How do I switch my books from cash basis to accrual (or from accrual to cash), and what has to change?

What “changing the basis your books run on” actually means — and how it differs from changing a report

'Method of accounting' covers both the taxpayer's overall method and the accounting treatment of any individual item. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code)

“The term “method of accounting” includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item.”

A change in method of accounting includes a change in the overall plan of accounting for gross income or deductions, and a change in the treatment of any material item used in that overall plan. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code)

“A change in the method of accounting includes a change in the overall plan of accounting for gross income or deductions or a change in the treatment of any material item used in such overall plan.”

Adjusting an item of income or deduction in a way that does not involve the proper time for including the item in income or taking the deduction is not a change in method of accounting. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code)

“Also, a change in method of accounting does not include adjustment of any item of income or deduction that does not involve the proper time for the inclusion of the item of income or the taking of a deduction.”

Under the cash basis, a business transaction is recorded only when the related cash is issued or received. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis)

“Under the cash basis of accounting , business transactions are only recorded when the cash related to them is either issued or received.”

Under the accrual basis, revenues and expenses are recorded in the period when they are earned, irrespective of actual cash flows. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual basis)

“The accrual basis is used to record revenues and expenses in the period when they are earned, irrespective of actual cash flows .”

The QuickBooks Desktop company preference that carries the basis is named Summary Report Basis, and it is set to either Accrual or Cash. (jurisdiction: United States, entity_scope: QuickBooks Desktop company file, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)

“In the Summary Report Basis section, select Accrual or Cash .”

In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed. (jurisdiction: United States, entity_scope: QuickBooks Desktop reports, platform: QuickBooks Desktop, platform_edition: QuickBooks 2018 and later, effective_from: QuickBooks 2018)

“In QuickBooks 2018 and later, you can easily toggle a report between cash and accrual views . However, the report reverts to the default basis that was set up in the preferences once it is closed.”

The Report Basis setting determines when income and expenses are recognised in Zoho Books accounting reports. (jurisdiction: not stated, entity_scope: Zoho Books organizations, platform: Zoho Books)

“The Report Basis you choose in Zoho Books determines when income and expenses are recognized in your accounting reports.”

A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting. (jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online)

“To see the difference another accounting method will make in your reporting, you can customize an individual report to use a different accounting method and compare the results.”

After the first return, IRS approval must generally be received before changing the accounting method; a change of accounting method covers both the overall system of accounting and the treatment of any material item, a material item being one affecting the proper time for inclusion of income or allowance of a deduction. (jurisdiction: United States (federal income tax), entity_scope: All taxpayers (individuals and business entities) filing U.S. federal income tax returns)

“Once you have set up your accounting method and filed your first return, generally, you must receive approval from the IRS before you change the method. A change in your accounting method includes a change not only in your overall system of accounting but also in the treatment of any material item. A material item is one that affects the proper time for inclusion of income or allowance of a deduction.”

A change from the cash method to an accrual method, or from an accrual method to the cash method, is given as an example of a change in accounting method that requires IRS approval. (jurisdiction: United States (federal income tax), entity_scope: All taxpayers (individuals and business entities) filing U.S. federal income tax returns)

“A change from the cash method to an accrual method or vice versa.”

The conversion adjustments are not to be entered into the business's accounting records unless the entire system is being changed over to the cash basis permanently, which usually also requires reconfiguring the accounting software. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Do not enter these changes into the accounting records of your business, unless you really want to change the entire system over to the cash basis permanently (which usually also requires the reconfiguration of the accounting software).”

Where the books are not being permanently converted, the conversion changes are entered on a spreadsheet and the revised cash-basis results are calculated manually. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Instead, enter these changes on an electronic spreadsheet, and manually calculate the revised financial results for the cash basis of accounting.”

Required authority: authoritative professional or accounting standard, official platform documentation. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.

What the accounting software can and cannot change about the basis itself

See The QuickBooks Desktop company preference that carries the basis is named Summary Report Basis, and it is set to either Accrual or Cash.

See In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed.

In QuickBooks Desktop, summary reports (which summarize groups of transactions and usually carry the word Summary in their titles) can be produced on either a cash or an accrual basis. (jurisdiction: United States, entity_scope: QuickBooks Desktop summary reports, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)

“Summary reports can be on a cash or accrual basis. They summarize groups of transactions and usually have the word Summary in their titles.”

A journal entry that hits both a Balance Sheet account and an income/expense account affects QuickBooks Desktop reports on both the cash and the accrual basis. (jurisdiction: United States, entity_scope: QuickBooks Desktop journal entries touching a Balance Sheet account and an income/expense account, platform: QuickBooks Desktop, platform_edition: QuickBooks Desktop for Windows)

“Journal entries that impact a Balance Sheet account, as well as an income/expense account, affect both cash and accrual basis reports.”

See The Report Basis setting determines when income and expenses are recognised in Zoho Books accounting reports.

See A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting.

The cash-to-accrual conversion can be difficult because accounting software configured for the cash basis is not designed to handle accrual basis accounting. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“The conversion of cash basis to accrual basis accounting can be a difficult one, for any accounting software that has been configured for the cash basis is not designed to handle accrual basis accounting.”

See The conversion adjustments are not to be entered into the business's accounting records unless the entire system is being changed over to the cash basis permanently, which usually also requires reconfiguring the accounting software.

Partly established. Established: what the accounting software cannot change about the ledger's own basis (S70); what therefore has to be achieved through the transactions rather than through a setting (S69). Missing: what the accounting software can change about the ledger's own basis.

Fixing the changeover point — everything else is measured from it

To secure the Commissioner's consent to a change in method of accounting, the taxpayer generally must file an application on Form 3115, 'Application for Change in Accounting Method', with the Commissioner during the taxable year in which the taxpayer desires to make the change, except as otherwise provided under the authority of paragraph (e)(3)(ii). (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code, conditions: Except as otherwise provided under the authority of paragraph (e)(3)(ii))

“Except as otherwise provided under the authority of paragraph (e)(3)(ii) of this section, to secure the Commissioner's consent to a taxpayer's change in method of accounting the taxpayer generally must file an application on Form 3115, “Application for Change in Accounting Method,” with the Commissioner during the taxable year in which the taxpayer desires to make the change in method of accounting.”

