Firstly, I would like to say Happy New Year to the ProTaxCommunity! Also, I would like to thank all the more experienced accountants who take time/energy out of the day to answer questions. We truly appreciate you and all the knowledge you have shared.
Speaking with a new corporate prospect. I asked for the previous year’s T2 and preliminary questions.
Prospect informed me no bookkeeping was done in previous years. Handed over bank statements at year-end and the accountant did the rest. QuickBooks desktop was used for invoicing but that’s it - no bookkeeping.
Looked at S100 (Balance sheet) and saw $0 in accounts receivable and accounts payable. Starting to think the old accountant used the cash basis of accounting. I have never seen this for before and read on that it is allowable If you are a farmer, fisher, or self-employed commissioned sales agent, which the prospect is not.
What I have seen in the past is sales on accrual and expense on a cash basis. The rationale behind the cash basis on expenses was that expenses are paid the day incurred or a day or two after and it saves time from needing to enter the bill and matching payment rather than just entering payment. However, with that method, I did see year-end accruals so accounts payable was accurate at year-end.
Informed the prospect Quickbooks Online may be better for bookkeeping than desktop because of automatically importing transactions from the business bank account and credit card among other things.
Also, I told the prospect that the bookkeeping should be done correctly and that sales/expenses should be entered in the bookkeeping software not just using for invoicing. Prospect is on board to do everything the right way now.
Does anyone have experience with this or transitioning a taxpayer from a cash basis to accrual and what was your strategy/approach?