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Changing from Accrual to Modified Cash Accounting

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Changing from Accrual to Modified Cash Accounting

Contents

About Changing from Accrual to Modified Cash Accounting

Adjusting GST/Vat and Sales Tax

Adjusting Accounts Receivable

Adjusting Receive Payments

Adjusting Accounts Payable

Adjusting Payments to Accounts Payable

Contacting LexisNexis PCLaw Technical Support

About Changing from Accrual to Modified Cash Accounting

Changing the accounting method at the start of the fiscal year involves the fewest procedures. Additional procedures are required if there are closed months in the current fiscal year, if the firm implements taxes, uses the Accounts Payable module, or has payment activity in open months of the current fiscal year. This document lists all procedures involved for changing the accounting method. Each procedure is listed below with a check box so you can mark only the procedures you need to do. The procedures are then described in detail under their own topic heading in the order that they are to be performed.

If there are closed months in the current fiscal year, re-opening the months reduces the number of

To do Done Procedure

Adjusting GST/VAT and Sales Tax (if applicable)

F F Are there closed months in the current fiscal year? Adjusting Accounts Receivable

F F Is there an A/R balance at the end of the previous fiscal year?

F F Is there billing activity in closed months of the current fiscal year? Adjusting Receive Payments

F F Are there payments in closed months in the current fiscal year?

F F Are there payments in open months of the current fiscal year? Adjusting Accounts Payable

F F Is there an A/P balance at the end of the previous fiscal year?

F F Is there A/P activity in closed months in the current fiscal year? Adjusting Payments to Accounts Payable

F F Are there payments to payables in closed months of the current fiscal year?

F F Are there payments to payables in open months of the current fiscal year?

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Description of Accounting Methods

Accrual and Modified Cash systems differ in the way taxes, accounts receivables, receive payments and accounts payable are handled.

Accrual systems post billed fees to Accounts Receivable (1200), taxes to their respective payable accounts, and uses General Liabilities (2000) for accounts payable.

Modified Cash systems do not have an A/R account, therefore fees do not affect the G/L, disbursements remain in Client Disb Recov (1210), and taxes are not allocated to their respective payable accounts until payment is received. Accounts payable is allocated directly to an expense account, but not until the payable is processed.

An equity account, (3500), is used in many of the following procedures. In a partnership, this account is called Income for Alloc. For a corporation, it is Retained Earnings. For simplicity, this document refers to the account as Income for Alloc (3500).

Adjusting GST/VAT and Sales Tax

This section is only applicable for firms using GST, VAT and/or sales tax.

Is there GST/VAT/sales tax activity in the previous fiscal year?

Tax from the previous fiscal year is included in “Adjusting Accounts Receivable” on page 3. A separate adjusting entry is not required.

Are there closed months in the current fiscal year?

If GST, VAT, or sales have been charged during a month that is now closed, run a Billing (Fees) Journal for the period and create an adjusting entry to zero the balance of the tax payable accounts.

This step can be performed separately or be included with “Adjusting Accounts Receivable” on page 3.

Producing a Billing (Fees) Journal

GST/VAT and sales tax can be separated on the Billing (Fees) Journal. 1. Leave the Matter, Client, Resp Lawyer and Invoice boxes blank.

2. Select the Start Date for the first day of the first closed month in the current fiscal year.

3. Select the End Date for the date of the last day of the last closed month in the current fiscal year. 4. Check Firm Totals Only.

5. Select from the Layout drop down list, Default with (tax details). 6. Click OK to produce the Billing (Fees) Journal, displaying tax detail.

Account Nickname Account Type Accrual Modified Cash

1200 Asset Accounts Receivable Does not exist 1210 Asset Client Disb Recov Client Disb Recov 2000 Liability General Liabilities Does not exist

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G/L Adjusting Entry

Create a general journal entry to zero out the balance of GST/VAT and sales tax accounts:

Exhibit 1. The Billing Fees Journal for adjusting accounts receivables 1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation. 3. Debit GST/VAT Payable (2400) for total GST/VAT billed.

4. Debt Sales Tax Payable (2450) for total sales tax billed. 5. Credit Accounts Receivables (1200) for total tax payable. 6. Click OK to proceed to a confirmation prompt:

7. Click Yes to post the adjusting entry.

Is there GST/VAT/sales tax activity in open months of the current fiscal year?

An adjusting entry is not required.

Adjusting Accounts Receivable

This step is necessary if an accounts receivable balance exists at the end of the previous fiscal year, or if there was billing activity within months that are now closed in the current fiscal year. Run a Billing (Fees) Journal to attain the A/R balance. Create adjusting entries to transfer the balance of Accounts Receivable (1200).

Is there an A/R balance at the end of the previous fiscal year?

Adjusting entries are required for billed fees, disbursements, and taxes (if applicable) that were unpaid at the end of the previous fiscal year.

