Which will suit my business, cash basis or accrual?

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When you start a company, you must decide how you will record income and expenditure through the year. There are two methods used to record details and calculate profits, and these are the cash basis and accrual accounting methods. Of course, there are benefits and disadvantages to both, and the one you decide to use will depend on the type and size of company you have.

What is the accrual accounting method?

If you take this route, you will record all transactions as they occur. Whether you buy or sell using credit or cash, the transaction will be recorded at the time it occurred. Goods that are sold on a credit basis are recorded as accounts receivable, while goods bought using credit are entered into the accounts payable.

What is the cash basis?

Cash basis accounting was introduced in 2013, to be used from 6th April of that year. The system was meant to make keeping accounts a simpler process for small companies. All income and expenditure has to be recorded at the time that the transaction occurred. Stock is recorded when it is purchased. However, the sale of the stock won’t be recorded until it occurs, which could mean that a company appears to have a deficit one month and a huge profit the next, although this isn’t an accurate reflection of the cash flow.

Which type of business can use cash basis?

A sole trader or partnership can use cash basis as long as annual turnover is below £81,000. If you have more than one business, the combined annual turnover of all companies must be below that amount. If your turnover increases during the year, you can continue to use cash basis until the total income for the year is £162,000. Any more than that and you will have to take the accrual accounting route the following year. If you are not sure what your turnover will be or you aren’t sure which method is most suitable for your company, consider an accountancy outsourcing service.

VAT and cash basis accounting

If you have registered for VAT voluntarily, you can still use cash basis as long as income doesn’t exceed £81,000. If you decide to include VAT when you record business income and expenditure, you must show any repayments of VAT received from HMRC as income and VAT payments to HMRC as expenditure.

If you want to know more about both systems, please let us know.