Wave Accounting Tutorial – Converting to Cash Method

Wave accounting is an excellent free resource for small business, but it does maintain an accrual based accounting system. However, a large portion of the United States small businesses use cash method as their accounting method, so we need to convert from accrual to cash prior to reporting taxes to the IRS or state.

This can get a bit more complicated for businesses that have customer deposits, prepaid expenses, or a large number of unpaid bills and invoices at the end of the accounting period. This tutorial will cover the basics, but please reach out to us at Lighthouse-Ledgers.com for help with more complicated transactions.

Summary:

  • Step One – Review Bills & Invoices regularly and confirm that all transactions are entered and correct.
  • Step Two – Reconcile the bank statements for the prior month.
  • Step Three – Open the Balance Sheet under reports. Change the date to the last day of the prior period and hit Update. Note the amount under Accounts Receivable.
  • Step Four – Open the Journal Transactions under Accounting. Add the following transaction (add an additional line for each income account affected) using the last day of the prior accounting period (example 12/31/2015):
    • Accounts Receivable, Credit $XXX
    • Income, Debit $XXX
      • Confirm it balances and hit save.
  • Step Five – Add another Journal Entry to reverse the last one using the First day of the current period (Example 1/1/2016).  Hit the exact same accounts, but the opposite side.  Confirm it balances and hit save.
  • Step Six – Open the Balance Sheet under reports.  Change the date to the last day of the prior period and hit Update.  Note the amount under Accounts Payable.
  • Step Seven – Open the Journal Transactions under Account.  Add the following transaction (add an additional line for each expense account affected) using the last day of the prior accounting period (example 12/31/15):
    • Accounts Payable, Debit $xxx
    • Expense, Credit $XXX
      • Confirm it Balances and hit save.
  • Step Eight – Add another Journal transaction to reverse the last one using the first day of the current period (Example 1/1/2016).  Hit the exact same accounts, but the opposite side.  Confirm it balances and hit save.
  • Step Nine (Optional) – Return to the Balance sheet under Reports and confirm the balances for Accounts Receivable and Accounts Payable now show $0.00 after changing the date to the last day of the prior period.

About the AuthorChristina Young, Author & Owner of Lighthouse Ledgers

Christina Young is a professional bookkeeper based out of Seattle, WA.  Her business, Lighthouse Ledgers, is focused on helping small business owners spend less time on bookkeeping so they can spend more time on the things that matter in their lives.

Lighthouse Ledgers – Balanced Books, Balanced Life

Disclaimer: Articles are educational only and based on opinion, experience, and research.  This is not to be interpreted as legal, tax, or financial advice.  Please consult with the services of a professional tax advisor, financial advisor, or legal advisor before making important business decisions.