Cash based vs accruals based accounting

Cash based or accruals which one should you use?


Cash based is only open to sole traders or partnerships - if you are limited you will be unable to use it.


What is cash based accounting?


It is a method that you can use to prepare your accounts. It looks at income and expenditure, when money is received or paid, not by the invoice date. In other words if you raise a sales invoice today but your customer pays it in a month - your profit and loss will show when the money is received. It has nothing to do with the form of payment that you receive.


What about finance costs? Under cash based you can allow a maximum of £500 per annum. This does not include Hire Purchase.


If you buy assets these are treated as expenses - so no calculation of capital allowances. The only capital allowance you can claim is a car.


What if I make a loss?


Trade losses can be carried forward and set against future profits.


So who can use it?


If you are self -employed or in a partnership

Have a turnover of £150,000 or less a year.


Who can't use it?


A comprehensive list can be found on HMRC but an example of trades are those that deal with waste removal, dealers in securities, managed service companies and cemeteries.


Can I use simplified expenses?


Yes - these include day to day running costs, admin costs, machinery and buying goods for re-sale.


Whats is accruals based accounting?


It is also called GAAP (Generally Accepted Accounting Principles), it ensures that only income and expenses relating to the tax tear are included in that year.


What is it?


Your accounts will take into account the date sales and purchase invoices were raised. They do not go by when the money was spent or received. If you hold stock you will need to carry out a stock take.

Assets aren't classed as an expense in the end of year accounts, but have to be dealt with in the appropriate way. Instead you can claim Capital Allowances and take the allowances off your profit or add them to your losses.

What if I make a loss?


There are 4 basic ways to obtain tax relief.


-Carry a loss back

-New businesses can set a loss in any of the 4 years of trading against your total income of the 3 tax years immediately before the loss.

-Use the loss in the current year and set it against all other income even savings - sideways loss relief.

-Carry forward the loss and set it against profit from the same trade.


HMRC offers lots of information on the 2 different forms of accounting and this can be handy starting point if you require more in-depth information.


The information featured in this article is for guidance only, no liability is accepted for the opinions it contains.


Cash vs accruals accounting