By conversion from one basis of accounting to another we mean converting from cash basis of accounting to accrual or mercantile basis of accounting and from accrual or mercantile basis of accounting to cash basis of accounting.

The accrual basis or mercantile system of accounting requires the organisation to maintain additional information relating to expenses outstanding or prepaid and incomes pre-received or receivable. Cash basis of accounting does not require these to be maintained.

Conversion

• from Cash Basis to Accrual/Mercantile Basis requires the information to be brought into the books of accounts.
• from Mercantile/Accrual Basis to Cash Basis requires the information to be written off from the books of accounts.

Ledger accounts provide information relating to a distinct aspect in accounting. The ledger accounts that would provide additional information required to be maintained in case of accrual or mercantile basis of accounting would be

1. Expenses Outstanding (≡ Creditors)

   The amount of expenses that have been incurred but have not yet been paid out.

   A distinct ledger account may be used for each expenditure like Outstanding Salaries a/c, Rent payable a/c, Interest unpaid a/c etc. or a single account may be used in place of all these like Outstanding Expenses a/c or Creditors for Expenses a/c.

   Creditors for expenses

   By Creditors we generally mean the persons or organisations to whom the organisation owes on account of credit purchase of stock or goods. Where the organisation uses the account head by name Creditors, the persons to whom the organisation owes on account of outstanding expenses are identified as Creditors for Expenses so as not to mix up both kinds of creditors.

2. Expenses Prepaid (≡ Debtors)

   The amount of expenses that have not yet been incurred but have been paid out in advance.

   A distinct ledger account may be used for each expenditure like Prepaid Salaries a/c, Rent prepaid a/c, Interest paid in advance a/c etc. or a single account may be used in place of all these like Prepaid Expenses a/c or Expenses paid in Advance a/c.

3. Incomes Receivable (≡ Debtors)

   The amount of incomes (revenue) that have accumulated and have not yet been received.

   A distinct ledger account may be used for each income like Interest Receivable a/c, Commission Due a/c, etc. or a single account may be used in place of all these like Incomes Receivable a/c.

4. Incomes Pre-received (≡ Creditors)

   Incomes that have not yet accumulated but have been received in advance.

   A distinct ledger account may be used for each income like Interest received in advance a/c, Commission Pre received a/c, etc. or a single account may be used in place of all these like Pre-received Incomes a/c or Incomes received in advance a/c.

To convert the accounting system from cash basis to accrual basis, we need to identify the values attributable to expenses outstanding, expenses prepaid, incomes receivable and incomes pre-received and bring them into the books of accounts thereby making the adjustments to be incorporated for past period transactions.

Conversion would be from the date on which these transactions are recordFrom thereon, the incomes and expenses have to be recorded on accrual basis.

The ledger accounts to be brought into the books of accounts are personal accounts and are an equivalent of either debtors or creditors.

Undisclosed Assets

Bringing the ledger accounts equivalent to debtors would amount to bringing in an undisclosed asset into the books, which would result in a gain.

Undisclosed Liabilities

Brining the ledger accounts equivalent to creditors would amount to brining in an undisclosed liabilities into the books, which would result in a loss.

A ledger account by name Profit and Loss Adjustment a/c is used to record these gains or losses.

Journal Entries

Journal in the books of M/s _____ for the period from _____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Profit & Loss Adjustment a/c To Expenses Outstanding a/c	Dr	26,000	26,000
[For brining the expenses outstanding to be paid into the books of accounts.]
Expenses Prepaid a/c To Profit & Loss Adjustment a/c	Dr	16,400	16,400
[For brining the expenses paid in advance into the books of accounts.]
Profit & Loss Adjustment a/c To Incomes Pre-received a/c	Dr	11,100	11,100
[For brining in the amount of incomes received in advance into books of accounts.]
Incomes Receivable a/c To Profit & Loss Adjustment a/c	Dr	5,200	5,200
[For brining the incomes receivable into the books of accounts.]

