Cash vs Accrual - smart thinking can help your cash flow
Updated: May 23, 2019
When you recognise your income and expenses can effect your cash flow. Smart planning can relieve that pressure for your business
Sole traders and partnerships can chose between recognising their income and expenses on a cash or accruals basis.
The difference between the two methods is what exactly is included in your tax return. The cash basis works on when you make payments or receive cash, you recognise it. The accruals basis recognises sales and expenses in the accounting period they were incurred, but not necessarily paid.
The chosen methods could effect the amount of tax you pay and can be used to your advantage.
For example, if you pay rent every 6 months in advance at the beginning of March, then on the cash basis the rent will all be recognised in your tax return, helping to reduce your tax payments for that tax year. On the accruals basis, only one months rent would be recognised in that tax year's return with the remaining 5 months payment only being accounted for in the next tax year. The result is a higher tax payment for this tax year.
Using the cash basis is permitted when:
Turnover in your businesses is less then £150,000
If turnover increases, you can still use cash accounting up to a turnover of £300,000
Only sole traders or partnerships (not Limited Liability Partnerships) can use cash accounting
There are specific types of businesses that HMRC does not allow. Please see the link here.
We can help review your business expenses and income to help you decide which option would best suit you.