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Cash basis or traditional accounting?

Cash basis accounting sometimes suits small businesses more than traditional accounting. This page gives you an overview of some of the differences between cash basis accounting and normal traditional accounting.

What is cash basis accounting?

Cash basis accounting is an alternative method to prepare your accounts, available to some businesses. The aim of the regime is to simplify accounting for small businesses.

The general idea is that income and expenditure are included in the accounts only when it is paid or received, so where a business purchases a business asset (a piece of property or equipment) that will be included as an ‘expense’ in the period in which it is paid for.

Where a business buys and sells goods or services on credit, these items will only be included when the cash is paid or received. A business will need to elect to use cash basis accounting by completing a box on the Self Assessment tax return. 

If you run a small business, cash basis accounting may suit you better than traditional accounting.

How does it differ from traditional accounting?

  Cash basis Traditional accounting
What happens if I buy a fixed apart other than a car? They will be treated as an ‘expense’ in the period in which they are purchased. They will be treated as capital and will attract capital allowances.
What happens if I buy a car?

The cost of the vehicle can’t be treated as an expense.

You have two options:

1. Claim capital allowances and the actual expense of running costs (both restricted for private use) or:

2. Claim mileage rates using simplified expenses

These will be treated as capital and will attract capital allowances.
What if I have bills that are yet to be paid at the end of the period? They will be included in the period in which they are paid, irrespective of when they relate to. You would need to make an accounting adjustment for these within accruals.
What if I have paid for bills that relate to the following period? They will be included in the period in which they are paid, irrespective of when they relate to. You would need to make an accounting adjustment for these within prepayments.
What happens if credit customers haven’t paid at the end of the period? They will be included in the period in which the cash is received, irrespective of when the sale relates to. The sale would be included in the period in which it occurred.
What happens if we haven’t paid our suppliers at the end of the period? They will be included in the period in which the cash is paid, irrespective of when the purchase relates to. The purchase would be included in the period in which it occurred.

 

Is cash basis accounting right for my business?

It depends. It is likely to be simpler in terms of accounts preparation but cash basis just really changes (either delays or brings forward) the time when expenses and income are included. Over the life of the business, it will not alter the amount of expenses or income that are recognised.

It is also worth noting that where an established business moves from traditional accounting to cash basis accounting, there are special rules. The rules are quite fiddly so if you are in this position it is worth speaking to an accountant.

How do I register for cash basis accounting?

You register for cash basis accounting by doing an election on your Self Assessment return. You will need to select on the return whether you are eligible to join and whether you want to report your accounts on this basis.

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