Sometimes businesses want to know how to convert from cash basis accounting to accrual basis accounting so they get more useful accounting information. Other times, as a result of tax laws, businesses may be required to figure out how to convert from cash basis accounting to accrual basis accounting.
Converting from cash basis accounting to accrual basis accounting doesn’t have to be difficult, but there are five factors you want to consider:
- You can use a different accounting method for external, or financial, accounting than you use for tax accounting. This means that you’ll need to decide, when you talk about converting, whether you’re converting your financial accounting or your tax accounting or both accounting systems from cash basis to accrual basis accounting.
- Accrual basis accounting works slightly different for financial accounting purposes than it does for tax accounting purposes.
- Accrual basis accounting requires more accounting and bookkeeping time and expertise, so you’ll want to plan for these increases.
- If you can, you probably want to use cash basis accounting for your tax accounting. Cash basis “tax” accounting often lets you defer income taxes.
- If you want to change your tax accounting method, you need to formally ask the Internal Revenue Service for permission. (This permission will, as a practical matter, basically always be granted if you’re converting from cash basis accounting to accrual basis accounting.)