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Producing a Billing (Fees) Journal

The Billing (Fees) Journal provides the value of outstanding fees, disbursements, and taxes for a specific period.

Exhibit 2. Billing Fees Journal for adjusting accounts receivable

1. Leave the Matter, Client, Resp Lawyer and Invoice boxes blank. 2. Accept the Start Date of 1/1/82.

3. Select the End Date for the last day of the previous fiscal year. 4. Check Firm Totals Only.

5. Check Include Paid Invoices.

6. Uncheck Show Balances as of End Date. 7. Click OK to produce the Billing (Fees) Journal.

8. Refer to the Total column for the balance of outstanding fees, disbursements and taxes.

G/L Adjusting Entry

Fees billed during the previous fiscal year that are still outstanding are adjusted to Income for Alloc (3500). A partnership can also have fees allocated to the lawyer’s individual retained earnings accounts. Disbursements are adjusted to Client Disb Recov (1210).

Taxes, if applicable, are adjusted to Income for Alloc (3500). Outstanding taxes are remitted at the end of the prior fiscal year, and so no further adjustments are required.

Pull-down menu: Reports > Journal > Billing (Fees)

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Create a general journal entry to transfer the balance from Accounts Receivable (1200) to Income for Alloc (3500) and Client Disb Recov (1210).

Exhibit 3. The Create G/L Adjustment window for adjusting accounts receivable 1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation.

3. Debit Income for Alloc (3500) for the value of outstanding billed fees, disbursements and taxes. 4. Credit Accounts Receivable (1200) for the value of outstanding billed fees, disbursements, and taxes. 5. Click OK to proceed to a confirmation prompt:

Click Yes to post the adjusting entry.

Is there billing activity in closed months of the current fiscal year?

If there is billing within closed months of the current fiscal year, transfer the value of billed fees and disbursements to Accounts Receivables (1200) If taxes were adjusted in “Adjusting GST/VAT and Sales Tax” on page 2, they do not need to be adjusted in this step.

Producing a Billing (Fees) Journal

The Billing (Fees) Journal provides the balance of billed fees, disbursements, and taxes. 1. Leave the Matter, Client, Resp Lawyer and Invoice boxes blank.

2. Select the Start Date for the first day of the current fiscal year.

3. Select the End Date for the last day of the last closed month in the current fiscal year. 4. Check Firm Totals Only.

5. Check Include Paid Invoices.

6. Uncheck Show Balances as of End Date. 7. Click OK to produce the Billing (Fees) Journal.

8. Refer to the Billed column for the value of billed fees, disbursements and taxes. Pull-down menu: Reports > Journal > Billing (Fees)

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G/L Adjusting Entry

Create a general journal entry to debit fees, disbursements, and taxes and credit A/R.

Exhibit 4. The Create G/L Adjustment window for adjusting Accounts Receivable in the current fiscal year 1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation. 3. Debit Fees Earned (4000) for total fees billed in all closed months of the current fiscal year.

Note: A partnership may also have individual fee accounts. These accounts can be substituted for (4000), or the balance of (4000) can be reallocated at a later date.

4. Debit Client Disb Recov (1210) for the value of disbursements billed in all closed months of the current fiscal year.

5. If applicable: Debit Sales Tax Payable (2450) and/or GST/VAT Payable (2400) for taxes billed in all closed months of the current fiscal year.

6. Credit Accounts Receivable (1200

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for the total of fees, disbursements, and taxes billed in the closed months of the current fiscal year.

7. Click OK to proceed to a confirmation prompt:

Click Yes to post the adjusting entry.

Is there billing activity in open months of the current fiscal year?

An adjusting entry is not required.

Adjusting Receive Payments

If there are payments in the current fiscal year, run a Payment Allocation Listing to show how the payments are applied. Payments may be applied to invoices created in the current or prior fiscal year. Payments made in both closed and open months of the current fiscal year need to be adjusted.

Are there payments in the previous fiscal year?

An adjusting entry is not required.

Pull-down menu: G/L > General Journal > G/L Adjustment

Warning: Do not refer to the Paid column of the Billing (Fees) Journal for the value of payments made by clients. The Billing (Fees) Journal value includes only payments made to invoices created with the date range of the produced report.

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Are there payments in closed months of the current fiscal year?

Payments occurring in any closed month of the current fiscal need to be adjusted. The payments may apply to invoices created in the current or prior fiscal year.

Producing a Payment Allocation Listing

The Payment Allocation Listing presents a record of payments within a specified period.

Exhibit 5. The Payment Allocation Listing for adjusting receive payments 1. Leave the Matter, Client, and Resp Lawyer boxes blank. 2. Select the Start Date for the first day of the current fiscal year.

