How to use the cash to accrual income converter
- Enter the cash received from customers and the cash paid for expenses during the period.
- Enter the receivables, unearned revenue, payables, accrued expenses and prepaid expenses at the start and at the end.
- Read the accrual revenue, accrual expenses and accrual net income.
- Use the bridge table to see how each balance moved the result away from cash.
Formula
Accrual revenue = cash received + increase in receivables - increase in unearned revenue
Accrual expenses = cash paid + increase in payables + increase in accrued expenses - increase in prepaid expenses
Accrual net income = accrual revenue - accrual expenses
A decrease in a balance is the same formula with a negative change, so the signs take care of themselves.
A small business with $100,000 of cash receipts
Receivables grew from $10,000 to $15,000, so $5,000 of sales were made but not yet collected. Unearned revenue fell from $4,000 to $2,000, so $2,000 of cash from earlier periods was earned now. Accrual revenue is $100,000 + $5,000 + $2,000 = $107,000.
On the cost side, $70,000 was paid. Payables rose by $1,500 and accrued expenses by $600, which are costs incurred but not paid. Prepaid expenses fell by $500, so $500 paid earlier was used up now. Accrual expenses are $70,000 + $1,500 + $600 + $500 = $72,600 and net income is $34,400, against $30,000 on a cash basis.
Why cash and accrual income differ
Cash accounting records money when it moves. Accrual accounting records revenue when it is earned and expenses when they are incurred, whatever the timing of payment. The gap between the two is made of the five balances on this page: money owed to you, money you owe, money you paid in advance, money customers paid in advance and costs that have built up without a bill yet.
When a business grows, receivables usually grow too, so accrual income runs ahead of cash. The reverse happens when a business collects old invoices faster than it bills new ones. Looking at the bridge helps you explain why profit and cash are not the same number.
Limits of the bridge
The conversion covers only the five balances shown. Inventory, depreciation, deferred taxes and other adjustments need their own lines, and a full set of statements is more than this tool offers. For a cash flow view starting from the same balances, see the Direct Method Cash Flow Statement Builder and the Indirect Cash Flow Statement Builder. The Journal Entry Generator can record the adjustments, and the Warranty Reserve Accrual Calculator handles a reserve that this page does not.
Assumptions and limits
- Cash received comes from customers only. Other receipts such as loans and owner deposits are left out.
- Cash paid is for operating expenses, and no inventory or equipment purchases are included.
- The figures shown are examples. Use your own cash records and balance sheets.
- Balances are taken from the start and end of the same period.
Frequently asked questions
Why is unearned revenue subtracted?
Cash received for work not yet done is not revenue yet. When the balance grows, part of the cash belongs to a later period, so revenue is lower than the cash.
What does a prepaid expense do to income?
Paying in advance moves cash out before the cost is incurred. When the prepaid balance rises, the expense is lower than the cash paid.
Can the accrual result be lower than cash?
Yes. If receivables fall and payables fall, a business collects and pays old items, and accrual income can be below the cash result.
Does this replace an accountant?
No. It shows the arithmetic of the adjustment for the five balances. Tax and reporting rules decide which method you must use.