Accrual Balance Sheet Mixed With Cash Basis Income Statement

I have an interesting situation with a S-Corporate return prepared by an accountant. The company keeps its books in Quickbooks, and they do their
accounting and report taxes on a cash basis. The accountant is taking the position that Quickbooks' cash-basis balance sheet incorrectly shows entries for Accounts Receivable and Accounts Payable - which are strictly speaking Accrual concepts. So he is preparing the return as follows:
1) He takes the Accrual balance sheet from Quickbooks and enters that in Schedule L
2) He takes the cash basis income statement from Quickbooks and enters that in the income part of the return
3) He then reconciles the accrual to cash conversion of net income with a line in Schedule M-1
While it might be a purer way to do things, it does make it harder to verify the return, and requires some extra work for the company.
My questions are:
1) Does anyone see a problem with preparing the return this way?
2) Is there a strong reason to not just use the Quickbooks' cash-basis balance sheet, and just allow it to include the Accounts Payable and Accounts Receivable entries? It would certainly make it easier to read and verify the return against the books. And from what I understand the IRS doesn't pay much attention to Schedule L in any case, so probably the cash-basis balance sheet would pass.
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Sounds to me like it is essentially being done correctly. The M-1 adjustment you speak of is an Accrual to Cash Conversion entry and it does go on the M-1. Though it may not stop there, especially depending on the tax software being used.
Small companies frequently use one method for their books and a second method for taxes, there is nothing wrong with this at all. The Accrual to Cash Conversion entry should be pretty straight forward and should NOT make it any harder to verify the return. The M-1 is itself a BOOK TO TAX Reconciliation and you should be able to trace all the numbers directly there.
Personally, I usually expand on the Accrual to Cash Conversion -
1 - I start with income (that matches the balance sheet - if you're using an accrual balance sheet I would use an accrual income statement) and back out this year's A/R and add back last year's A/R; 2 - on the Tax Schedule for Other Deductions I back out this year's A/P and add back last year's A/P; 3 - on the M-1 I list all four numbers, current and prior year A/R and A/P - but only so the detail is there for the client to see.
Since this is an S corp. you may have some other issues to deal with like stock and or loan basis. Some tax programs also don't seem to correctly deal with the differences between Retained Earnings and the Accumulated Adjustments Account - these are NOT the same and often show different numbers (even if the entity has been an S Corp from day 1).
Hope this helps, Gene E. Utterback, EA, RFC, ABA
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Richard Di Bernardo, CPA had written this in response to http://www.rockryno.com/taxes/Re-Accrual-Balance-Sheet-Mixed-With-Cash-Basis-Income-State-23114-.htm :
Richard Di Bernardo, CPA ------------------------------------- Gene E. Utterback, EA, RFC, AB wrote:

I think that this procedure is inconsistent with IRC Sect 446(a):
446. General rule for methods of accounting
(a) General rule Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
Line 1 of M-1 reflects "net income per books." If this reflects the accrual method, then, according to the code, taxable income, likewise, must also be computed with the accrual method.
Accrual to cash adjustments should not be booked in the schedule M-1. These adjustments should be part of your "books." M-1 is "book to tax."
In this situation, I opine that the IRS can claim that the cash method is an improper method of accounting.
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You may opine all you like, using one method for tax and another for books is an accepted practice that is supported by the code. However, I do NOT have the citation in front of me and because of the date I am NOT going looking for it.
I can assure you though, that this IS an accepted practice. Once we get past 10/15 - and my doctor's appointments next week, I will try to remember to get back to the group with the relevant citations, but I cannot promise when I'll be able to do so.
Gene E. Utterback, EA, RFC, ABA
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guidocinelli had written this in response to http://www.rockryno.com/taxes/Re-Accrual-Balance-Sheet-Mixed-With-Cash-Basis-Income-State-23314-.htm :
------------------------------------- Richard Di Bernardo, CPA wrote:

http://www.rockryno.com/taxes/Re-Accrual-Balance-Sheet-Mixed-With-Cash-Basis-Income-State-23114-.htm
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