A non-automatic Form 3115 must be filed during the tax year for which the change is requested, unless published guidance provides otherwise. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: non-automatic change procedures; unless otherwise provided by published guidance)

“You must file Form 3115 under the non-automatic change procedures during the tax year for which the change is requested, unless otherwise provided by published guidance.”

The year of change is the first tax year the applicant uses the proposed method, even if no affected items are taken into account in that year, and each applicant must list its own year of change. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes)

“The year of change is the first tax year the applicant uses the proposed accounting method, even if no affected items are taken into account for that year. Each applicant (and filer, if also an applicant) must list its respective year of change.”

Section 15.01 covers a taxpayer changing its overall method from the cash method (or from an accrual method for inventory purchases/sales with the cash method for everything else) to an accrual method, and applies both to taxpayers required to make the change and to taxpayers that want to make it without being required. (jurisdiction: United States (federal income tax), entity_scope: taxpayers changing overall method of accounting to an accrual method, accounting_basis: U.S. federal income tax method of accounting)

“This change applies to a taxpayer that wants to change its overall method of accounting from the cash receipts and disbursements method (cash method), or from an accrual method with regard to purchases and sales of inventories and the cash method for computing all other items of income and expense, to an accrual method. A change under this section 15.01 applies to (1) a taxpayer required to make this change by § 448, any other section of the Code or regulations, or in other guidance published in the Internal Revenue Bulletin (IRB), and (2) a taxpayer that wants to make this change but is not required to do so by § 448, any other section of the Code or regulations, or in other guidance published in the IRB.”

The “year of the change” is defined as the taxable year for which taxable income is computed under a method of accounting different from that used for the preceding taxable year. (jurisdiction: United States (federal income tax), entity_scope: Any taxpayer whose taxable income is computed under a method of accounting different from that used for the preceding taxable year)

“The “year of the change” is the taxable year for which the taxable income of the taxpayer is computed under a method of accounting different from that used for the preceding taxable year.”

For a change in the over-all method of accounting, such as from the cash receipts and disbursements method to an accrual method, the “net amount of the adjustments” is the consolidation of increases and decreases in income or deduction items arising with respect to balances in accounts such as inventory, accounts receivable and accounts payable, measured at the beginning of the taxable year of the change. (jurisdiction: United States (federal income tax), entity_scope: Any taxpayer whose taxable income is computed under a method of accounting different from that used for the preceding taxable year, accounting_basis: cash receipts and disbursements method changing to an accrual method (given as the example of an over-all method change))

“In the case of a change in the over-all method of accounting, such as from the cash receipts and disbursements method to an accrual method, the term “net amount of the adjustments” means the consolidation of adjustments (whether the amounts thereof represent increases or decreases in items of income or deductions) arising with respect to balances in various accounts, such as inventory, accounts receivable, and accounts payable, at the beginning of the taxable year of the change in method of accounting.”

Where a change is made on a cut-off basis there is no section 481(a) adjustment: only items arising on or after the beginning of the year of change use the new method, and items arising before it continue under the former method. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: change made on a cut-off basis)

“In those cases, there is no section 481(a) adjustment. Under a cut-off basis, only the items arising on or after the beginning of the year of change are accounted for under the new method of accounting. Any items arising before the year of change continue to be accounted for under the applicant's former accounting method.”

In the example, the section 481(a) adjustment for a change effective for calendar year 2022 is calculated as of January 1, 2022 — the first day of the year of change. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: illustrative example)

“ABC Corporation changes to an overall accrual method, a nonaccrual-experience method, and the recurring item exception for calendar year 2022. The section 481(a) adjustment is calculated as of January 1, 2022, as follows.”

Partly established. Established: how the changeover point is chosen (S32, S55). Missing: why every subsequent step - which balances move, what the transition difference is, which periods are comparable - is defined relative to the changeover point.

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government.

Whether you need permission, notification or a filing before the change takes effect

See After the first return, IRS approval must generally be received before changing the accounting method; a change of accounting method covers both the overall system of accounting and the treatment of any material item, a material item being one affecting the proper time for inclusion of income or allowance of a deduction.

See A change from the cash method to an accrual method, or from an accrual method to the cash method, is given as an example of a change in accounting method that requires IRS approval.

A taxpayer who changes the method of accounting employed in keeping the books must secure the consent of the Commissioner before computing income on the new method for tax purposes, except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code, conditions: Except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder)

“Except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder, a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner.”

See To secure the Commissioner's consent to a change in method of accounting, the taxpayer generally must file an application on Form 3115, 'Application for Change in Accounting Method', with the Commissioner during the taxable year in which the taxpayer desires to make the change, except as otherwise provided under the authority of paragraph (e)(3)(ii).

Permission to change a method of accounting will not be granted unless the taxpayer agrees to the Commissioner's prescribed terms and conditions for effecting the change, including the taxable year or years in which any adjustment necessary to prevent duplication or omission of amounts is taken into account. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code, conditions: taxpayer agrees to the Commissioner's prescribed terms and conditions)

“Permission to change a taxpayer's method of accounting will not be granted unless the taxpayer agrees to the Commissioner's prescribed terms and conditions for effecting the change, including the taxable year or years in which any adjustment necessary to prevent amounts from being duplicated or omitted is to be taken into account.”

A filer eligible to request consent under the automatic change procedures for the requested year of change must file under those procedures, unless published guidance provides otherwise. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: eligible to request consent under the automatic change procedures for the requested year of change; unless otherwise provided in published guidance)

“Unless otherwise provided in published guidance, you must file under the automatic change procedures if you are eligible to request consent to make an accounting method change under the automatic change procedures for the requested year of change.”

Under the automatic change procedures no user fee is required, and an applicant that timely files and complies is granted consent to change its accounting method, subject to IRS review. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: Form 3115 filed under the automatic change procedures; applicant timely files and complies)

“No user fee is required for a Form 3115 filed under the automatic change procedures. An applicant that timely files and complies with the automatic change procedures is granted consent to change its accounting method, subject to review by the IRS National Office and operating division director.”

