Pro forma Financial Statements

Pro forma financial statements are hypothetical projections used by companies to estimate the financial impact of potential business decisions and events. They allow companies to evaluate the risks and benefits of these decisions before implementation and provide stakeholders with a clearer understanding of a company’s financial health and future prospects.

Why are Pro Forma Financial Statements Important for CPA Firms?

As a CPA firm, it is crucial to have a deep understanding of pro forma financial statements to provide value-added services to your clients. By leveraging these statements, CPA firms can offer insights and advice on potential business decisions, helping clients assess the financial impact of those decisions.

In this blog post, we will provide an overview of key concepts and considerations related to pro forma financial statements. We will cover different types, benefits, methods used, limitations and risks, examples of practical use, and guidance on how CPA firms can effectively assist their clients in utilising them.

Types of Pro Forma Financial Statements

As a CPA firm, understanding the different types of pro forma financial statements can help you provide valuable insights and advice to your clients. Here we’ll take a closer look at the three main types of these statements, their uses, and other variations you may encounter.

Let’s dive in!

1. Pro forma income statement

• A pro forma income statement projects the financial results of a company’s operations over a future period, usually a quarter or a year.
• It estimates revenues, expenses, and profits based on hypothetical assumptions, such as changes in sales volumes, prices, or costs.
• A pro forma income statement can help companies evaluate the impact of potential changes in their business model, such as introducing a new product line, expanding into a new market, or restructuring their operations.

2. Pro forma balance sheet

• A pro forma balance sheet projects a company’s financial position at a future point in time, usually the end of a quarter or a year.
• It estimates the company’s assets, liabilities, and equity-based on hypothetical assumptions, such as changes in capital expenditures, financing, or asset sales.
• A pro forma balance sheet can help companies evaluate the impact of potential changes in their capital structure, such as issuing new debt, buying back shares, or acquiring other companies.

When evaluating a company’s financial health, you need to know two types of statements: pro forma financial statements and regular financial statements. While both can provide valuable insights into a company’s performance, they differ in several important ways.

Let’s study more about this.

• These are hypothetical projections of what a company’s financial statements would look like under certain circumstances, such as a merger or acquisition, or a new product launch.
• These are not required by Generally Accepted Accounting Principles (GAAP) or the Securities and Exchange Commission (SEC).
• These are often used for internal decision-making purposes or to communicate financial information to external stakeholders in a more understandable way.
• It may include non-GAAP financial measures or exclude certain expenses to give a more accurate reflection of a company’s financial position under the specific scenario being modeled.
• It can be prepared for future periods or for past periods to reflect the impact of a specific event that occurred in that period.

3. Regular financial statements

• Reflect a company’s actual financial performance over a given period of time, usually a fiscal quarter or year.
• Are required to be prepared and presented following GAAP and to follow SEC reporting requirements if the company is publicly traded.
• Provide a historical record of a company’s financial performance and position.
• Must include all required GAAP disclosures and financial statement footnotes.
• Generally, we cannot exclude expenses or use non-GAAP measures unless they are specifically allowed under GAAP.

In addition to these types, there are also other variations, such as:

• Pro forma condensed financial statements: abbreviated versions of these statements used to highlight critical financial data in a concise format.
• Accounting pro forma statements: used to evaluate the impact of accounting changes on a company’s financial statements.
• Cost of goods sold (COGS) pro forma statements: used to evaluate the impact of changes in product costs on a company’s financial statements.

It’s important to note that these are based on hypothetical assumptions and may not reflect actual financial performance. CPA firms should be cautious in interpreting these statements and ensure they comply with applicable regulations and guidelines.

Benefits of Pro Forma Financial Statements

These statements provide a wealth of benefits for companies, allowing them to make informed decisions, attract investors, and secure loans. Pro forma statements can help businesses stay competitive and profitable in a rapidly changing marketplace by presenting a snapshot of a company’s future financial position.

Here we explore the top benefits of pro forma financial statements for companies of all sizes and guide how to create and use them effectively.

1. Forecasting future financial performance

It can help companies estimate their financial performance for future periods based on certain assumptions, such as changes in revenue or expenses. This can be especially helpful for companies that are planning significant investments, expansions, or changes to their operations.

2. Strategic business decisions

It can provide valuable information for decision-making purposes. By modeling the potential financial impact of different scenarios, companies can make more informed choices about which options to pursue.

3. Attracting investors and securing loans

It can be a powerful tool for demonstrating a company’s potential to investors or lenders. By presenting a pro forma balance sheet, income statement, and cash flow statement, companies can show how they expect to grow and generate profits in the future.

4. Help with budgeting and planning

It can be used to create budgets and financial plans for the future. By modeling the impact of different scenarios, companies can develop more accurate budgets and projections.

