Prepare a bridge from your cash-basis reports to an accrual-oriented view for the review period. Start with bank-reconciled revenue and expense reports, then add schedules for unpaid customer invoices, unpaid vendor bills, customer deposits, deferred or unearned revenue, prepaid expenses, payroll and commissions, inventory or work in progress, fixed assets, debt, and cutoff items around each period end. Tie every schedule to the general ledger, bank statements, contracts, invoices, bills, and subsequent receipts or payments. Label estimates and unusual items, explain one-time timing differences, and keep tax-method questions separate from buyer analysis. A buyer may need a normalized view of when activity was earned or incurred, but that request does not by itself require you to change your filed accounting method. Ask your CPA or transaction adviser before making a formal method change.
What the buyer is trying to understand
Cash-basis books record many events when money moves. A buyer reviewing recurring earnings, working capital, or cash conversion may instead ask when the underlying sale was delivered, the service was performed, or the cost was incurred. The purpose is usually to understand the operating period behind the cash movement, not to criticize the bookkeeping system.
The IRS describes the cash method generally as recognizing income when actually or constructively received and deducting expenses when paid. Under an accrual method, income is generally reported when earned and expenses when incurred or capitalized, with the objective of matching income and expenses to the correct period [1]. That distinction explains why a cash-basis profit report can look unusually strong or weak near a month, quarter, or year end.
Set the review objective before building schedules. A buyer may want a monthly earnings bridge, a working-capital estimate, a quality-of-earnings support file, or only an explanation of year-end movements. Confirm the period, materiality threshold, accounting framework, and requested format with the buyer or the buyer's adviser. Do not assume that a request for an accrual analysis means the seller has agreed to restate historical financial statements.
Build a clean cash-basis starting point
Begin with the reports that were actually used to manage the business. Preserve the original cash-basis income statement, balance sheet if available, general ledger, chart of accounts, bank statements, credit-card statements, payroll reports, sales-tax or similar filing support where relevant, and reconciliation workpapers. Record the report dates and the accounting period covered. A buyer should be able to trace the starting totals to source records without relying on an unexplained spreadsheet adjustment.
Reconcile bank and payment-platform balances through each period end, identify transfers between accounts, and separate owner distributions, personal items, financing proceeds, and capital purchases from ordinary operating activity. Mark entries that were posted after period close but relate to the earlier period. If the books contain manual journal entries or year-end accountant adjustments, list them separately rather than blending them into recurring operations.
Create an exceptions log for missing invoices, duplicate payments, uncleared checks, disputed balances, unusual credits, and transactions that changed classification. The log is useful even when an item is ultimately immaterial. It gives the reviewer a controlled explanation and makes it easier to apply the same treatment across periods.
Prepare a revenue and receivables schedule
A cash report may omit revenue that was earned before payment or include receipts for work that will be performed later. Prepare a customer-level or contract-level schedule showing invoice or contract reference, service or delivery date, invoice date, amount, cash-receipt date, amount still owed, credits, refunds, and the status of the underlying obligation. Tie the schedule to sales reports and the subsequent cash receipts ledger.
For open receivables, distinguish an earned amount that is unpaid from a deposit, retainer, refundable amount, or milestone payment for future work. Explain collection history, disputes, credit memos, and balances that are unlikely to convert to cash. Do not call every outstanding invoice recurring revenue. The reviewer needs to know whether the amount represents completed work, an enforceable claim, or an advance for future performance.
Use a cutoff schedule around each reporting date. List the last and first invoices, shipments, service completions, milestone acceptances, credit notes, and receipts on both sides of the cutoff. If a customer pays early, show the payment separately from the period in which the related work is expected to be performed. The SEC's revenue-recognition guidance for registrants illustrates why delivery or performance, arrangement terms, price, and collectibility can matter before revenue is recognized, and why a customer deposit can remain a liability before delivery [3]. The exact accounting conclusion depends on the facts and applicable framework.
Prepare payables, accrued costs, and payroll schedules
Cash-basis expenses can be understated when a bill arrives after the period end or when a service was received before payment. Build an unpaid-vendor-bill schedule with vendor, invoice date, service or delivery period, due date, amount, payment date, expense category, and supporting bill or contract. Include goods received but not yet invoiced when the evidence is reliable, and label the amount as an estimate if an invoice or contract is not yet available.
Add schedules for payroll earned but paid later, bonuses, commissions, paid time off where relevant, benefits, professional fees, rent, utilities, insurance, freight, warranty costs, and other recurring obligations that cross the cutoff. Separate a normal timing accrual from a one-time estimate or a cost that belongs to a different owner, project, or period. Tie subsequent payments to the schedule and investigate differences rather than forcing the payment amount to equal the earlier estimate.
The goal is not to create a false level of precision. A transparent range or an identified unresolved item is more useful than a precise number unsupported by a contract, invoice, payroll record, or consistent historical pattern. Ask a qualified accountant how the schedule should be treated under the applicable tax, statutory, or financial-reporting rules.
Separate deferred revenue, prepaids, inventory, and work in progress
Cash receipts often contain several economic periods. For each customer deposit, prepaid subscription, retainer, maintenance plan, project milestone, or gift-card-like obligation, document the cash date, contract terms, promised deliverable, amount earned by the reporting date, amount remaining, expected recognition pattern, refunds, and cancellation terms. The schedule should make clear whether the balance is revenue already earned, a liability for future work, or an amount requiring further review.