Under the non-automatic procedures, approval by the IRS National Office results in a letter ruling, a separate Form 3115 is filed for each unrelated item or submethod changed, and a user fee is required. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, conditions: non-automatic change procedures)

“If the requested change is approved by the IRS National Office, the filer will receive a letter ruling on the requested change. File a separate Form 3115 for each unrelated item or submethod that is being changed. A user fee is required.”

See A non-automatic Form 3115 must be filed during the tax year for which the change is requested, unless published guidance provides otherwise.

See The year of change is the first tax year the applicant uses the proposed method, even if no affected items are taken into account in that year, and each applicant must list its own year of change.

A change from an accrual method to the cash receipts and disbursements method, or the reverse, is an overall accounting method change, and Schedule A must be completed for it. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes)

“If you answered “Yes,” complete Schedule A of Form 3115. For example, an overall accounting method change includes a change from an accrual method to the cash receipts and disbursements method or vice versa. See section 446(c).”

A prior overall method change, or a prior change for the same item, within the 5 tax years ending with the requested year of change makes the applicant ineligible for the automatic procedures unless otherwise provided. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes)

“Unless otherwise provided, an applicant is not eligible to file under the automatic change procedures if the applicant made or requested a prior overall method change or a prior item change (for the same item) within the 5 tax years ending with the requested year of change.”

See Section 15.01 covers a taxpayer changing its overall method from the cash method (or from an accrual method for inventory purchases/sales with the cash method for everything else) to an accrual method, and applies both to taxpayers required to make the change and to taxpayers that want to make it without being required.

The § 448(c) gross receipts test is met with average annual gross receipts of $25,000,000 or less for the three prior taxable years, inflation-adjusted to $27,000,000 (2022), $29,000,000 (2023), $30,000,000 (2024) and $31,000,000 (2025). (jurisdiction: United States (federal income tax), entity_scope: taxpayers testing small business taxpayer status, accounting_basis: U.S. federal income tax method of accounting, conditions: average annual gross receipts measured over the three prior taxable years)

“The § 448(c) gross receipts test is met if a taxpayer has average annual gross receipts for the three prior taxable years of $25,000,000 or less (adjusted for inflation), as described in § 448(c) and § 1.448-2(c) or § 1.460-3(b)(3), as applicable. For a taxable year beginning in 2022, the inflation-adjusted amount is $27,000,000. See Rev. Proc. 2021-45, 2021-48 I.R.B. 764. For a taxable year beginning in 2023, the inflation-adjusted amount is $29,000,000. See Rev. Proc. 2022-38, 2022-45 I.R.B. 445. For a taxable year beginning in 2024, the inflation-adjusted amount is $30,000,000. See Rev. Proc. 2023-34, 2023-48 I.R.B. 1287. For a taxable year beginning in 2025, the inflation-adjusted amount is $31,000,000. See Rev. Proc. 2024-40, 2024-45 I.R.B. 1100.”

Subject to the stated exceptions, C corporations, partnerships with a C corporation partner, and tax shelters may not use the cash method. (jurisdiction: United States (federal income tax), entity_scope: C corporations, partnerships with a C corporation as a partner, and tax shelters, accounting_basis: cash method)

“Except as provided below, C corporations and partnerships with a C corporation as a partner may not use the cash method. Tax shelters are also precluded from using the cash method.”

Use of the cash method is also limited for a taxpayer required to maintain an inventory because production, purchase, or sale of merchandise is an income-producing factor. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes, accounting_basis: cash method)

“Use of the cash method is also limited for a taxpayer that is required to maintain an inventory because the production, purchase, or sale of merchandise is an income-producing factor.”

Which balances come onto the books, and which come off, in each direction

A taxpayer changing its overall method under section 15.01 must compute a § 481(a) adjustment reflecting accounts receivable, accounts payable, inventory and any other item needed to prevent duplication or omission, excluding income accrued but not received that was worthless or partially worthless on the last day of the year immediately before the year of change. (jurisdiction: United States (federal income tax), entity_scope: taxpayers changing overall method to an accrual method under section 15.01, accounting_basis: U.S. federal income tax method of accounting)

“A taxpayer changing its overall method of accounting under this section 15.01 must compute a § 481(a) adjustment. This adjustment must reflect the account receivables, account payables, inventory, and any other item determined to be necessary in order to prevent items from being duplicated or omitted. However, the adjustment does not include any item of income accrued but not received that was worthless or partially worthless, within the meaning of § 166(a), on the last day of the year immediately prior to the year of change.”

Converting from cash to accrual requires adding back all expenses for which a benefit has been received but the supplier or employee has not yet been paid. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Add back all expenses for which the company has received a benefit but has not yet paid the supplier or employee .”

At conversion, expenditures made during the period are reviewed for prepaid expenses and the unused portion is moved into an asset account. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Review expenditures made during the accounting period to see if there are any prepaid expenses , and move the unused portion of these items into an asset account .”

At conversion, accounts receivable and the corresponding sales are recorded for all customer billings issued for which no cash has yet been received. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Record accounts receivable and sales for all billings issued to customers and for which no cash has yet been received from them.”

Customer prepayments recorded as sales under the cash basis are re-recorded as short-term liabilities until the related goods are shipped or services provided. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Customers may have paid in advance for their orders, which would have been recorded as sales under the cash basis of accounting. Record them as short-term liabilities until such time as the company has shipped the related goods or provided the indicated services.”

Cash expenditures made for expenses that belonged in the preceding accounting period are subtracted at conversion. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Subtract cash expenditures made for expenses that should have been recorded in the preceding accounting period .”

Sales originating in a prior period but recorded in the current period on cash receipt are reversed and re-recorded as a sale and account receivable in the preceding period. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Some sales originating in a prior period may have been recorded within the current accounting period based on the receipt of cash in that period. If so, reverse the sale transaction and record it instead as a sale and account receivable in the preceding period.”

Converting accrual records to the cash basis directs removing from the financial statements any expense accrued because no supplier invoice exists for it. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Subtract accrued expenses . If an expense has been accrued because there is no supplier invoice for it, remove it from the financial statements .”

