cash). So they made 170,000 in cash payments to salaries and wages in 2014, but 10k of that went to what is now considered a liability. That is why it is a 160,000 dollar expense now under accrual and was 170,000 under cash.

So the 170,000 dollar cash payments towards wages and salaries would be a 160,000 dollar expense under accrual. Is this correct?

Thank you for any help. I want to know what is going on instead of just putting the numbers down.

#### Triest123

VIP Member
I am having some issues with converting the cash basis of accounting to accrual basis of accounting. I will give a homework question as an example, but this just seems to be tricking me. I need to convert a cash basis income statement to accrual.

Cash receipts from customers.......\$450,000
Cash Payments:
Salaries and wages..\$170,000
Income taxes...........65,000
Insurance...............40,000
Interest..................25,000
Net Income.............................\$150,000

Additional Info - Balances at 12/31
Accounts Receivable 2014: \$50,000 - 2013: \$30,000
Salaries and wages payable: 2014: \$10,000 - 2013: \$20,000

So basically, Accounts Receivable increased by \$20,000. This would essentially increase net income by 20k, because we now recognize the earned revenue for accounts receivable.

I am confused on the salaries and wages. This is what I think is going on:

So because they are now switching to the accrual basis, that 20k was already on the books at year end of 2013. So instead of recognizing it when paid/received, they are now recognizing it when it was earned/incurred. Because it was already on the books in 2013 (and a payable), their 10k dollar payment is no longer written down as an expense for 2014. Instead, it is now them paying off a current liability with current assets (cash). So they made 170,000 in cash payments to salaries and wages in 2014, but 10k of that went to what is now considered a liability. That is why it is a 160,000 dollar expense now under accrual and was 170,000 under cash.

So the 170,000 dollar cash payments towards wages and salaries would be a 160,000 dollar expense under accrual. Is this correct?

Thank you for any help. I want to know what is going on instead of just putting the numbers down.
=> Yes. The cash payment for salaries and wages (\$170,000) including the settlement of
salary payable of \$20,000, which had been recognised as expenses in the year 2013,

So the actual expenses for the year is \$170,000 -20,000 +10,000 = 160,000

#### Accounts Playable

Thanks a lot, I appreciate it.

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