5. Ensure compliance with GAAP and SEC requirements

These statements must comply with GAAP and Securities and Exchange Commission (SEC) requirements. By creating it, companies can ensure that they follow these rules and regulations.

6. Effective creation and use of pro forma financial statements

It can be presented as condensed and easily understandable. This can be helpful for stakeholders who may need a deeper understanding of accounting principles or financial statements.

Overall, it can be a valuable tool for companies that want to plan for the future, make strategic decisions, attract investors or secure loans, and ensure compliance with GAAP and SEC requirements. Pro forma financial statements can help companies achieve their financial goals and objectives by presenting a clear and accurate view of financial projections.

How to Create Pro Forma Financial Statements

Creating accurate pro forma financial statements is a critical aspect of financial planning and analysis for companies. As a CPA firm, it is essential to have a deep understanding of these statements to provide valuable services to your clients. It can help your clients make critical business decisions and assess the financial impact of those decisions.

To create it, you must have a solid understanding of the business and its financials. It is important to gather relevant data and information, make assumptions and projections, and follow generally accepted accounting principles (GAAP).

Here are some critical steps to follow:

1. Gather the necessary financial information, such as historical financial statements, budgets, and operating metrics.
2. Identify the key assumptions and drivers of the business and use them to make projections for future periods.
3. Develop a pro forma income statement, balance sheet, and cash flow statement based on your projections.
4. Ensure that your pro forma statements comply with GAAP and are consistent with the company’s accounting policies.
5. Analyze and interpret the pro forma financial statements to provide meaningful insights to your clients. Review and update the pro forma financial statements regularly to reflect business and market conditions changes.

By following these steps, you can create accurate and reliable pro forma financial statements to help your clients make informed business decisions.

Examples of Pro Forma Financial Statements

Pro forma financial statements are essential for companies looking to make informed financial decisions. By creating hypothetical financial projections, companies can estimate the potential impact of different business decisions on their finances. Pro forma financial statements can be used in various situations, including mergers and acquisitions, initial public offerings, and new product launches.

CPA firms can benefit from understanding how pro forma financial statements work and how they can be used.

Here are some examples of pro forma financial statements:

1. Pro forma income statement

A pro forma income statement estimates a company’s income and expenses for a future period based on anticipated changes to revenue and expenses. This type of statement can be used to estimate the impact of new products or services, changes in pricing, or other factors that may affect a company’s revenue.

2. Pro forma balance sheet

A pro forma balance sheet estimates a company’s assets, liabilities, and equity for a future period based on anticipated changes. This type of statement can estimate the impact of changes in inventory levels, investments, or other factors that may affect a company’s assets and liabilities.

3. Pro forma cash flow statement

Pro forma cash flow statement estimates future cash flow based on anticipated changes in a company. It helps assess impacts on expenses, investments, and more.

4. Pro forma condensed statement of operations

This type of statement summarizes a company’s revenue and expenses for a future period. It can be used to quickly assess the impact of a business decision on a company’s profitability.

5. Pro forma financial projections

Pro forma financial projections are comprehensive financial statements including all three above-mentioned statements.

Generally Accepted Accounting Principles (GAAP) and Pro Forma Financial Statements

Adhering to Generally Accepted Accounting Principles (GAAP) is crucial for accurate and reliable financial reporting. This also applies to pro forma financial statements, as they are designed to provide stakeholders with an estimate of a company’s financial performance.

CPA firms play a critical role in ensuring that their clients’ statements comply with GAAP guidelines.

Here are some key considerations to keep in mind when it comes to GAAP and pro forma financial statements:

• GAAP guidelines provide a framework for financial reporting that ensures consistency, accuracy, and transparency.
• When creating these statements, it’s essential to follow GAAP guidelines to ensure that the projections are reliable and consistent with actual financial performance.
• Failure to comply with GAAP guidelines can lead to inaccuracies, misrepresentations, and legal repercussions.
• CPA firms can help their clients navigate GAAP guidelines and ensure compliance when creating these statements.

CPA firms ensure accurate statements for informed decisions and investor attraction. Stay updated on GAAP for compliance and value-added services.

Pro Forma Financial Statements and Securities and Exchange Commission (SEC) Regulations

Understanding the regulations set by the Securities and Exchange Commission (SEC) regarding pro forma financial statements is crucial. Pro forma financial statements are hypothetical projections that can be used to estimate the potential impact of future events on a company’s financial performance.

The SEC requires companies to follow specific guidelines when presenting these statements in their filings.

Here we will discuss the regulations set by the SEC for these statements and the requirements for presenting them in SEC filings.

Key Points for CPA Firms

• Pro forma financial statements are subject to SEC regulations when presented in a company’s filings. SEC mandates specific format and disclosure of material differences between pro forma and actual statements.
• CPA firms should ensure that their clients comply with SEC regulations when preparing and presenting pro forma financial statements.
• SEC filings reveal companies’ use of pro forma statements. CPA firms advise clients on compliance.

