Cash basis or accrual accounting: which is best for your business?


Did you know that there's more than one way to account for your business?

That's right. In 2013, HMRC introduced cash basis as a business accounting method for businesses with a turnover of £150,000 or less (as of 2017), so businesses could choose between cash and accrual (sometimes know as traditional) accounting.

But which one is right for your business?

Here's the information you need for both types of accounting, to help you decide.

Accrual accounting

Also known as traditional accounting, this is the method most businesses use.

If you use accrual accounting, your income is recorded when you've earned it rather than when you receive the payment, and your expenses are recorded when you incur them rather than when you pay an invoice.

So, if you invoice a client during the 2017-18 tax year but don't receive payment until the 2018-19 tax year, you would still record it as income for 2017-18.

Accrual accounting is a great option for complicated businesses such as those with high levels of stock, but smaller, more simple businesses may benefit from using cash basis accounting.

Cash basis accounting

If you run an unincorporated business with an annual turnover of £150,000 or less, you can account for your business on a cash basis.

This means that rather than accounting for payments when they are invoiced, you'll only account for them when they are paid or received.

This means that you only need to declare your income and expenses when the money comes in and out of your business. This is handy for small businesses, as they won't pay tax on income they haven't received yet.

However, there are also disadvantages.

If you're hoping to get finance for your business, cash accounting may show your profit as lower and therefore less likely to receive finance. Banks may also ask to see your accounts using accrual accounting, which will mean more work for you.

If you have already borrowed money to finance your business, you should also be aware that you can only claim up to £500 of interest or bank charges as an expense using cash accounting.

You also won't be able to offset any losses against other taxable income using this method.

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