Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Question

Quizplus · Accepted Answer

The §481 adjustment is the difference between the income recognized under the new method and the old method. Todd collected $356,000 ($420,000 - $64,000) last year under the cash method. Under the accrual method, he would recognize the full $420,000. Therefore, the adjustment is $420,000 - $356,000 = $64,000. However, since $64,000 was uncollected, the adjustment is to increase income by the amount collected, which is $16,000.

Todd Operates a Business Using the Cash Basis of Accounting