Do the same for prepaid expenses. List the payment date, vendor, coverage period, original amount, portion relating to the review period, remaining balance, and evidence of the benefit. For construction, project, and professional-services businesses, include job-level work in progress, approved change orders, billings, costs incurred, retainage, customer advances, and estimated completion status where those records exist. Do not invent percentage-of-completion calculations from incomplete job files.
Inventory and equipment deserve separate treatment because a cash payment may be a balance-sheet investment rather than a period expense. Provide purchase records, quantity or asset registers, ownership details, disposals, and the basis used in the existing books. The buyer's analysis may require an adjustment, but the adjustment should be traceable and reviewed by an appropriate accountant.
Create a cutoff and working-capital bridge
Combine the schedules into a bridge that starts with reported cash-basis revenue and expenses and shows each proposed timing adjustment by month and account. Typical columns are reported amount, accrual-oriented adjustment, adjusted amount, source document, explanation, reviewer status, and whether the item is recurring. Keep additions and deductions mathematically consistent, and prevent the same invoice, bill, deposit, or payment from appearing in more than one schedule.
For working capital, define each included account instead of copying a generic checklist. A buyer may ask for trade receivables, trade payables, customer deposits, inventory, accrued operating costs, or prepaid expenses. Owner-related balances, taxes, debt, capital expenditures, and unusual claims may be analyzed separately. The proper classification can depend on the transaction agreement, business model, accounting framework, and negotiated definition, so label it as a transaction-specific analytical choice rather than a universal rule.
Reconcile the bridge to the next available period. Subsequent collections and payments can support existence and cutoff, but they do not automatically prove that every amount belongs in the earlier period. Retain the underlying contract or invoice and explain any difference between the scheduled amount and the later settlement.
Keep tax method changes separate from buyer analysis
A diligence schedule is an analytical reconstruction. A formal change in tax accounting method is a separate professional decision. IRS guidance says an established method generally must be used consistently, and a change from cash to accrual is generally a change in accounting method that may require approval or a prescribed procedure [1]. The IRS also explains that a method change can require an IRC 481(a) adjustment to prevent duplication or omission of income and deductions [2]. These are reasons to involve a CPA or tax adviser before changing returns, not reasons to avoid preparing a buyer-facing bridge.
Do not backdate entries, alter filed returns, or relabel the books as accrual-basis merely to satisfy a review request. Keep a version of the original reports, a clearly labeled analytical schedule, and a record of who prepared and reviewed each adjustment. If the buyer requests a formal restatement, ask which accounting framework, period, materiality rule, and adviser instructions apply before proceeding.
The same caution applies to legal conclusions. A schedule can identify a potential obligation or timing issue, but it cannot determine contract rights, tax liability, purchase-price treatment, or the final working-capital peg for every transaction. Those questions should go to the relevant qualified advisers.
Use a controlled review workflow
Assign an owner for each schedule, a human reviewer with authority to approve the treatment, and a source-of-truth location for contracts, invoices, bills, payroll records, bank data, and the general ledger. Use a status such as not started, prepared, evidence requested, reviewed, or unresolved. Record the reason for every adjustment and the stopping condition for follow-up, such as no reliable source after a defined request or an amount below the agreed materiality threshold.
If software or AI assists with extraction, limit it to a defined task such as finding invoice dates, matching payment references, or flagging duplicate identifiers. A human should verify the source document, period, amount, classification, and exception status before the result enters the bridge. Do not upload confidential deal or customer information to a tool without checking permissions, retention, access, and the applicable confidentiality arrangement. Stop the pilot if extraction errors cannot be detected reliably, source links are lost, or reviewers cannot reproduce the result.
At the end, produce a tie-out pack: source report, schedules, bridge, exception log, review sign-off, unresolved questions, and a short explanation of the accounting basis used. This gives the buyer a usable path from cash records to the proposed accrual view without claiming that the seller's books have been formally converted.
What to hand over and what to preserve
A practical handover usually includes the period-end cash-basis reports, bank reconciliations, revenue and receivables schedule, payables and accrued-cost schedule, deferred-revenue and customer-deposit schedule, prepaid and inventory support, cutoff testing, working-capital bridge, exceptions log, and definitions for each proposed adjustment. Include read-only exports where possible and preserve the original files so later changes can be identified.
Before sharing, remove unrelated personal information, duplicate records, credentials, and documents outside the agreed scope. Use the transaction's approved data-room permissions and follow counsel's instructions for confidentiality. Keep a private internal copy of the review notes, assumptions, and unresolved items, while sharing only the version authorized for the buyer process.
Acquivo gives business owners the entire sell-side process an investment bank would run, as software, with no success fee. The software is user-operated, so the owner and chosen advisers remain responsible for source selection, permissions, review, and decisions. Acquivo is a software platform that delivers the entire sell-side M&A process, valuation, marketing materials, buyer matching, and deal management, on one platform for business owners, M&A attorneys, and boutique investment banks.
Key Points
- Start with bank-reconciled cash-basis reports and preserve the original reports before making analytical adjustments.
- Build separate schedules for receivables, payables, accrued costs, customer deposits, deferred revenue, prepaids, inventory, payroll, and cutoff items.
- Tie every adjustment to a contract, invoice, bill, payroll record, bank transaction, general-ledger entry, or clearly labeled estimate.
- A buyer-facing accrual bridge is not automatically a formal tax or statutory accounting-method change.
- Assign a human reviewer, source-of-truth records, permissions, and stopping conditions for any software or AI-assisted extraction.
Sources and references
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Educational information, not individual legal, tax, or investment advice. Consult qualified professionals for your circumstances. Acquivo provides software, not representation or negotiation on your behalf.