The accrual basis of accounting recognizes revenue when it is earned and records expenses when they are incurred, regardless of when cash is actually received or paid. The cash basis of accounting, on the other hand, only records transactions when cash changes hands. So, if you're switching from accrual to cash basis accounting, you'll need to make some adjustments to your books.
Here's how to convert from accrual to cash basis:
1. Determine the point in time when you want to switch from accrual to cash basis. This could be at the beginning of your fiscal year, or it could be at some other point (e.g., when your business reaches a certain size). Once you've decided on a date, make sure all future transactions are recorded on a cash basis.
2. Go through your past transactions and adjust them so that they comply with the new method. For example, if you had previously recognized revenue for a project that wasn't completed until after the switch date, you would need to reverse that entry and wait until the project is finished before recording the revenue again (on a cash basis). Similarly, if there were expenses incurred before the switch date but not paid until after, those would need to be adjusted as well.
3. Make sure your financial statements reflect the change in accounting method by clearly labeling them as accrual or cash for clarity purposes. Going forward, use whichever method is most appropriate for your business needs - there's no requirement that businesses must use one over the other (although accrual is generally more common).