Change in the Method of Accounting From a Cash Basis to an Accrual Basis

As per guidance notes for the Accrual basis of accounting issued by the Institute of Chartered Accountants of India (ICAI), an entity can change its accounting basis from cash to accrual. The effect of such a change should be ascertained regarding the transactions of the previous accounting periods and to the extent such transactions impact the current financial position of the enterprise. This story discusses the guidance as provided by the guidance note.

Conversion of books of accounts from cash basis to accrual requires a series of adjustments with journal entries in the financial accounting system so that the financial statements (Balance Sheet, Profit & Loss A/c, etc.) present the organization’s assets, liabilities, revenues and expenses in the proper period. These adjustments are known as “adjusting journal entries”, and they fall into two categories Accruals and Deferrals.

The format has to facilitate transparent, accurate, and complete depiction of financial position for the preparation of the first financial statements on the accrual basis of accounting.

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