Cash basis Accounting for small business

Cash basis 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. Out of traditional accounting methods or accruals based accounting or GAAP accounting which is generally accepted accounting principles and it’s only applicable for self-employed. So we’ll trade for Partnerships. So forget about this accounting method if you’re a limited company or anything like this and purely taught in about small businesses as per usual strongly recommend that you seek professional guidance from an accountant, but this hopefully will just answer a few of the basics. 

Surrounding this accounting method from the kind of lighting the blue touch paper. So you’ll know what questions you need to ask your accounting 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 a hundred and fifty thousand pounds a year in the 1718 tax year that’s actually been increased quite considerably in the 1617 tax year. I think you’ll miss 83,000 so Oh that’s now gone up to 150,000 threshold and there’s actually an exit threshold of 300,000 pounds off your Midway through your taxi and it looks like you’re going to be making more than 250,000 have extended it effectively up to 300,000 but then for the following taxi, I get have to leave the cash accounting scheme and move over to traditional accounting. So the key basis with cash accounting is that the only record income that you’re actually received and you all need to record it. This is that you’ve actually paid out that’s different from accrual-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 you’ll see if the income that you’ve been voiced customers, for now, one point 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 accruals 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 at made two hundred thousand pounds a year, then you’re going to have to do everything on your crawl space because your total turnover is

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 will list 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 500 pounds a year. First races probably aren’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 are likely to be applying for bank loans or mortgages and stuff like that because often banks will ask for full accrual-based accounts. Sometimes the 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. The other reason that cost basis might not work for you is if you all want to offset any losses in your self-employment against other income. So that’s quite an important one and something that might cover off on a separate video at some point both with the accrual spaces.

 You can potentially offset losses against other income that you’ve got coming in from say Employments. It’s not quite that straightforward if you are on a 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 for when you invoice 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 all out a lot of money and you’re generally not old 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 the self if you 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 low levels of stopped at the point where it’s starting to turn into a bit of a bigger business. You should definitely think about the accruals counting method instead. It’s something you need to talk to your accountant about, but hopefully, the accrual basis is probably more appropriate for your business if you have a more complex business model, if you invoice customers for payment rather than accepting payment straight away. And if you invoice 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 stop and if you have a high turnover, these all really trigger points for when you should be certainly thinking with the accruals basis as opposed to the cash basis.

Usually, I speak to an accountant. You should understand enough about that. 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. 

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