Key Takeaways

Pro forma statements aid businesses. CPA firms must understand their purpose, types, benefits, and creation. CPA firms provide insights to assess financial impact and support client success. Following GAAP and SEC regulations is essential for creating pro forma statements.

Non-compliance can have serious consequences, including legal issues and damage to a company’s reputation.

At Unison Globus, we specialize in providing top-notch financial advisory and accounting services, including pro forma financial statements. Our team of experts can help your business navigate the complexities of creating and using pro forma financial statements effectively.

Contact us today to learn more about our services and how we can support your business’s financial success.

Sound planning, budgeting, and forecasting significantly impact an organization’s survival, potential growth, and profitable tenure. These inevitably significant processes are the ones that enable an organization, at large, to set the KPIs, their short- and long-term goals, and ultimately the propensity to make an informed decision.

A budget is a carefully thought-out roadmap that an organization is expected to abide by with the intention to achieve the set goal. A lot goes into curating an ideal budget. One needs to crucially scrutinize the organization’s cash flow, its current financial position, and other critically material past records.

Variable Costs and their Importance

Variable costs refer to the direct costs and variable overhead incurred during the production or manufacturing of a product or service, excluding all fixed costs. They specifically pertain to costs that are directly influenced and affected by changes in production.

Management plays a crucial role in actively managing these costs, as fixed costs have already been incurred and cannot be reversed. Therefore, these costs require direct involvement and attention from management. It enables cost-volume-profit (CVP) analysis and break-even analysis by determining the contribution margin which improves resource allocation by the business. Now, to know these things you or your accountant must know to calculate variable cost per unit, and a variable costing income statement.

How to find Variable cost per Unit?

Understanding the variable costs per unit formula and its applications can help businesses make informed decisions about pricing, production, and profitability. By calculating the variable costs per unit, businesses can determine the minimum price they need to charge to cover their costs and make a profit.

For example, if your company sells sets of plates for $400 but each set requires $250 to create, test, package, and market, your variable cost per unit is $250.

Variable Costs Formula

The formula for calculating variable costs is straightforward. You need to multiply the variable cost per unit by the number of units produced or sold. Here is the formula:

Variable Costs = Variable Cost per Unit x Number of Units

For example, if a company produces 10,000 units of a product with a variable cost per unit of $10, its variable cost would be:

Variable Costs = $10 x 10,000 = $100,000

A Variable Costing Income Statement

A variable costing income statement is a financial report in which you subtract the variable expenses from revenue, resulting in a contribution margin. The contribution margin is the incremental profit earned when a product’s sales exceed its variable costs.

Variable Costs and its impact on Budget

1) Business activity independent

Variable costs are directly connected to the production activities such as raw materials, energy, temporary labor costs, or leased employees needed to manufacture products. The Schematic below shows roughly how the total costs increase with the number of units (Or product quantity). This information is often useful to “Price” the product.

2) Time-wise adaptability

Variable costs can vary and are dependent on time since they are directly related to the manufacturing of the products. Note that, if you extend your time frame, all costs including fixed costs become variable in theory. Why? Because you can find “better deals”, high rent vs. low rent, or high salaries vs. low salaries.

Ways to reduce the impact of variable expenses on your budget:

1. Determine the annual average for each variable expense in your budget

While determining the annual average for the variable expense, instead of looking into the last 12 months’ figures, take into consideration the average of 3 years’ worth of expenses. This will help you account for anomalies that may impact your variable expenses.

2. Add a buffer

After you have determined the average for each variable expense, add a buffer to it. A buffer of 3% to 5% should be more than enough to cover your price increases and anomalies that might result in an outlier year for the expense.

3. Track your actual spending

Compare your actual expenditure for each variable expense to the budgeted amount. Look for the areas where the expenditure went over budget or under budget for each expense category.

4. Set up a savings account for variable expenses

This is a crucial step in this process. Each month the actual expenses are under budget for any variable expense, move the excess into a savings account for variable expenses. This will create a reserve you can draw from during months when your expenses are higher than usual.

5. Reassess variable expenses annually

It is important to resist the temptation of using the same variable expenses projections in the budget each year, even if there is a substantial amount in the variable expenses savings account. Following such a practice is highly erroneous. It is crucial to reassess variable expenses regularly, particularly those that can be controlled more effectively.

Conclusion

In conclusion, variable costs are an essential aspect of any business operation. Understanding the concept of variable costs is vital for businesses to make informed decisions regarding their pricing, production, and overall financial health.

Variable costs vary based on the level of production, and this makes them different from fixed costs, which remain constant regardless of production levels. The formula for calculating variable costs per unit is relatively straightforward and can help businesses in determining the cost of producing each unit of their product.