3. Select the End Date for the last day of the last closed month for the current fiscal year. 4. Check Totals Only.

5. Click OK to produce the Payment Allocation Listing.

6. Refer to the Total Payments and Adjustments line for Fee Tot, Disb, and Tax.

G/L Adjusting Entry

Create a general journal entry to debit Accounts Receivable (1200) and credit fees, disbursements, and taxes.

Pull-down menu: Reports > Accounts Receivables > Payment Allocation Listing

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1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation.

3. Debit Accounts Receivable (1200) for the total value of payments in all closed months of the current fiscal year.

4. Credit Fees Earned (4000) for the total of payments applied to fees in all closed months of the current fiscal year.

Tip: A partnership may also have individual fee accounts. These accounts can be substituted for (4000) or the balance of (4000) can be reallocated at a later date.

5. Credit Client Disb Recov (1210) for the total of payments applied to disbursements in all closed months of the current fiscal year.

6. If applicable: Credit Sales Tax Payable (2450) and/or GST/Vat Payable (2400) for payments applied to taxes in all closed months of the current fiscal year.

7. Click OK to proceed to a confirmation prompt:

Click Yes to post the adjusting entry.

Are there payments in open months of the current fiscal year?

Payments received in an open month need to be adjusted on the last day of that month. A separate adjusting entry should be made for each open month for which there are payments.

Producing a Payment Allocation Listing

The Payment Allocation Listing provides a record of payments for a specific period. 1. Leave the Matter, Client, and Resp Lawyer boxes blank.

2. Select the Start Date for the first day of the first open month. 3. Select the End Date for the last day of the first open month. 4. Check Totals Only.

5. Click OK to produce the Payment Allocation Listing.

6. Repeat this procedure for each open month where payments were received. 7. Refer to the Total Payments and Adjustments line for Fee Tot, Disb, and Tax.

G/L Adjusting Entries

Create a general journal entry to reallocate payments. Make a separate entry for each open month, dated on the last day of the particular month.

1. Select the Date for the last day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation. 3. Debit Accounts Receivable (1200) for the value of payments in the month.

4. Credit Client Disb Recov (1210) for the value of payments applied to disbursements in the month. 5. Credit Fees Earned (4000) for the value of payments applied to fees in the month.

Tip: A partnership may also have individual fee accounts. These accounts can be substituted for (4000) or the balance of (4000) can be reallocated at a later date.

Pull-down menu: Reports > Accounts Receivables > Payment Allocation Listing

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6. If applicable: Credit Sales Tax Payable (2450) and/or GST/Vat Payable (2400) for the value of payments applied to taxes in the month.

7. Click OK to proceed to a confirmation prompt. 8. Click Yes to post the adjusting entry.

9. Repeat this procedure for each subsequent open month where there are payments. Substitute the date of the last day of the particular month.

Adjusting Outstanding Accounts Payable

This step is for firms using accounts payable.

In Accrual systems, a liability is incurred through accounts payable as soon as the payable is created. The liability is continued until the payable is processed. Modified Cash allocates a payable directly to an expense account but not until the payable is processed. The balance of an expensed payable is not carried over to the next year.

Is there an A/P balance at the end of the previous fiscal year?

Payables still outstanding at the end of the previous fiscal year need to be adjusted to equity so the expense is not carried over to the current year.

Producing a Payable Listing Report

The Payable Listing provides a record of payables for a specific period.

Exhibit 7. The Payable Listing window for adjusting accounts payable 1. Leave the Vendor and Invoice boxes blank.

2. Accept the Invoice Date > Start Date default of 1/1/82.

3. Select the Invoice Date > End Date for the last day of the previous fiscal year. 4. Accept the Due Date > Start Date default of 1/1/82.

5. Accept the Due Date > End Date default of 12/31/2199.

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11. Refer to the breakdown of expenses in the AP Allocations Summary section of the report.

G/L Adjusting Entry

Create a general journal entry to debit General Liabilities (2000) and credit the individual expense accounts.

Exhibit 8. The Create G/L Adjustment window for adjusting Accounts Payable 1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation.

3. Debit General Liabilities (2000) for the Allocation Totals value displayed on the Payable Listing - AP Allocation Summary.

4. Credit the individual expense accounts as shown for the Allocation Totals on the Payable Listing - AP Allocations Summary.

5. Click OK to proceed to a confirmation prompt:

6. Click Yes to post the adjusting entry.

Is there A/P activity in closed months of the current fiscal year?

Payables created in closed months of the current fiscal year need to be adjusted to their respective expense accounts.

Producing a Payable Listing

The Payable Listing provides a record of payables for a specified period. 1. Leave the Vendor and Invoice boxes blank.

2. Select the Invoice Date > Start Date for the first day of the first closed month. 3. Select the Invoice Date > End Date for the last day of the last closed month. 4. Accept the Due Date > Start Date default of 1/1/82.