Converting to the cash basis directs excluding accounts receivable and their related sales where the related cash was not received within the period. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Subtract accounts receivable . Do not include any accounts receivable and their related sales if the related cash was not received within the period.”

Converting to the cash basis directs excluding expenses for accounts payable that were not actually paid in cash during the period. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Subtract accounts payable . Do not include expenses for any accounts payable that were not actually paid in cash during the period.”

Sales accrued at the end of the preceding period under the accrual basis are shifted forward into the period in which the customer's cash was actually received. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Under the accrual basis, some sales may have been accrued at the end of the preceding period. If the related customer payment was not received until the following period, shift these sales forward into the accounting period when cash was actually received.”

Customer advance payments recorded as liabilities under the accrual basis are shifted to sales in the period in which the cash was received. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Shift customer prepayments . If customers paid in advance for their orders, these payments would have been recorded as liabilities under the accrual basis. Shift these transactions to sales in the period when the cash was received.”

Advance payments to suppliers recorded as prepaid expenses under the accrual basis are shifted to expenses in the period in which the cash was paid. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Shift prepayments to suppliers . If the company pays in advance for some expenditures , these payments would have been recorded as prepaid expenses under the accrual basis. Shift these transactions to expenses in the period when the cash was paid.”

The section 481(a) adjustments are required to take into account inventories, accounts receivable, accounts payable, and any other item determined necessary to prevent amounts from being duplicated or omitted. (jurisdiction: United States (federal income tax), entity_scope: Any taxpayer whose taxable income is computed under a method of accounting different from that used for the preceding taxable year)

“The adjustments specified in section 481(a) and this section shall take into account inventories, accounts receivable, accounts payable, and any other item determined to be necessary in order to prevent amounts from being duplicated or omitted.”

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

Where the one-time transition difference lands, and what you have to document about it

The applicant must state whether the proposed method of accounting will be used for its books and records and financial statements, and if it will not must attach an explanation. (jurisdiction: United States (federal), entity_scope: taxpayers filing a U.S. federal income tax return that are applying to change a method of accounting, effective_from: 2022-12 (Rev. December 2022 form revision))

“Will the proposed method of accounting be used for the applicant’s books and records and financial statements? For insurance companies, see the instructions . . . . . . . . . . . . . . . . . . . . . . If “No,” attach an explanation.”

See A taxpayer changing its overall method under section 15.01 must compute a § 481(a) adjustment reflecting accounts receivable, accounts payable, inventory and any other item needed to prevent duplication or omission, excluding income accrued but not received that was worthless or partially worthless on the last day of the year immediately before the year of change.

See For a change in the over-all method of accounting, such as from the cash receipts and disbursements method to an accrual method, the “net amount of the adjustments” is the consolidation of increases and decreases in income or deduction items arising with respect to balances in accounts such as inventory, accounts receivable and accounts payable, measured at the beginning of the taxable year of the change.

In computing taxable income for the taxable year of the change, the adjustments determined to be necessary solely by reason of the change, in order to prevent amounts from being duplicated or omitted, are required to be taken into account. (jurisdiction: United States (federal income tax), entity_scope: Any taxpayer whose taxable income is computed under a method of accounting different from that used for the preceding taxable year)

“In computing taxable income for the taxable year of the change, there shall be taken into account those adjustments which are determined to be necessary solely by reason of such change in order to prevent amounts from being duplicated or omitted.”

See The section 481(a) adjustments are required to take into account inventories, accounts receivable, accounts payable, and any other item determined necessary to prevent amounts from being duplicated or omitted.

For a voluntary (taxpayer-initiated) change in method of accounting, the entire section 481(a) adjustment is generally taken into account in computing taxable income in the taxable year of the change, whether it increases or decreases taxable income. (jurisdiction: United States (federal income tax), entity_scope: Any taxpayer whose taxable income is computed under a method of accounting different from that used for the preceding taxable year, conditions: change in method of accounting is voluntary (initiated by the taxpayer))

“If a change in method of accounting is voluntary (i.e., initiated by the taxpayer), the entire amount of the adjustments required by section 481(a) is generally taken into account in computing taxable income in the taxable year of the change, regardless of whether the adjustments increase or decrease taxable income.”

A section 481(a) adjustment is ordinarily required for an accounting method change, taken into account generally over 1 tax year if negative and over 4 tax years beginning with the year of change if positive. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes)

“Ordinarily, an adjustment under section 481(a) is required for accounting method changes. The section 481(a) adjustment period is generally 1 tax year (year of change) for a negative section 481(a) adjustment and 4 tax years (year of change and next 3 tax years) for a positive section 481(a) adjustment.”

See Where a change is made on a cut-off basis there is no section 481(a) adjustment: only items arising on or after the beginning of the year of change use the new method, and items arising before it continue under the former method.

See In the example, the section 481(a) adjustment for a change effective for calendar year 2022 is calculated as of January 1, 2022 — the first day of the year of change.

Amounts not attributable to the accounting method change, such as corrections of math or posting errors or errors in calculating tax liability, must not be included in the Schedule A amounts. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers/applicants changing a method of accounting for U.S. federal income tax purposes)

“Do not include amounts that are not attributable to the accounting method change, such as amounts that correct a math or posting error or errors in calculating tax liability.”

Adjustments arising because the accounting policies used in the opening statement of financial position differ from those previously used arise from events and transactions before the date of transition, and an entity should recognize such adjustments directly in equity at the date of transition. (jurisdiction: United States, entity_scope: small- and medium-sized entities that elect to use the AICPA FRF for SMEs accounting framework, accounting_basis: FRF for SMEs accounting framework (AICPA special purpose framework; not accounting principles generally accepted in the United States of America), conditions: use of the framework is optional; the document states it has no official or authoritative status; applies on transition to the FRF for SMEs accounting framework)

“Any resulting adjustments arise from events and transactions before the date of transition to the framework. An entity should recognize such adjustments directly in equity at the date of transition to the FRF for SMEs accounting framework.”

Reversing those prior-period sales requires an adjustment to the beginning retained earnings account. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“This will require an adjustment to the beginning retained earnings account.”

