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 $427,000 of sales on account, and $66,800 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Question

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When switching from cash basis to accrual basis, there may be a difference in the timing of when revenue is recognized. To adjust for this difference, a §481 adjustment is necessary. In this case, the uncollected sales at the end of the year will need to be recognized as revenue in the current year, resulting in an increase in income. The adjustment is calculated as the difference between the accounts receivable at the end of the year and the accounts receivable at the beginning of the year. In this case, the adjustment is $66,800 - 0 = $66,800, which will increase income by this amount.

Todd Operates a Business Using the Cash Basis of Accounting