What is Cash Accounting? Accrual Accounting? Traditional Accounting?

Cash Basis Accounting

Under Cash Accounting you only report Sales when you are paid and Expenses when you pay them. This can be particularly useful if your clients take longer to pay you than you take to pay your suppliers.

Its referred to as the ‘Cash Basis’ for Income Tax and ‘Cash Accounting’ for VAT.

The ‘Cash Basis’ for the Self Employed was introduced in April 2013.

You can use Cash Basis if you:

  • run a small self-employed business, for example sole trader or partnership
  • have a turnover of Β£150,000 or less a year

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than Β£150,000.

Limited companies and limited liability partnerships cannot use cash basis.

From the 6th April 2017, the Finance Bill 2017 made the Cash Basis the default basis for Landlords which means on Self Assessment returns Landlords have to tick a box to use Traditional Accounting.

HMRC believe that Cash Accounting/Cash Basis is a simpler way to prepare accounts for tax returns, in reality, I am not convinced as it can be confusing where there are management fees, rent arrears, costs covering more than a year and mortgage interest.

Joint Ownership can add to the confusion because both owners are free to make their own choice as to whether to use the Cash Basis or Traditional Accounting. The exception to this rule is married couples and civil partners who have to adopt the same approach.

VAT Cash Accounting

VAT Cash Accounting is open to all business types.

Usually, the amount of VAT you pay HM Revenue and Customs (HMRC) is the difference between your sales invoices and purchase invoices. You have to report these figures and pay any money to HMRC even if the invoices have not been paid.

With the Cash Accounting Scheme you:

  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your supplier

To join the scheme your VAT taxable turnover must be Β£1.35 million or less.

You must leave Cash Accounting when your Turnover hots Β£1.6 million.

Accrual Accounting and Traditional Accounting

These are the same thing.

The Accruals Method essential follows the principle of matching revenue and expenses in the same period.

Companies must use this method for their published accounts.

S396 Companies Act 2006 (CA 2006) (S404 for group accounts) specifies that the directors of every company have to prepare a balance sheet and a profit and loss account every financial year and that the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year, and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year.

In order to comply with this Directors need to enter all sales and purchases in the accounts, not just the ones that have been paid.

Accruals refers to including liabilities that you have incurred but not paid for example accountancy fees to prepare the accounts.

There could also be prepayments for things paid in advance such as insurance.

The accounts will also included items such as depreciation.

To give a True and Fair view Company Accounts are prepared to accountings standards such as FRS105 and FRS102 and UK GAAP.

steve@bicknells.net

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