By identifying and analyzing variable costs, businesses can effectively manage their expenses, increase their profit margins, and remain competitive in their respective industries. By implementing effective cost management strategies, businesses can reduce their variable costs and increase their bottom line.

Unison Globus is committed to helping businesses of all sizes manage their finances, including their variable costs. Our team of experienced professionals provides a range of accounting and financial services designed to help businesses reduce costs, increase revenue, and grow their operations. Contact us today to learn more about how we can help your business succeed. Want to outsource accounting or bookkeeping services for your business? Get a trial of our services now.

The Rise of Accounting Outsourcing Services

As small to medium-sized accounting practices grow and expand, many are turning to outsourced accounting as a solution to common challenges. But what exactly is outsourced accounting, and why has it become so popular in the accounting and bookkeeping industry today? In this definitive guide, we’ll examine what outsourced accounting is, why it’s becoming more popular, and what it could mean for your business.

What is Outsourced Accounting?

Outsourced accounting involves assigning accounting, bookkeeping, and/or compliance work to accounting professionals in another country. Business owners typically partner with an outsourced accounting services provider who presents them with qualified candidates for screening and onboarding as new team members. This approach allows owners to delegate day-to-day work to their new global team members, freeing up time to focus on the core business and growth.

• Accounting outsourcing involves contracting an external service provider to handle a business’s accounting functions.
• This includes bookkeeping, accounts receivable, accounts payable, and personal and business tax returns.
• Accounting outsourcing services providers typically use cloud-based software to provide real-time access to financial data.
  The outsourced team can communicate via video calls, emails, and other virtual channels.
• With outsourced accounting services, businesses can access the benefits of having an in-house accounting team without the cost and commitment of hiring full-time staff.

Why is Accounting Outsourcing Becoming More Popular?

Firms are turning to outsourced accounting solutions to counter several common pressures, including:

Price pressure

Advances in cloud accounting technology have led to lower client expectations for compliance and administrative services.

Talent shortage

Attracting and retaining qualified accountants is challenging, especially as they tend to fall on the higher end of the pay scale. This squeezes margins on more routine work, drying up the recruitment pool.

Capacity crunch

Owners often need help to complete procedural work and leave time for high-margin strategic work, leading to a need for new solutions to remain competitive.

Greater competition

With competitors anywhere from across the country to across the globe, growing your capacity also means matching your reach.

Why Outsource Accounting Services?

Outsourcing accounting functions can free up time and resources, allowing you and your staff to focus on core competencies and growth while providing better services to clients. With specialized expertise, technology, and greater flexibility, outsourcing can be a valuable tool for businesses looking to reduce costs and improve efficiency.

At Unison Globus, we offer cloud-based outsourced accounting services that can help you achieve your business goals. Here are some of the ways we can help:

Bookkeeping

Our team of experienced bookkeepers can help you maintain accurate and up-to-date financial records, giving you real-time insights into your business.

Accounts payable and receivable

Our outsourced accounting services can help you manage your accounts payable and receivable, ensuring that payments are made and received on time.

Financial reporting

We can provide you with timely and accurate financial reports, allowing you to make informed decisions about your business.

Tax compliance

Our team of experts can help you stay compliant with tax laws and regulations, minimizing your risk of penalties and fines.

Cloud-based accounting

Our cloud-based accounting services can provide you with 24/7 access to your financial data from anywhere, at any time.

If you’re considering outsourcing accounting services, be sure to assess potential service providers and avoid common outsourcing mistakes. At Unison Globus, we provide guidance and support to help you get started. Check out our services page and sign up for a free trial today to see how we can help you focus on your core business and provide better services to your clients.

Moreover, keeping mind the additional reasons to outsourced accounting services are:

• Accounting outsourcing services can save your business time and money while improving the quality of work.
• By accounting outsourcing, you can access specialized expertise and technology that may not be available in-house.
• Accounting outsourcing can also provide greater flexibility to adjust staffing levels based on business needs.

Overall, outsourcing accounting services can help your business focus on core competencies and growth rather than administrative tasks.

Benefits of Outsourcing Accounting Services

Accounting outsourcing offers several key benefits for accounting firms, including:

• Increased capacity, efficiency, and profitability: Outsourcing provides a holistic solution to common business challenges.
• More time to focus on business development and providing a better client experience.
• A better work-life balance for owners and staff.
• The ability to fill roles more quickly with qualified staff.
• Lesser-Known Benefits of Outsourcing Accounting

In addition to the above benefits, accounting outsourcing can also offer the following:

• Increased ability to promote local staff to help with higher-level work.
• Happier staff and staff retention due to reduced pressure and more manageable workloads.
• Cost-effectiveness due to savings on technology and infrastructure.
• Business continuity in the event of power outages or other disruptions.
• Increased productivity and competitiveness.

