162: Testing ChatGPT's Explanation of How To Convert from Cash to Accrual Basis Accounting

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When I was working as an associate right out of school, I never imagined I could own these many practices with this amount of support. So thank you. You have helped build my marketing mind to a whole new level. You have this natural talent, this unique ability. Hello, everyone, and welcome to another episode of DSO Secrets. Here's the topic of the day. I've been playing around with ChatGPT. Oh, and by the way, it's cold tonight. I'm in the bonus room up above our garage where it's really cold. So I'm kind of bundled up and feeling very wintry. Somebody I work with would tell me, tell you right now that I look a little bit like a lumberjack. I'm going to take that as a compliment. So here's, here's what we're going to do. We're going to put Chat GPT to the test and see if it understands the difference between cash basis and accrual accounting. And we're going to see, we're going to ask it a how to question and say, how do we convert from cash basis to accrual? And we are going to put chat GPT to the test. My. And by the way, my spoiler alert here is, is it started out okay, but it got a lot better when I refined the search, but it's still not complete. So here's what I did right here. I went to Chat GPT and I said, all right, how do I switch from cash basis to accrual accounting? It starts out by responding. Switching from cash basis accounting to accrual accounting involves a significant change in the way you track and report financial transact. Yes, completely accurate. Here are the general steps to follow. Now as I go through these steps and then the next set of steps after I did one refining, asked one refining question, I'll be honest with you, it felt like I was listening to myself talk a little bit. This, this is fairly impressive in terms of the words it uses and the language it uses. It's not a complete solution, but we'll get to that. All right, so it says, first of all, assess the need for the switch. The decision should be based on the size and complexity of your business. As well as future goals. For example, if your business is growing rapidly, you may need more accurate financial reporting than that accrual accounting provides. Spot on. Also, if you need to have your financial statements audited because you're getting big. If you have a large lender loan covenants, all those sorts of things. Number two, it says, understand the differences between the two methods. In cash basis accounting, revenue and expenses are recorded when cash is received or paid. In accrual accounting, revenue and expenses are recorded when they are earned or incurred. Oh, music to my ears. Nailed it. Absolutely nailed it. Straight from an accounting textbook probably. Number three, adjust your chart of accounts. You're going to have to make some changes because there's some reclassifying that will occur. You're going to have to create possibly some contra revenue accounts. You're going to have to create some contrast AR accounts, maybe even an AR account account as well. On your balance sheet, you're going to have to create probably a deferred revenue or an unearned revenue bucket. On the liability side of your balance sheet, there's a few different things like that. So this is again spot on, but not, not in all the detail that we probably would need to succeed on our own. But it's got a great, just great set of information. Choose your conversion date. This is. I love this one. I don't know that I think about this very much because just intuitively I know that it should happen. But I don't say it that much because when you make the switch, you want to make the switch completely for your revenue, your expenses. So everything as of this date switches over. And the reason why is if you don't and you string it along and you're doing different things at different points in time, then all of a sudden your year over year comparisons get completely thrown out of whack and it's really hard to tell what's going on. If you know your date, then you always can work around your date and make sure your year over year comparisons are more accurate.