Shifting prior-period accrued sales into the period of cash receipt may require an adjustment to the beginning retained earnings account. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“This may require an adjustment to the beginning retained earnings account.”

An entity should disclose the amount of each charge or credit to equity at the date of transition resulting from adopting these principles and the reasons for them, and if the date of transition is earlier than the current period so that prior period financial statements can be presented, those prior year statements need to be restated to conform to the framework. (jurisdiction: United States, entity_scope: small- and medium-sized entities that elect to use the AICPA FRF for SMEs accounting framework, accounting_basis: FRF for SMEs accounting framework (AICPA special purpose framework; not accounting principles generally accepted in the United States of America), conditions: use of the framework is optional; the document states it has no official or authoritative status; applies on transition to the FRF for SMEs accounting framework)

“A entity should disclose the amount of each charge or credit to equity at the date of transition to the FRF for SMEs accounting framework resulting from the adoption of these principles and the reasons therefor. If the date of transition is earlier than the current period so that prior period financial statements can be presented, those prior year financial state- ments need to be restated to conform to the framework.”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

The double-count exposure at the changeover, and the check that finds it

See A taxpayer changing its overall method under section 15.01 must compute a § 481(a) adjustment reflecting accounts receivable, accounts payable, inventory and any other item needed to prevent duplication or omission, excluding income accrued but not received that was worthless or partially worthless on the last day of the year immediately before the year of change.

See Cash expenditures made for expenses that belonged in the preceding accounting period are subtracted at conversion.

See Sales originating in a prior period but recorded in the current period on cash receipt are reversed and re-recorded as a sale and account receivable in the preceding period.

See Sales accrued at the end of the preceding period under the accrual basis are shifted forward into the period in which the customer's cash was actually received.

See Customer advance payments recorded as liabilities under the accrual basis are shifted to sales in the period in which the cash was received.

See Advance payments to suppliers recorded as prepaid expenses under the accrual basis are shifted to expenses in the period in which the cash was paid.

See In computing taxable income for the taxable year of the change, the adjustments determined to be necessary solely by reason of the change, in order to prevent amounts from being duplicated or omitted, are required to be taken into account.

See The section 481(a) adjustments are required to take into account inventories, accounts receivable, accounts payable, and any other item determined necessary to prevent amounts from being duplicated or omitted.

The taxpayer must furnish all information requested on the Form 3115 to the extent applicable, including all classes of items that will be treated differently under the new method, any amounts that will be duplicated or omitted as a result of the change, and the taxpayer's computation of the adjustments necessary to prevent those duplications or omissions. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code)

“To the extent applicable, the taxpayer must furnish all information requested on the Form 3115. This information includes all classes of items that will be treated differently under the new method of accounting, any amounts that will be duplicated or omitted as a result of the proposed change, and the taxpayer's computation of any adjustments necessary to prevent such duplications or omissions.”

Certainty of a complete and accurate conversion requires examining all accounting transactions of the year being converted and of the final quarter of the preceding year. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Unfortunately, the only way to be certain of a complete and accurate conversion is to examine all accounting transactions during the year being converted, as well as in the final quarter of the preceding year.”

Partly established. Established: the double-count exposure at the changeover - an item recognised under the old basis and again under the new (S41, S57, S58, S67). Missing: the check that finds it before the period closes.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

What has to change in how you enter transactions from the changeover onwards

See The applicant must state whether the proposed method of accounting will be used for its books and records and financial statements, and if it will not must attach an explanation.

Under the Accrual accounting method income and expenses are recorded when the invoice is sent or the bill is received. (jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, accounting_basis: accrual)

“When using the Accrual accounting method, you record income and expenses when you send the invoice or receive the bill.”

See Where a change is made on a cut-off basis there is no section 481(a) adjustment: only items arising on or after the beginning of the year of change use the new method, and items arising before it continue under the former method.

All conversion adjustments must be made manually, with journal entries. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis, conditions: accounting software configured for the cash basis)

“This means that all conversion adjustments must be made manually, with journal entries .”

See The cash-to-accrual conversion can be difficult because accounting software configured for the cash basis is not designed to handle accrual basis accounting.

See The conversion adjustments are not to be entered into the business's accounting records unless the entire system is being changed over to the cash basis permanently, which usually also requires reconfiguring the accounting software.

See Where the books are not being permanently converted, the conversion changes are entered on a spreadsheet and the revised cash-basis results are calculated manually.

Partly established. Established: what has to change in how transactions are entered from the changeover onwards for the new basis to be genuinely in effect (S20). Missing: what the books look like when the balances were converted but the entry habits were not.

Required authority: authoritative professional or accounting standard, official platform documentation. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.

Proving afterwards that the conversion was complete and can be explained

A very complete set of accounting records is required to convert from the cash basis to the accrual basis. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Further, a very complete set of accounting records is required to convert from the cash basis to the accrual basis.”

See Where a change is made on a cut-off basis there is no section 481(a) adjustment: only items arising on or after the beginning of the year of change use the new method, and items arising before it continue under the former method.

See Certainty of a complete and accurate conversion requires examining all accounting transactions of the year being converted and of the final quarter of the preceding year.

The first verification step after conversion is to ensure that total debits equal total credits in the adjusted trial balance. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“To verify that the conversion from cash basis to accrual basis is accurate, first ensure that total debits equal total credits in the adjusted trial balance.”

Verification finishes by reconciling the adjusted figures against source documents such as invoices, contracts and bank statements to validate timing and completeness. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: cash basis to accrual basis)

“Finally, reconcile the adjusted figures with source documents like invoices, contracts, and bank statements to validate timing and completeness.”

The accrued liabilities account on the balance sheet is the easiest source for identifying accrued expenses, and its contents are to be examined for correctness before being used. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“The easiest source of this information is the accrued liabilities account in the balance sheet . Be sure to first examine the contents of this account to ensure that it is correct.”

The conversion spreadsheet is to be password-protected and backed up in case it is questioned during a tax audit. (jurisdiction: not stated, entity_scope: not stated, accounting_basis: accrual to cash)

“Be sure to password-protect and backup this spreadsheet, in case it is ever called into question as part of a tax audit.”