Addressing Concerns About Accounting Outsourced Solutions

While accounting outsourced solutions offer many benefits, some business owners may need help with the impact on the local job market. However, outsourcing does not necessarily lead to job replacement. Instead, it offers a solution for firms to grow their capacity and remain competitive while still providing valuable services to the local community.

Factors to consider before outsourcing

Before deciding to outsource accounting or other business functions, it is essential to consider a few factors. These include defining your objective for outsourcing, assessing potential service providers, and evaluating your ability to communicate with a global team. Additionally, it is recommended to appoint a local “champion” to manage the outsourced team.

Roles to outsource

Several roles can be outsourced, including financial services, accounting functions, executive assistants, corporate secretaries, data analytics assistants, client service assistants, paraplanners, financial planning assistants, mortgage broker assistants, HR assistants, recruitment support assistants, IT assistants, integrations specialists, marketing coordinators, social media managers, and business development associates. Outsourcing these roles can save time and resources and provide a high ROI.

Avoidable outsourcing mistakes

To ensure a seamless outsourcing process, it is essential to avoid common pitfalls, such as delegating the most challenging work first, failing to create standardised workflows, not getting clients and local staff onboard, hiring only one remote team member, and not taking the time to understand the global team’s culture and fully integrating them into the company. It is recommended to meet with the global team in person at least twice a year to foster a sense of belonging and articulate their value within the company.

Global team ambitions

Outsourced accounting services and other business functions can be a low-risk, high-reward prospect, provided the correct steps are taken. If your firm is considering outsourcing, Unison Globus is available to provide a Accounting Outsourcing Strategy and one-on-one chat to help with the inception and rollout of your global team.

Outsourced Accounting for Small Businesses: Benefits and Considerations

Small businesses frequently face resource and budget constraints, making it difficult to maintain an in-house accounting team capable of meeting their needs. By outsourcing accounting services to a reputable provider, small businesses can benefit from a cost-effective solution. Outsourcing enables access to specialized expertise, advanced technology, and scalability, all without the burdensome overhead costs associated with hiring and training a full-time accounting team.

With outsourced accounting, small businesses can focus on their core competencies, such as marketing, product development, and customer service, while leaving accounting functions to the experts. This can help increase operational efficiency, reduce errors and fraud, and provide a better customer experience by ensuring accurate and timely financial reporting.

Benefits of Outsourcing Accounting for Small Business

Another significant benefit of outsourcing accounting services for small businesses is access to a wide range of services. Whether a small business needs basic bookkeeping services or more advanced financial analysis and reporting, outsourcing providers can tailor their services to meet the business’s specific needs.

For example, Unison Globus provides various outsourced accounting services, including bookkeeping, payroll processing, tax compliance, financial reporting, and analysis. Their team of experienced professionals can help small businesses save time and reduce costs by streamlining accounting functions and providing valuable insights into their financial performance.

Small businesses should also consider the potential risks and challenges when considering outsourcing accounting services. For instance, selecting the appropriate provider can lead to improved work quality, mitigating the risk of data security breaches or legal and regulatory compliance problems. Small businesses must conduct thorough research on potential providers, assessing their experience and reputation. It is crucial to verify that the chosen provider has robust data security measures in place to safeguard sensitive financial information.

In conclusion, outsourcing accounting services for small businesses looking to reduce costs, increase efficiency, and specialized access expertise. Small businesses can focus on their core business by partnering with a reputable provider like Unison Globus while leaving accounting functions to the experts.

How to start with Outsourced Accounting Services?

• Define your objective for outsourced accounting services to provide direction to your team.
• Assess potential service providers to find a good fit for your business.
• Determine whether you have the capability to communicate with a global team and consider appointing a local champion to manage the team.
• Typical accounting functions that are outsourced include bookkeeping, tax returns, and executive assistant tasks.
• Avoid common outsourcing mistakes such as delegating the most challenging work first and not integrating the outsourced team fully into your company culture.

Conclusion: Is Outsourcing Right for Your Firm?

Outsourced accounting services can be a game-changer for accounting firms, freeing up time and resources to focus on core business and provide better client services. It reduces costs, improves efficiency, and provides access to specialized expertise and technology.

Assessing potential service providers and avoiding common outsourcing mistakes is crucial. Unison Globus can provide guidance and support to help you get started. Check out our service page and sign up for a trial today.

Accounting Podcasts

Let’s face it: when we’re searching for something enjoyable to pass the time, we frequently turn to podcasts. However, because there are millions of possibilities to pick from, particularly in accounting, finding the ideal fit can be a lengthy endeavor. But not anymore!

We’ve compiled a selection of the best accounting podcasts, which cover a wide range of business topics and offer helpful advice that can be beneficial to even the most successful accountants in public accounting.

