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 $426,500 of sales on account, and $66,600 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Question

Quizplus · Accepted Answer

A §481 adjustment is required when a taxpayer changes from the cash method to the accrual method or vice versa. In Todd's case, he switched from the cash basis to the accrual method for sales on account. This means that he needs to make an adjustment for the accounts receivable that he had not yet collected at the end of the year.

The amount of the adjustment is the difference between the accounts receivable at the end of the year under the cash method and the accounts receivable under the accrual method. In this case, under the cash method there were no accounts receivable because Todd did not recognize revenue until he received the cash. Under the accrual method, however, he recognized revenue when he made the sale, regardless of whether he had received the cash.

Therefore, the §481 adjustment is the amount of accounts receivable that existed under the accrual method but not under the cash method, which is $66,600. This adjustment increases Todd's income by that same amount, which is answer choice B.

Todd Operates a Business Using the Cash Basis of Accounting