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

Comparing periods either side of the change, and statements already issued

The auditor should evaluate whether comparability between periods has been materially affected by changes in accounting principles or by material adjustments to previously issued financial statements. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“To identify consistency matters that might affect the report, the auditor should evaluate whether the comparability of the financial statements between periods has been materially affected by changes in accounting principles or by material adjustments to previously issued financial statements for the relevant periods.”

The auditor should also evaluate whether the statements for those periods are consistent with the financial statements previously issued for the same periods. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“The auditor also should evaluate whether the financial statements for periods described in this paragraph are consistent with previously issued financial statements for the respective periods.”

A change in accounting principle with a material effect on the financial statements should be recognized in the auditor's report. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report on the audited financial statements.”

A materially effective change in accounting principle should be recognized in the auditor's report by a titled explanatory paragraph placed immediately after the opinion paragraph. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report on the audited financial statements through the addition of an explanatory paragraph, including an appropriate title (immediately following the opinion paragraph).”

The explanatory paragraph should identify the nature of the change and cross-reference the note disclosure that describes the change. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“The explanatory paragraph should include identification of the nature of the change and a reference to the note disclosure describing the change.”

The explanatory paragraph should appear in the year of the change and in later years until the new principle is applied to every period presented. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“The explanatory paragraph relating to a change in accounting principle should be included in reports on financial statements in the year of the change and in subsequent years until the new accounting principle is applied in all periods presented.”

Under retrospective application, the prior-year statements presented alongside the current year reflect the change and therefore look different from the same years' previously issued statements. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“However, the previous years' financial statements presented with the current year's financial statements will reflect the change in accounting principle and, therefore, will appear different from those previous years' financial statements on which the auditor previously reported.”

Comparability in an entity's financial statements is enhanced when the same accounting policies are used consistently from period to period; consistency helps prevent misconceptions arising from applying different accounting policies in different periods, and when a change in accounting policy is deemed appropriate, disclosure of the effects of the change may be necessary to maintain comparability. (jurisdiction: United States, entity_scope: small- and medium-sized entities that elect to use the AICPA FRF for SMEs accounting framework, accounting_basis: FRF for SMEs accounting framework (AICPA special purpose framework; not accounting principles generally accepted in the United States of America), conditions: use of the framework is optional; the document states it has no official or authoritative status)

“Comparability in the financial statements of an entity is enhanced when the same accounting policies are used consistently from period to period. Consistency helps prevent misconceptions that might result from the application of different accounting policies in different periods. When a change in accounting policy is deemed to be appropriate, disclosure of the effects of the change may be necessary to maintain comparability.”

The record of the change itself — date, direction, schedule, difference, approval

See The applicant must state whether the proposed method of accounting will be used for its books and records and financial statements, and if it will not must attach an explanation.

See A taxpayer who changes the method of accounting employed in keeping the books must secure the consent of the Commissioner before computing income on the new method for tax purposes, except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder.

See To secure the Commissioner's consent to a change in method of accounting, the taxpayer generally must file an application on Form 3115, 'Application for Change in Accounting Method', with the Commissioner during the taxable year in which the taxpayer desires to make the change, except as otherwise provided under the authority of paragraph (e)(3)(ii).

See Permission to change a method of accounting will not be granted unless the taxpayer agrees to the Commissioner's prescribed terms and conditions for effecting the change, including the taxable year or years in which any adjustment necessary to prevent duplication or omission of amounts is taken into account.

See The taxpayer must furnish all information requested on the Form 3115 to the extent applicable, including all classes of items that will be treated differently under the new method, any amounts that will be duplicated or omitted as a result of the change, and the taxpayer's computation of the adjustments necessary to prevent those duplications or omissions.

See The explanatory paragraph should identify the nature of the change and cross-reference the note disclosure that describes the change.

One criterion evaluated at .07 is that the disclosures related to the accounting change are adequate. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“The disclosures related to the accounting change are adequate,”

One criterion evaluated at .07 is that the company has justified the alternative accounting principle as preferable. (jurisdiction: United States, entity_scope: audits of financial statements performed under PCAOB standards, effective_from: 2008-11-15)

“The company has justified that the alternative accounting principle is preferable.”

See An entity should disclose the amount of each charge or credit to equity at the date of transition resulting from adopting these principles and the reasons for them, and if the date of transition is earlier than the current period so that prior period financial statements can be presented, those prior year statements need to be restated to conform to the framework.

When a voluntary change in accounting policy has an effect on the current period or any prior period — or would have such an effect except that the amount of the adjustment is impracticable to determine — an entity should disclose the nature of the change and the reasons why applying the new accounting policy provides reliable and more relevant information. (jurisdiction: United States, entity_scope: small- and medium-sized entities that elect to use the AICPA FRF for SMEs accounting framework, accounting_basis: FRF for SMEs accounting framework (AICPA special purpose framework; not accounting principles generally accepted in the United States of America), conditions: use of the framework is optional; the document states it has no official or authoritative status; voluntary change in accounting policy)

“When a voluntary change in accounting policy has an effect on the current period or any prior period, or would have an effect on that pe- riod, except that it is impracticable to determine the amount of the adjust- ment, an entity should disclose a. the nature of the change in accounting policy; b. the reasons why applying the new accounting policy provides reliable and more relevant information (see paragraph 9.04);”

Accounting records include the taxpayer's regular books of account and such other records and data as may be necessary to support the entries on the books of account and on the return; the example the regulation gives of such other records is a reconciliation of any differences between the books and the return. (jurisdiction: United States (federal), entity_scope: All taxpayers computing taxable income under chapter 1 of the Internal Revenue Code)

“Accounting records include the taxpayer's regular books of account and such other records and data as may be necessary to support the entries on his books of account and on his return, as for example, a reconciliation of any differences between such books and his return.”

The form requires the filer to enter the beginning and ending dates of the tax year of change. (jurisdiction: United States (federal), entity_scope: taxpayers filing a U.S. federal income tax return that are applying to change a method of accounting, effective_from: 2022-12 (Rev. December 2022 form revision))

“Tax year of change begins (MM/DD/YYYY) Tax year of change ends (MM/DD/YYYY)”

See The conversion spreadsheet is to be password-protected and backed up in case it is questioned during a tax audit.