Don’t hesitate to listen to one or more of these episodes. It’s possible that you’ll find your new favorite playlist among these.

Green Apple Podcast

The Green Apple Podcast by John Garrett brings the bizarre and extraordinary to the surface by interviewing guests who try to be unique in order to stand out in their respective businesses.

With accounting professionals, lawyers, consultants, and other thought leaders on the podcast, you’ll enjoy learning more about their interests and how they incorporate them into their enterprises for more business enlightenment and independence.

Cloud Accounting Podcast

This podcast, hosted by Blake Oliver, CPA, and David Leary, is a cloud accounting podcast that focuses on how businesses may use current cloud accounting technologies to improve their operations in each weekly edition. They discuss many subjects, such as:

• Accounting and finance apps
• Accounting technology
• Cryptocurrency and emerging tech
• Cloud stories
• Remote work and cloud tools
• Online sales and marketing tips
• How to manage a modern practice

Accounting Influencers

Martin Bissett and Rob Brown host the Accounting Influencers podcast, which focuses on the following:

• accountancy and fintech news
• commentary around this news
• practical ‘what works’ tips and expert interviews

The podcast is CPE-accredited, promoted via social media, and commercially supported, with over 21,000 listeners in 150 countries, primarily in the United States and the United Kingdom.

Unison Globus Public Accountant

The Unison Globus Podcast features ongoing, in-depth talks on some of the hottest accounting trends with some of the industry’s most prominent business leaders and successful entrepreneurs.

Every episode will leave you with a minimum of one new tidbit of knowledge.

Future Firm

The finest aspect of Future Firm with Ryan Lazanis is that each episode is only a few minutes long. It is always packed with excellent, actionable advice.

This one is highly suggested because it won’t use much of your time but will prompt you to consider practical methods to improve your company.

Aly & Andrew’s All Aussie Accounting Adventures

If you’re interested in opening and operating your own accounting firm/small business, or if you want to learn more about this topic, Aly & Andrew’s All Aussie Accounting Adventures is the audio book for you.

Aly and Andrew give pearls of wisdom and sensible guidance based on their own personal experience with the process in each episode.

Accounting Best Practices with Steve Bragg

Accounting Best Practices with Steve Bragg, hosted by entrepreneur, author, and accounting expert Steve Bragg, will allow you to stay on top of all current challenges so that you miss nothing.

Each episode of this podcast is roughly 7-8 minutes long, making it ideal if you’re short on time and like processing information quickly.

Bean Ninjas

Bean Ninjas are unquestionably experts in providing world-class bookkeeping, accounting, virtual CFO, and tax services to 7- and 8-figure eCommerce firms seeking to scale.

This is evident in their monthly podcast episodes, which provide essential accounting and business advice for the professional development of anyone interested in the public accounting field.

Journal of Accountancy Podcast

Besides publishing The Journal of Accountancy decided to produce a related podcast.

The program frequently discusses significant accounting challenges and the most recent accounting news.

Taxgirl Podcast

The Taxgirl Podcast focuses on critical information on tax tips, money, cash flow, and making wise financial decisions. All themes are timely, educational, and easily understood. It allows you to remain knowledgeable about the most significant concerns in the world of taxes. New episodes are released regularly.

Scaling New Heights Podcast

Cutting-Edge Training for Small Business Advisors: The ‘Scaling New Heights’ podcast is created for accountants and other business advisors. It offers access to essential training from the annual Scaling New Heights conference throughout the year.

Each weekly broadcast features an interview with a prominent guest who is either a previous Scaling New Heights presenter or an upcoming conference presenter. It is approximately 30 minutes in length and is accessible on iTunes, Player FM, and Stitcher.

Grow My Accounting Practice

A show for accountants and bookkeepers seeking to expand their practices. We delve deeply into both the theoretical and actionable strategies you need to expand your practice as you’ve always envisioned.

You will learn about marketing, sales, hiring, management, pricing, and everything else required to expand a business. The only topic they do not discuss is accounting skills. They provide you with business skills. You already possess them.

Read also: Outsourcing from Marketing lens – Why India is the preferred choice of Outsourcing

Podcasts are becoming increasingly popular in the business world, as they integrate the strengths of radio, television, and the internet into one convenient medium.
Streaming podcasts on any device is hassle-free, as it doesn’t require any special software or hardware.

Compared to watching videos or reading articles, podcasts demand significantly less effort from the listener.

Gone are the days of carrying around physical newspapers like the Financial Times; now, you can access a wealth of information and stay up-to-date with the latest developments right at your fingertips.

So, listen to these 12 killer accounting podcasts on your daily commute, at work, or in your free time. Some are motivational, some are educational, and some are inspiring.

Want to outsource accounting or bookkeeping services? Click here.

