To convert your financial statements from Cash to Accrual, you will need to make Journal Entries in your accounting system. These entries may include:
- Defer Team Revenue – record team revenue in the same period as the games are played
- Defer Class Revenue – record class revenue in the same period the classes are given
- Defer Camp Revenue – record camp revenue in the same period the camps take place
- Defer Membership Revenue – record membership revenue throughout the period in which the membership is valid
- Defer Rental Revenue – record rental revenues in the period in which the rental takes place
The above entries are necessary to meet Generally Accepted Accounting Principals. These principals also consider the materiality of a particular adjustment, which means how significant that adjustment changes the picture your financial statements provide of your current financial position. For Example, if your company’s Total Sales in a year are $2,000,000 you likely need not worry about adjustments that are less than $10,000 at the end of the year. Ultimately, this is your call, but you may want to consult a financial accountant (not tax) to better understand this concept.
Why Accrual Accounting?
Simply put, accrual accounting provides more accurate information to manage your business and understand your true financial position. A simple example to illustrate is collection of team fees in advance of a season. If you didn’t run the league, would you owe the money back to your teams? Accrual Accounting shows this liability on your books, while cash basis records the team fees as revenue when collected and then negative revenue when you return it.
Cash basis basically reports what happened in your bank account for a given period. Accrual Accounting is a true representation of the financial performance of your company…good or bad!
Many companies think they are on a cash basis, but are part accrual and part cash. If you have accounts payable, inventory and accounts receivable on your books, you fit into this category. Cash records expenses when you write the check. These types of accounts are accrual accounting.