CASH ACCOUNTING VS TRADITIONAL ACCOUNTING

For a self employed or a partnership, there are two options available on how to calculate profits; Cash Accounting or Traditional Accounting (Accrual based). Cash Accounting will record the transaction as and when cash is paid or received.

In contrast, the accrual based accounting will record the transaction on basis of invoices sent or invoices received; whether or not actual payments have occurred. From the tax your 2013/14 self employed or partners can choose to make their accounts on cash basis.

What is Cash Accounting and Accrual Accounting Difference?

CASH ACCOUNTING:

This is a simpler way of maintaining your accounts. All you have to do is to keep track of money in and money out. How were you need to make sure that you know that certain items are treated differently as compared to the traditional accounting.

1. All the payments that you make for equipment and vans are allowable expenses
2. There is a £500 threshold for allowable expense of interest paid on cash borrowings
3. Any particular loss cannot be set off against any other kind of income
4. Any capital allowances other than that of cars cannot be claimed

You will be allowed to use accounting on cash basis for calculation of your profits only if your turnover is £79,000 per annum or less. The threshold is raised to  £158,000 if you are also claiming Universal credit.

TRADITIONAL ACCOUNTING:

Traditional Accounting or  the accrual basis will record transactions on basis of invoices. Unpaid or unreceived invoices will be taken to cash payable or cash receivables accounts. You will have to keep  records of all your sales/ incomes and all your purchases/ expenses. This must include:

1. Valuation of stock and work in progress at the end of accounting period
2. Cost of business vehicle, travel expenses and interest from banks/building societies
3. Income from other sources and investment in other assets like stock or equipment
4. Payment to employees in form of wages, expenses or benefits

You will record income or expense only if it relates to the current period. Costs and incomes spreading over more than one income will have to be apportioned. For example if rent of 12 months is paid mid year, only six months rent will be included in this year expenses.

If you want further information on how to distinguish between cash and accrual basis of accounting and which to use or want help in proper book keeping requirements of either, you can contact Certax London. We offer book keeping, self assessment and tax consultancy that is reliable and affordable.