Partly established. Established: the date of the change (S93); the schedule of balances moved (S67, S90); the transition difference (S67, S90); where that record is kept (S92). Missing: the direction of the change; who approved the change.

What a change in the basis on which books are maintained consists of

See 'Method of accounting' covers both the taxpayer's overall method and the accounting treatment of any individual item.

See A change in method of accounting includes a change in the overall plan of accounting for gross income or deductions, and a change in the treatment of any material item used in that overall plan.

See Adjusting an item of income or deduction in a way that does not involve the proper time for including the item in income or taking the deduction is not a change in method of accounting.

See Under the cash basis, a business transaction is recorded only when the related cash is issued or received.

See Under the accrual basis, revenues and expenses are recorded in the period when they are earned, irrespective of actual cash flows.

No one accounting method is imposed on all taxpayers, but the system used must clearly reflect income and expenses and must be supported by permanent accounting books plus any other records needed to support the entries on those books and the tax return. (jurisdiction: United States (federal income tax), entity_scope: All taxpayers (individuals and business entities) filing U.S. federal income tax returns)

“No single accounting method is required of all taxpayers. You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns.”

See A very complete set of accounting records is required to convert from the cash basis to the accrual basis.

See After the first return, IRS approval must generally be received before changing the accounting method; a change of accounting method covers both the overall system of accounting and the treatment of any material item, a material item being one affecting the proper time for inclusion of income or allowance of a deduction.

See All conversion adjustments must be made manually, with journal entries.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

Balances moved, the cumulative difference, and the point it is all measured at

See The year of change is the first tax year the applicant uses the proposed method, even if no affected items are taken into account in that year, and each applicant must list its own year of change.

See A change from an accrual method to the cash receipts and disbursements method, or the reverse, is an overall accounting method change, and Schedule A must be completed for it.

See Subject to the stated exceptions, C corporations, partnerships with a C corporation partner, and tax shelters may not use the cash method.

See Use of the cash method is also limited for a taxpayer required to maintain an inventory because production, purchase, or sale of merchandise is an income-producing factor.

See A taxpayer changing its overall method under section 15.01 must compute a § 481(a) adjustment reflecting accounts receivable, accounts payable, inventory and any other item needed to prevent duplication or omission, excluding income accrued but not received that was worthless or partially worthless on the last day of the year immediately before the year of change.

See Converting from cash to accrual requires adding back all expenses for which a benefit has been received but the supplier or employee has not yet been paid.

See At conversion, expenditures made during the period are reviewed for prepaid expenses and the unused portion is moved into an asset account.

See At conversion, accounts receivable and the corresponding sales are recorded for all customer billings issued for which no cash has yet been received.

See Customer prepayments recorded as sales under the cash basis are re-recorded as short-term liabilities until the related goods are shipped or services provided.

See Cash expenditures made for expenses that belonged in the preceding accounting period are subtracted at conversion.

See Converting accrual records to the cash basis directs removing from the financial statements any expense accrued because no supplier invoice exists for it.

See Converting to the cash basis directs excluding accounts receivable and their related sales where the related cash was not received within the period.

See Converting to the cash basis directs excluding expenses for accounts payable that were not actually paid in cash during the period.

See Sales accrued at the end of the preceding period under the accrual basis are shifted forward into the period in which the customer's cash was actually received.

See Customer advance payments recorded as liabilities under the accrual basis are shifted to sales in the period in which the cash was received.

See Advance payments to suppliers recorded as prepaid expenses under the accrual basis are shifted to expenses in the period in which the cash was paid.

See The “year of the change” is defined as the taxable year for which taxable income is computed under a method of accounting different from that used for the preceding taxable year.

See For a change in the over-all method of accounting, such as from the cash receipts and disbursements method to an accrual method, the “net amount of the adjustments” is the consolidation of increases and decreases in income or deduction items arising with respect to balances in accounts such as inventory, accounts receivable and accounts payable, measured at the beginning of the taxable year of the change.

See In computing taxable income for the taxable year of the change, the adjustments determined to be necessary solely by reason of the change, in order to prevent amounts from being duplicated or omitted, are required to be taken into account.

See The section 481(a) adjustments are required to take into account inventories, accounts receivable, accounts payable, and any other item determined necessary to prevent amounts from being duplicated or omitted.

See For a voluntary (taxpayer-initiated) change in method of accounting, the entire section 481(a) adjustment is generally taken into account in computing taxable income in the taxable year of the change, whether it increases or decreases taxable income.

See A section 481(a) adjustment is ordinarily required for an accounting method change, taken into account generally over 1 tax year if negative and over 4 tax years beginning with the year of change if positive.

See Where a change is made on a cut-off basis there is no section 481(a) adjustment: only items arising on or after the beginning of the year of change use the new method, and items arising before it continue under the former method.

See In the example, the section 481(a) adjustment for a change effective for calendar year 2022 is calculated as of January 1, 2022 — the first day of the year of change.

See Amounts not attributable to the accounting method change, such as corrections of math or posting errors or errors in calculating tax liability, must not be included in the Schedule A amounts.

See Adjustments arising because the accounting policies used in the opening statement of financial position differ from those previously used arise from events and transactions before the date of transition, and an entity should recognize such adjustments directly in equity at the date of transition.

See Shifting prior-period accrued sales into the period of cash receipt may require an adjustment to the beginning retained earnings account.

See The taxpayer must furnish all information requested on the Form 3115 to the extent applicable, including all classes of items that will be treated differently under the new method, any amounts that will be duplicated or omitted as a result of the change, and the taxpayer's computation of the adjustments necessary to prevent those duplications or omissions.

See The conversion adjustments are not to be entered into the business's accounting records unless the entire system is being changed over to the cash basis permanently, which usually also requires reconfiguring the accounting software.

See Where the books are not being permanently converted, the conversion changes are entered on a spreadsheet and the revised cash-basis results are calculated manually.