Accrual to Cash Adjustment

A company’s finances can be handled using either the cash basis or the accrual basis of accounting. Income is calculated differently in the two approaches. The accrual method of accounting is the most common. However, many businesses employ the cash method instead.

It is crucial to grasp the fundamental distinction between the accrual and cash bases of accounting in order to comprehend the shift from one to the other. So, let’s clear your basics and understand the accrual to cash adjustments for your next finance handling.

Accrual Basis of Accounting – Overview

The accrual basis of accounting is a method of keeping financial records that mandates matching a period’s income and expenses. If you use this method of accounting, you’ll have to tally up your earnings and outgoings in the same accounting period. This holds true irrespective of the cyclical nature of financial flows.

Companies worldwide typically employ an Accrual Basis due to the matching notion. Accurately estimate the profitability over time by comparing the revenues and costs of a specific period.

What does accrued adjustment mean?

Journal entries made at the close of a reporting period to adjust the revenues or expenses shown on the income statement are accrual-type adjusting entries. Following is a breakdown of the four distinct categories of journal entries that you can use to correct for accruals.

Rise in costs due to incurred expenses for which an invoice from the relevant supplier is still pending.

A reduction in the total costs recognized that still needs to be spent.
Earned revenue growth represents money coming in from customers yet to invoice.

A reduction in revenues for revenues that have been recognized but have yet to be earned.

Cash Basis of Accounting – Overview

In contrast to the accrual basis of accounting, which records income and expenses in the period they are earned, the cash basis of accounting records them in the period in which cash is received.

The fundamental principle behind this method of reporting is to account for cash outflows and inflows. Countability is on the period they occur rather than the periods in which the related expenses and revenues are spent.

As the name implies, the cash basis of accounting does not keep any accounts receivable or payable, which is the fundamental distinction between the cash and accrual basis of accounting. On the other hand, the accrual method of accounting puts off the recognition of income and costs until after the fact.

Can you change from accrual to cash adjustment journal entry?

If this is your company’s first federal tax return, the IRS will likely let you choose the accounting system you like, but the agency mandates that you stick with the same technique in subsequent years to ensure consistency. In most cases, you will need to file IRS Form 3115 to get approval to switch from the accrual accounting technique to the cash basis accounting method.

Switch to cash basis accounting method – Eligibility

Most small businesses use a cash-basis accounting system, but the IRS may only allow you to move if your company is structured in a certain way. For instance, you cannot use the cash-basis accounting for the businesses that manufacture, purchase, or sell physical products. Corporations, partnerships, and QPCs are all eligible to employ cash-basis accounting with the IRS so long as they meet specific requirements.

Overview of How to Convert Accrual to Cash Adjustments

Consider the following procedures to make the switch from the accrual cash adjustment tax returns:

Adjusting for accrued expenses

Subtracting accrued expenses from the financial statements is necessary for switching from the accrual to cash adjustment journal entries. If a supplier invoice cannot verify an accumulated expense, reverse it in the financials. The accrued liabilities section of the balance sheet is where you may quickly find this data.

Adjusting for accounts receivables

Adjusting for accounts receivable is also crucial when switching from an accrual basis to a cash basis of accounting. If the money from sales comes in after the designated term ends, write off all accounts receivables.

Adjusting for accounts payable

Accounts payable require adjustment the same way as accounts receivable do in the financial statements. The financial statements should only reflect those transactions for which cash was paid as a settlement in the reporting period in question. Because of this, you can only add costs paid with cash during the reporting period in the financial statement.

Adjusting for prior period sales

Accumulate the sales at the end of the prior period under the accrual basis of accounting. If the cash from these transactions is received after the time they are made, they are shifted back to the period in which payment is due. Since cash payments are still unpaid, in addition to the current period sales, the need to make adjustments stems primarily from this necessity.

Customer prepayment adjustment

Under the accrual system, prepayments from clients would be counted as revenue if the order was completed. These sales must be accounted for in the period corresponding to the time in which the cash was received. This will help you record the orders on a cash basis.

Supplier prepayment adjustment

Prepaid expenses need to be revised in the same way that prepaid revenue (which was treated as a Current Liability under the Accrual Basis of Accounting) was modified. When using the Accrual method of accounting, any costs that the company has prepaid must be reclassified as outlays.

The modifications, as mentioned earlier, are essential for a seamless change from the accrual to the cash adjustment journal entry. These modifications entail switching to a payment schedule solely based on cash inflows and outflows.

Best Software and Services for Accrual Accounting

As your company grows in size and complexity, you should be prepared to switch to accrual-basis-friendly tools and resources. Intuit’s QuickBooks Online, for instance, provides the option to switch between cash and accrual accounting.

One can record Invoices, expenses, employee time, and more using this service, which is available monthly. Collaboration with an outsourcing accounting firm is made more accessible by the widespread use of spreadsheets, which can be quickly shared to reveal a clear picture of financial standing and tax liabilities.

