Problem:
Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company's records on a cash basis. Mr. Pitt provides the following information:
1. A comprehensive insurance policy requires a payment every year for the upcoming year. The last payment of $12,000 was made on September 1,2012.
2. Mr. Pitt allows customers to pay using a credit card. At the end of the current year, various credit card companies owed Mr. Pitt $6,500. At the end of last year, customer credit card charges outstanding were $5,000.
3. Employees are paid once a month, on the 10th of the month following the work period. Cash disbursements to employees were $8,200 and $7,200 for Janueary 10, 2014, and Janueary 10, 2013, respectively.
4. Utility bills outstanding totaled $1,200 at the end of 2013 and $900 at the end of 2012.
5. A physical count of inventory is always taken at the end of the fiscal year. The merchandise on hand at the end of 2013 cost $35,000. At the end of 2012, inventory on hand cost $32,000.
6. At the end of 2012, he owed suppliers $4,000.00.
I am really struggling with accounting concepts and even how to just "do it". Can you help me Determine net income applying the accrual accounting method if Mr. Pitt's 2013 cash basis net income (including depreciation expense) is $26,000.
I would also like help understanding the effect on Mr. Pitt's balance sheet of converting from cash to accrual. That is, would assets, liabilities, and owner's equity be higher or lower and by what amounts?
I would appreciate ALL the help you can give me. I am still struggling with understanding "T" accounts, ledgers, and how to post entries, much less the difference in cash and accrual accounting.