Partly established. Established: which categories of balance must be recognised or removed when a set of books moves between the cash and accrual bases, in each direction (S58); how the resulting cumulative difference is treated (S57, S59, S60, S61, S64); the point at which the conversion takes effect (S32, S55); that the balances moved and the cumulative difference are measured as of the point at which the conversion takes effect (S56); the exposure to recognising one item under both bases across the point at which the conversion takes effect (S41, S57, S58, S67); what must change in how transactions are recognised from that point onwards (S61). Missing: that earlier periods are not restated; how books read when balances were converted but recognition was not.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

The authorisation, notification and filing requirements for a change of accounting method

See After the first return, IRS approval must generally be received before changing the accounting method; a change of accounting method covers both the overall system of accounting and the treatment of any material item, a material item being one affecting the proper time for inclusion of income or allowance of a deduction.

See A change from the cash method to an accrual method, or from an accrual method to the cash method, is given as an example of a change in accounting method that requires IRS approval.

See A taxpayer who changes the method of accounting employed in keeping the books must secure the consent of the Commissioner before computing income on the new method for tax purposes, except as otherwise expressly provided in chapter 1 of the Code and the regulations thereunder.

See To secure the Commissioner's consent to a change in method of accounting, the taxpayer generally must file an application on Form 3115, 'Application for Change in Accounting Method', with the Commissioner during the taxable year in which the taxpayer desires to make the change, except as otherwise provided under the authority of paragraph (e)(3)(ii).

See Permission to change a method of accounting will not be granted unless the taxpayer agrees to the Commissioner's prescribed terms and conditions for effecting the change, including the taxable year or years in which any adjustment necessary to prevent duplication or omission of amounts is taken into account.

See A filer eligible to request consent under the automatic change procedures for the requested year of change must file under those procedures, unless published guidance provides otherwise.

See Under the automatic change procedures no user fee is required, and an applicant that timely files and complies is granted consent to change its accounting method, subject to IRS review.

See Under the non-automatic procedures, approval by the IRS National Office results in a letter ruling, a separate Form 3115 is filed for each unrelated item or submethod changed, and a user fee is required.

See A non-automatic Form 3115 must be filed during the tax year for which the change is requested, unless published guidance provides otherwise.

See The year of change is the first tax year the applicant uses the proposed method, even if no affected items are taken into account in that year, and each applicant must list its own year of change.

See A change from an accrual method to the cash receipts and disbursements method, or the reverse, is an overall accounting method change, and Schedule A must be completed for it.

See A prior overall method change, or a prior change for the same item, within the 5 tax years ending with the requested year of change makes the applicant ineligible for the automatic procedures unless otherwise provided.

See Section 15.01 covers a taxpayer changing its overall method from the cash method (or from an accrual method for inventory purchases/sales with the cash method for everything else) to an accrual method, and applies both to taxpayers required to make the change and to taxpayers that want to make it without being required.

See The § 448(c) gross receipts test is met with average annual gross receipts of $25,000,000 or less for the three prior taxable years, inflation-adjusted to $27,000,000 (2022), $29,000,000 (2023), $30,000,000 (2024) and $31,000,000 (2025).

See Subject to the stated exceptions, C corporations, partnerships with a C corporation partner, and tax shelters may not use the cash method.

See Use of the cash method is also limited for a taxpayer required to maintain an inventory because production, purchase, or sale of merchandise is an income-producing factor.

See The form requires the filer to enter the beginning and ending dates of the tax year of change.

What mainstream accounting platforms document about the cash/accrual setting

See The QuickBooks Desktop company preference that carries the basis is named Summary Report Basis, and it is set to either Accrual or Cash.

See In QuickBooks 2018 and later a report can be toggled between cash and accrual views, but the report reverts to the default basis set in the preferences once it is closed.

See In QuickBooks Desktop, summary reports (which summarize groups of transactions and usually carry the word Summary in their titles) can be produced on either a cash or an accrual basis.

See A journal entry that hits both a Balance Sheet account and an income/expense account affects QuickBooks Desktop reports on both the cash and the accrual basis.

See The Report Basis setting determines when income and expenses are recognised in Zoho Books accounting reports.

See A user can customize an individual report to use a different accounting method and compare the results, in order to see the difference the other method makes in reporting.

The Footer setting controls whether the date prepared, the time prepared and the cash or accrual report basis are displayed on a report, and the footer alignment. (jurisdiction: United States, entity_scope: QuickBooks users, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; Intuit Enterprise Suite)

“Select if you want to display the date prepared, time prepared, the cash or accrual report basis, and decide the footer alignment.”

See Under the Accrual accounting method income and expenses are recorded when the invoice is sent or the bill is received.

Not established from an authoritative source.

The professional expectation for documenting a change and presenting periods either side

See The auditor should evaluate whether comparability between periods has been materially affected by changes in accounting principles or by material adjustments to previously issued financial statements.

See A change in accounting principle with a material effect on the financial statements should be recognized in the auditor's report.

See A materially effective change in accounting principle should be recognized in the auditor's report by a titled explanatory paragraph placed immediately after the opinion paragraph.

See The explanatory paragraph should identify the nature of the change and cross-reference the note disclosure that describes the change.

See The explanatory paragraph should appear in the year of the change and in later years until the new principle is applied to every period presented.

See Comparability in an entity's financial statements is enhanced when the same accounting policies are used consistently from period to period; consistency helps prevent misconceptions arising from applying different accounting policies in different periods, and when a change in accounting policy is deemed appropriate, disclosure of the effects of the change may be necessary to maintain comparability.

See One criterion evaluated at .07 is that the disclosures related to the accounting change are adequate.

See One criterion evaluated at .07 is that the company has justified the alternative accounting principle as preferable.

See An entity should disclose the amount of each charge or credit to equity at the date of transition resulting from adopting these principles and the reasons for them, and if the date of transition is earlier than the current period so that prior period financial statements can be presented, those prior year statements need to be restated to conform to the framework.

See When a voluntary change in accounting policy has an effect on the current period or any prior period — or would have such an effect except that the amount of the adjustment is impracticable to determine — an entity should disclose the nature of the change and the reasons why applying the new accounting policy provides reliable and more relevant information.