Ledger Accounts

Expenses Outstanding a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Balance c/d	26,000	31/12/_5	By P/L Adjustment a/c	26,000
		26,000			26,000
			31/12/_5	By Balance b/d	26,000

Expenses Prepaid a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To P/L Adjustment a/c	16,400	31/12/_5	By Balance c/d	16,400
		16,400			16,400
31/12/_5	To Balance b/d	16,400

Incomes Pre-received a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Balance c/d	11,100	31/12/_5	By P/L Adjustment a/c	11,100
		11,100			11,100
			31/12/_5	By Balance b/d	11,100

Incomes receivable a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To P/L Adjustment a/c	5,200	31/12/_5	By Balance c/d	5,200
		5,200			5,200
31/12/_5	To Balance b/d	5,200

Profit & Loss Adjustment a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5 31/12/_5	To Outstanding Expenses To Pre-received Incomes	26,000 11,100	31/12/_5 31/12/_5	By Prepaid Expenses By Income receivable By P/L Appropriation a/c	16,400 5,200 15,500
		37,100			37,100

The overall gain or loss revealed by the P/L Adjustment a/c is transferred to the P/L Appropriation a/c or the Capital a/c, depending on where the accumulated profits of the previous periods have been transferred.

These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that have not been taken into consideration in the previous periods on account of not having received the cash relating to the same.

To convert the accounting system from accrual/mercantile basis to cash basis from a particular point of time, one needs to identify the ledger accounts representing expenses outstanding, expenses prepaid, incomes receivable and incomes pre-received and write them off from the books of accounts thereby incorporating the adjustments to be made for past period transactions.

Conversion would be from the date on which these transactions are recordFrom thereon, the incomes and expenses have to be recorded on cash basis.

The ledger accounts to be brought into the books of accounts are personal accounts and are an equivalent of either debtors or creditors.

From thereon, the incomes and expenses have to be recorded on cash basis.

Writing off Assets

Writing off the ledger accounts equivalent to debtors would amount to writing off an existing asset in the books, which would result in a loss.

Writing off Liabilities

Writing off the ledger accounts equivalent to creditors would amount to writing off an existing liability in the books, which would result in a gain.

A ledger account by name Profit and Loss Adjustment a/c is used to record these gains or losses.

Journal Entries

Journal in the books of M/s _____ for the period from _____ to _____

Particulars		Amount (Dr)	Amount (Cr)
Expenses Outstanding a/c To Profit & Loss Adjustment a/c	Dr	31,650	31,650
[For writing off the expenses outstanding from the books of accounts.]
Profit & Loss Adjustment a/c To Expenses Prepaid a/c	Dr	18,700	18,700
[For writing off the expenses paid in advance from the books of accounts.]
Incomes Pre-received a/c To Profit & Loss Adjustment a/c	Dr	13,650	13,650
[For writing off the amount of incomes received in advance from books of accounts.]
Profit & Loss Adjustment a/c To Incomes Receivable a/c	Dr	8,750	8,750
[For writing off the incomes receivable from the books of accounts.]

Ledger Accounts

Expenses Outstanding a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To P/L Adjustment a/c	31,650	31/12/_5	By Balance b/d	31,650
		31,650			31,650

Expenses Prepaid a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Balance b/d	18,700	31/12/_5	By P/L Adjustment a/c	18,700
		18,700			18,700

Incomes Pre-received a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To P/L Adjustment a/c	13,650	31/12/_5	By Balance b/d	13,650
		13,650			13,650

Incomes receivable a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Balance b/d	8,750	31/12/_5	By P/L Adjustment a/c	8,750
		8,750			8,750

Profit & Loss Adjustment a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5 31/12/_5 31/12/_5	To Prepaid Expenses To Incomes receivable To P/L Appropriation a/c	18,700 8,750 17,850	31/12/_5 31/12/_5	By Outstanding Expenses By Pre-received Incomes	31,650 13,650
		45,300			45,300

The overall gain or loss revealed by the P/L Adjustment a/c is transferred to the P/L Appropriation a/c or the Capital a/c, depending on where the accumulated profits of the previous periods have been transferred.

These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that have been taken into consideration in the previous periods on account of not having received the cash relating to the same.