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All right, now make adjusting entries. This is completely true. You have to jump in and book accounts receivable up down, have things flow through the income statement. There's a number of things have to happen. Then it says update your financial statement so that it captures all these changes that you've made. Then you've got to train your staff, your bookkeeper, your accounting team. You got to get it, make sure everybody's up to speed on the accrual elements and the adjusting journal entries that have to be made and so forth. And then number eight it says and get help if you're not confident to do this on your own, go find a professional accountant or bookkeeper. I'd say make sure that they have done this before and make sure they know journal entries and they understand all these sorts of things. So now this was a nice generic touch, but then I thought, all right, I want to see how does it do when I ask it to make the conversion from cash to accrual for a dental practice? This was very interesting. So all I did was ask it, can you tailor this to a dental practice? And of course ChatGPT, in all of its polite and kind ways of talking to us, says certainly exclamation point. I love the emphasis. Here are some specific considerations for a dental practice looking to switch from cash to accrual. First one is assess the need for the switch like it said above. But now it layers in and says as a dental practice you may be growing and expanding your services. It didn't say that before this. I am really impressed with this AI that it changed from having a generic description of assessing the need to switch to accrual to getting into very specific dental language and things that are relevant in considering whether or not it's a good time for you to make the switch. So it talks about expanding services. The accrual method could be a better fit. Additionally, you can you may be looking to secure financing or investors which often require accrual based financial statements. I have said that a thousand times. Nathan Chitty, if he's listening, has said this a thousand times. That is the truth in dental. Number two, understand differences between the two methods in a dental practice. Again, it's tailoring here. Revenue is earned when services are rendered. It did not say this before guys. It gets right into the crux and the heart of the matter on revenue recognition, which is the key. 90% of your effort to convert to accrual is going to be in the way that you recognize revenue. So it hits it right there. Earned when services are rendered regardless of when payments received. And this means the accrual method may provide a more accurate picture of your financial performance. That feels like I've said that over and over before. Next, adjust your chart of accounts so it even goes in and says, for example, you may need to separate accounts for accounts receivable. Like I said before, prepaid expenses, unearned revenue and probably accounts payable and accrued, payroll, accrued pto, all of those fun things. That's the dental world. Next, choose a conversion date. This is a lot like up above it says, you know, pick one date and, and I'm an advocate for that for sure. Then it says make adjusting entries. You have to make these entries to record revenue and expenses that have not been recorded for your books. You may need to record accounts receivable for patients who have not yet paid for their services rendered. Nice AI touch. I like it. And this is update your financial statements. Then it goes into training your staff so that they know what's going on and they know how to function within the accrual method. And then the last one is get help if needed. I wish it said in here, hire a dental finance professional or dental finance leader. It didn't say that, but you guys get the point. Now is this complete and comprehensive? Could you make the entire change right now with this information? No, absolutely not. Could a bookkeeper with this set of information make the change? Probably not. Could a finance leader lead you through this process using this information? Absolutely. The key things that it's missing is if you want to get to accrual basis. This has everything to do with what your accounts receivable balances are at the of every month. And it has to do with the estimates that you made for revenue recognition in prior months and being able to track how well you did against those so that you can make adjusting what are called. I just forgot what they're called but make adjusting entries if your estimates for prior months is inaccurate because it ultimately comes down to not when you're getting paid, it's what date of service you're getting paid and being able to go back into your practice management software. And you need to do a couple of things. Number one is you have to put the fee schedules in. If you're taking insurance, you have to put them in there so that your system can tell you what it thinks your gross production was that you'll actually collect. If you're using UCR but you have, you're actually getting paid most of the time or a lot of your payments are coming in from insurance companies at pre contracted rates that are much lower than ucr, there's a big kind of fake production number in there that is completely irrelevant and will throw you off. So you want to have all your fee schedules entered in so you can see them, number one. Number two, you need to book in all of your EOBs, not at the patient level, but all the way at the claim level in your practice management software. When you do that, it gives you the detail you need so that you could go and look at dates of service you're being paid for, not the date that you're actually going getting paid for that, for those dates of service. So that is, those are two critical pieces that dismissed that whoever would be helping you would need to know and be able to take you through. And then there are a few other steps about how to, you know, create the journal entries, how to, how to do some of these actual accounting functions. I mean, maybe if we use Chat GPT to say, hey, how do you create a journal entry? It would tell us, do I put the expense in the debit or the credit column of the journal entry? I probably could get into some of that, but I hope most of you aren't spending your time doing that, learning those things. My hope is that you'll get a finance leader, finance professional with good dental experience that can jump in and help you with making the conversion. All in all, I'm pretty impressed with, with Chat GPT. This information is all true and it's all relevant. It wasn't comprehensive to pull it off. This wouldn't be a one stop shop or source. But there's a lot of great information here and I really love the twist or the, I should say the adjustment made when I just asked this one simple question. Can you tailor this to a dental practice? It, it got surprisingly specific and it was really impressive. All right, so there it is. That's Chat GPT up against accrual versus Cash basis accounting? I'd say. I'd say accrual accounting probably one, but Chat GPT is pretty impressive and I can see a lot of really cool applications for this moving forward. Many, many thanks to everybody who's joined. I have had a great time doing this and I look forward to our next episode. Have a great night. Happy day.

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