Adjusting Year-End Receivables

If you prepare your financial statements using the accrual method, but maintain your books on a daily basis using the cash method, you normally do not make entries to your accounts receivable general ledger account during the accounting period. At the end of your accounting period, you need to make an adjusting entry in your general journal to bring your accounts receivable balance up-to-date.


As an example, assume that you keep your books on the cash basis, but your financial reporting and tax return are done on the accrual basis. You add up your accounts receivable ledgers and find that your total receivables are $16,500 on December 31, 2001. Your accounts receivable balance on December 31, 2000, which is currently shown in your general ledger, was $13,950. You need to make the following adjusting entries to update your year-end accounts receivable balance:


Debit Credit
Sales 13,950
Accounts receivable
To clear out 1/1/2001 accounts receivable balance


Debit Credit
Accounts receivable 16,500
Reserve for income tax
To set up 12/31/2001 accounts receivable balance