Moving from cash-based accounting to accrual-based accounting can be a complex process, but with the right tools, it can be simplified. Dive into our step-by-step guide to help you make the transition, along with how Blue Onion can assist with each step.
Step 1: Evaluate Your Current Financial Situation
Before making the transition, you need to understand your current financial situation. Evaluate your current accounting methods and determine how they will change under accrual-based accounting. Review the current financial statements to understand how revenue is recognized and what expenses are recorded.
Blue Onion’s software can help to evaluate your current financial situation. We automate the order-to-cash reconciliation process, providing a comprehensive view of every transaction from the customer’s order to the cash deposited into your bank account. With the help of easy-to-use reports that provide details on every journal entry line item, you can gain a deeper understanding of your finances. Additionally, Blue Onion’s dashboard gives you an overview of your revenue and expenses, making it easier to comprehend your current accounting methods.
Step 2: Determine the Period of Transition
Selecting a transition period is crucial for effective planning and alignment with business objectives. Whether opting for a calendar year, a fiscal year, or any other timeframe that resonates with your business goals, this decision lays the foundation for successful implementation strategies and goal achievement.
Step 3: Account for Deferred Revenue
Under accrual-based accounting, revenue cannot be recognized until the order is fulfilled. This requires the accounting of deferred revenue. If you're following Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) for accrual accounting, you're calculating and recording deferred revenue
Recognized as a liability on a company's balance sheet, deferred revenue comes into play when an advance payment is received. This financial concept often surfaces in subscription-based offerings or services that call for prepayments.
Blue Onion’s software automates the calculation of deferred revenue, making it easier to track and reconcile the deferred revenue balance, ensuring that fulfillment data is being accurately tracked. Blue Onion will also automatically generate a deferred revenue waterfall to easily track and reconcile the deferred revenue balance, as well as ensure that fulfillment data is being accurately tracked.
Step 4: Track Accounts Receivable, Sales Tax, and Refunds
On a cash-basis system of accounting, there is no need to account for accounts receivable (A/R) or sales tax liability accounts. Under accrual-based accounting, however, you need to track these accounts. These accounts should be set up to track and monitor changes to these accounts during the period of transition.
Blue Onion’s software automatically accounts for accounts receivable, sales tax, and refunds, including shipping and a return of the sales tax accrual. Blue Onion will automatically provide a detailed view of your sales tax accounts and the relevant accounting journal entries for orders for a given period.
Step 5: Record Fulfilled Orders and Revenue Recognition
Since accrual-based accounting recognizes revenue when the order is fulfilled, you need to record your revenue based on this method. Debit all of the fulfilled orders and record the revenue for the given period based on Accounting Standards Codification (ASC) 606 guidelines.
Blue Onion’s software automates the recording of revenue, pulling in order line detail for all transactions, debiting all of the fulfilled orders, and recording the ASC 606-compliant revenue for the given period.
Step 6: Reconcile Cash and Track Merchant Fees
Under accrual-based accounting, you need to reconcile your cash receipts to ensure that all transactions have been accounted for. Reconcile cash from different payment processors and track merchant fees. The cash received and fees should be broken out by the payment processor and the fee type.
Blue Onion’s software automates the process of reconciling cash from different payment processors and tracking merchant fees for each period. The software breaks out the cash received and fees automatically by the payment processor and fee type, providing an easy way to reconcile cash receipts.
Blue Onion provides transactional-level details to provide a clear view of each order reconciliation, allowing you to trace every transaction from order to cash, ensuring accuracy and completeness in your accounting records.
Making the Leap: Simplify Your Accounting Transition with Blue Onion
Transitioning from cash-based accounting to accrual-based accounting can be challenging, but creating a detailed plan and utilizing automation software, like Blue Onion can simplify the process. Blue Onion streamlines each step, simplifying deferred revenue calculations, accounts receivable management, sales tax handling, refunds, revenue recording, and cash receipts reconciliation.
