Final answer:
To convert expenses from cash basis to accrual basis, specific adjustments must be made to record expenses when they are incurred rather than when they are paid. The example calculation shows a cash basis accounting profit of $115,000, with revenues of $200,000 and explicit costs of $85,000.
Step-by-step explanation:
The equation for converting expenses from cash basis to accrual basis is not a single formula, rather it involves making specific adjustments to the expenses recorded on a cash basis. These adjustments are essential to recognize expenses in the period they are incurred, rather than when they are paid. An example of an adjustment would be to include expenses that have been incurred but not yet paid at the end of the accounting period, as well as to exclude expenses that have been paid but are actually related to future accounting periods.
Using the provided information for revenues and explicit costs, on a cash basis, the accounting profit is calculated as follows:
Revenues:
Explicit Costs:
Accounting Profit:
To convert this to an accrual basis, you would adjust the explicit costs to include any expenses incurred during the period but not yet paid and subtract any expenses paid that pertain to future periods. This might result in an increase or decrease in the reported expenses and, subsequently, the accounting profit on an accrual basis.