Contact Us to Learn More About Our Financial Management Services.

Accrual to Cash Conversion Formula

To illustrate the change from an accrual to a cash basis adjustment, accountants employ specific formulas. The transition from accrual to cash accounting is simplified as a result.

The formula basically sorts accounts (and their corresponding amounts) into two groups: those that should be eliminated from the financial statements and those that should be reinstated. Here is a quick rundown of what happens throughout the transformation.

The following are the types of expenses that need to be subtracted from the balance sheets:

• Accrued (or outstanding) expenses
• Outstanding Income (income not yet settled for by debtors)
• Accounts Receivable
• Accounts Payable

The same logic applies to the following accounts that need to be re-established in the financials:

• Advanced Income
• Advance Expenses (Prepaid Expenses)

Also, the following formulas are used to convert some lines of the financial statements from the accrual to cash adjustment formula:

1. Cash Sales = Beginning Balance of Accounts Receivables + Sales Revenue – Ending Balance of Accounts Receivables.

2. Cash Payment for Expenses = Ending Balance for Prepaid Expenses + Expenses in the Income Statement + Beginning Balance for Accrued Expenses – Beginning Balance for Prepaid Expenses – Ending Balance for Accrued Expenses.

3. Cash Payments for Purchases (Merchandise Inventory) = Ending Balance of Merchandise Inventory + Cost of Goods Sold + Beginning Balance of Accounts Payable – Beginning Balance of Merchandise Inventory – Ending Balance of Accounts Payable.

The primary goal of the accrual to cash adjustment formulas

As mentioned earlier, the primary goal of the accrual to cash adjustment formulas is to remove the effects of transactions that have been recorded but not yet settled in cash from the financial accounts. As a result, all of the previously recorded income and expenditures must be updated to reflect those already settled in cash.

Reviewing one’s bank records and comparing one’s cash inflows and outflows is also a quick and easy way to make the transition from an accrual to a cash adjustment journal entry. The remaining sum represents the profit made during the specified time frame. Businesses that want to better understand their profitability in cash on hand often switch from an accrual to a cash basis.

In addition, unlike the cash basis of accounting, the accrual basis of accounting considers several different accounts.

Case in point: Money owed and expenses that have already been incurred. It is common practice for businesses to transition to a cash basis to have a clearer picture of how their operations truly perform in terms of cash flow.

Accrual Accounting and Cash Basis Accounting Example

So, you run a company that offers machine sales.

In the books, cash sales are not recorded until the receipt of cash or a check, meaning that if $5,000 worth of equipment is sold, the transaction remains unrecorded until payment is received.

Under the accrual approach, income of $5,000 is recognized on the day of the sale. Even if you don’t get the money for a few days, weeks, or months.

This also holds true for financial outlays. For example, if a corporation uses the cash method to keep track of its finances, any bills over $1,700 one would record, once one makes the payment. On the other hand, if the corporation uses the accrual technique, the $1,700 will be deducted from its cash on the day it pays the payment.

A best-of-both-worlds option

Businesses can benefit from combining cash and accrual accounting methods. Hybrid accounting is the term for this type of approach.

By combining traditional and contemporary accounting techniques, businesses better monitor their cash flow and assess their sustainability over time. For the IRS’s approval of the hybrid approach, however, you must adhere to specific guidelines.

• A company must utilize the accrual method of bookkeeping for purchases and sales when keeping track of inventories is essential to reporting revenue.
• If a company reports its earnings using the cash method, it must likewise disclose its expenditures similarly.
• If you record your expenses using the accrual technique, you must also use it to calculate your income.
• One can assume a Cash Basis use along with any other reporting technique.

FAQs

Is it better to file taxes on an accrual or cash basis?

Keeping a sufficient cash reserve for tax payments is a major benefit of cash-basis accounting, which is why many businesses choose it. The accrual approach may be preferable to have the most reliable data possible for yearly income projections.

Is cash accounting in accordance with GAAP?

According to GAAP, the cash-basis method of accounting is unacceptable. Companies that adhere to GAAP guidelines should use the accrual-basis accounting approach.

Payroll is affected differently by cash and accrual accounting; is that so?

Payroll is a necessary component of any organization, big or small, that employs people. A company’s Accumulated Payroll account is an example of an accrued expense from processing payroll.

That account is a liability on the balance sheet and contains all employee earnings. Payroll is a good example of an account that lends itself well to accrual accounting, as it has both an accruing and a cost component.

Which types of financial reports are most sensitive to changes in accounting practices?

Your accounting technique will influence the statement of cash flows since you calculate the net income differently.

You record Expenses and earnings in the income statement as soon as you receive or make them.

However, the balance sheet includes accounts like accumulated liabilities and accrued payroll that are likewise affected by the selected accounting system.