Cash accounting or the cash basis as it’s commonly called in the UK is a method of accounting that you need to understand if you run a small business. Even though your accountant might handle your tax return for you at the end of the tax year. It’s still important that you understand what this terminology means so cash accounting or the cash basis is generally most applicable to very small businesses in the UK. And you’re going to come across it when you come to do your self-assessment tax return it’s literally a box on your tax return you need to get this correct on your tax return because it affects the way you are keeping your records and accounting for things in your business.
The cash basis is a relatively new thing it came in around 2013 2014 or thereabouts it’s designed to make your account simpler if you’re a small business it’s an alternative to traditional accounting methods or accruals-based accounting or GAAP accounting. Which is generally accepted accounting principles and it’s only applicable for self-employed sole traders or partnerships so forget about this accounting method if you’re a limited company or anything like this. We are purely talking about small businesses as per usual we strongly recommend that you seek professional guidance from an accountant but this hopefully will just answer a few of the basic questions surrounding this accounting method. We are kind of lightning the blue touch paper so you know what questions you need to ask your accountant and apart from anything else as a business owner. You should know this information anyway so the cash basis is only open to you if your turnover is under 150,000 pounds a year. In the 1718 tax year that’s actually been increased quite considerably in the 1617 tax year. We think it was 83,000 so that’s now gone up to the 150,000 thresholds and there’s actually an exit threshold of 300,000 pounds. Over your midway through your taxi and it looks like you’re going to be making more than 150,000 they’ve extended it effectively up to 300-thousand but then for the following tax year. We’d have to leave the cash accounting scheme and move over to traditional accounting so the key basis of cash accounting is that you only record income that you’ve actually received. And you only record expenses that you’ve actually paid out that’s different from a cruise-based accounting where you’re going to record income based on work that you’ve invoiced or expenses that you’ve been invoiced for. But you haven’t necessarily paid out the money for the expenses and you haven’t necessarily received the income that you’ve been voiced, customers.
For now, one quite important point for this is that if you have several self-employment so in other words if you have more than one self-employed business you have to use the same accounting method across all of your businesses. So you can’t say that you’re going to use a cash basis for one business and an accrual basis for another you need to settle on one type because your turnover threshold is going to get assessed across a total of all of your businesses. Added up so if you’ve got one business that made a hundred thousand pounds a year and another business that made two hundred thousand pounds a year then you’re going to have to do everything on the accrual space. Because your total turnover is already past even the exit threshold of the cash basis and it’s also important to note that certain businesses aren’t allowed to use the cash basis at all so you need to go on the HMRC website. And that lists all those different types of businesses that aren’t allowed to use it so HMRC gives some quite good guidelines of when it might not be suitable for your business to run on a cash basis. For example- if you want to claim back expenses on bank charges of more than five hundred pound a year cash basis probably isn’t going to be the best bet for you also if you carry high levels of stock or have a more complex business structure you might find that the cash basis doesn’t work out very well for your business. Another reason you might not want to go down the cash basis is if you’re likely to be applying for bank loans or mortgages and stuff like that. Because often banks will ask for full accrual-based accounts sometimes a cash basis isn’t sufficient for that so again if you’re likely to be applying for loans or mortgages speak to your accountant. The cash basis might not be for you and the other reason that the cash basis might not work for you is if you’re wanting to offset any losses in your self-employment. Against other income, so that’s quite an important one and something that we might cover off on a separate article at some point but with the accrual basis you can potentially offset losses against other income that you’ve got coming in from saying employments. It’s not quite that straightforward if you’re on the cash basis so in a nutshell, the cash basis is all about keeping records based on when you’ve actually received money and actually spent money. As opposed to when you’ve been invoiced or when you’ve invoiced someone else it’s a more simple way of keeping accounting records and it’s particularly suitable if you’ve got a very simple business model.
So in other words a business where you don’t generally go out a lot of money and you’re generally not bored in a lot of money at any one point in time you should consider it if you are a business that has no employees. Other than yourself if you’re carrying very low levels of stock and if you’ve got a very low turnover so it’s ideal for things like YouTubers musicians sole traders. You know plumbers electricians that sort of thing if you’re keeping lower levels of stock but at the point where it starts to turn into a bit of a bigger business. You should definitely think about the accruals accounting method instead it’s something you need to talk to your accountant. About but hopefully I’ve given you enough information in this article so that you understand the basics of it so the accruals basis is probably more appropriate for your business. If you’ve got a more complex business model if you invoice customers for payment rather than accepting payments straight away and if you get invoiced by suppliers then you should definitely think about going down the route of the accruals basis instead of the cash basis. And also if you employ staff if you have high levels of stock and if you have a high turnover these all really trigger points for when you should be certainly thinking of the accruals basis. As opposed to the cash basis but as we say as per usual speak to an accountant you should understand enough about it now. That you understand the basics and you know what questions to ask your accountant about it and they can tell you based on your personal circumstances.