5. Accept the Due Date > End Date default of 12/31/2199.

Pull-down menu: G/L > General Journal > G/L Adjustment

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6. Select in the Include Invoices area, Both. 7. Select the Include Vendors area, Both. 8. Uncheck Detailed Report.

9. Click OK to produce the Payable Listing.

10. Refer to the breakdown of expenses in the AP Allocations Summary section of the report.

G/L Adjusting Entry

Create a general journal entry to debit General Liabilities (2000) and credit the individual expense accounts.

1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an expanded explanation

3. Debit General Liabilities (2000) for the Allocation Totals value displayed in the AP Allocation Summary.

4. Credit the individual expense accounts as shown in the AP Allocations Summary. 5. Click OK to proceed to a confirmation prompt.

6. Click Yes to post the adjusting entry.

Is there A/P activity in open months of the current fiscal year?

An adjusting entry is not required.

Adjusting Payments to Accounts Payable

These procedures are for firms using accounts payable.

In Modified Cash systems, payables are allocated to the respective expense accounts when the payable is processed.

In Accrual systems, General Liabilities (2000) is decreased when payment is received.

Since Accrual systems post payments against General Liabilities (2000), it is not possible to determine the specific expense account the payment is applied to unless individual payables are referenced in the Purchases Journal.

Are there payments to payables in the previous fiscal year?

An adjusting entry is not required.

Are there payments to payables in closed months in the current fiscal year?

Payments occurring in any closed month of the current fiscal need to be adjusted. The payments may apply to payables created in the current or prior fiscal year.

Pull-down menu: G/L > General Journal > G/L Adjustment

Warning: Do not refer to the Paid column of the Payable Listing created in “Adjusting Outstanding Accounts Payable” on page 9. These values include only payments made to payables that match the date range of the report.

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Producing a Payment Listing Report

The Payment Listing provides a record of payments within a specified period.

Exhibit 9. The Payment Listing for adjusting payments to accounts payable 1. Leave the Vendor and G/L Account boxes blank. 2. Select in the Include Vendors area, Both.

3. Accept the Invoice Date > Start Date default of 1/1/82. 4. Select the End Date for the last day of the last closed month.

5. Select the Payment Date > Start Date for the first day of the current fiscal year. 6. Select the Payment Date > End Date for the last day of the last closed month. 7. Check Include Unpaid Invoices.

8. Click OK to produce the Payment Listing.

9. Refer to the G/L Account Summary for the value of payments made in all closed months of the current fiscal year.

G/L Adjusting Entry

Create a general journal entry to debit a generic or individual expense account and credit General Liabilities (2000) for the value of the payments.

Pull-down menu: Reports > Accounts Payable > Payment Listing

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1. Select the Date for the first day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation code. 3. Debit an expense account(s) for the payment value as displayed on the Payment Listing. 4. Credit General Liabilities (2000) for the payment value as displayed on the Payment Listing. 5. Click OK to proceed to a confirmation prompt:

Click Yes to post the adjusting entry.

Are there payments to payables in open months of the current fiscal year?

Payments made to payables in an open month need to be adjusted on the last day of that month. Make an adjusting entry for each month where payables were processed.

Producing a Payment Listing

Run a Payment Listing for each open month where payables were processed. 1. Leave the Vendor and G/L Account boxes blank.

2. Accept the Invoice Date > Start Date default of 1/1/82.

3. Select the Invoice Date > End Date for the last day of the first open month. 4. Select the Payment Date > Start Date for the first day of the first open month. 5. Select the Payment Date > End Date for the last day of the first open month. 6. Check Include Unpaid Invoices.

7. Click OK to produce the Payment Listing.

8. Repeat this procedure for all open months where payables were processed.

9. Refer to the G/L Account Summary for the value of payments made in each open month of the current fiscal year.

G/L Adjusting Entries

Create general journal entries to debit a generic or individual expense account and credit General Liabilities (2000) for the value of the payments. Make a separate entry for each month, on the last day of that month.

1. Select the Date for the last day of the first open month.

2. Select in the Explanation box, an explanation code or type an extended explanation. 3. Debit a generic expense account(s) for the value of payable payments made in the month. 4. Credit General Liabilities (2000) for the value of payable payments made in the month.

Pull-down menu: Reports > Accounts Payable > Payment Listing

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Contacting LexisNexis PCLaw Technical Support

Contact LexisNexis PCLaw Technical Support to change the accounting method within PCLaw. A Technical Support Representative is required to perform this change.

1. Click the Tech Support button to display the Technical Support window. 2. Call the technical support number for your location.

Note to support personnel: Refer to Technical Support Appendix Accrual to Modified to Cash. Pull-down menu Help > About LexisNexis Back Office Powered by PCLaw

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