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If you’re starting up your business, then there are plenty of decisions to make. One of these is whether to use cash-basis or traditional accounting. An accountant will advise you which is the best method for your particular business, but having an understanding doesn’t hurt!

What is traditional (accrual) accounting ?

Traditional accounting is sometimes also known as accrual, or accrual basis, accounting. With this method of accounting, you must record every single invoice you send and receive  whether it’s been paid or not. This also means that you’ll pay tax on income, even if the customer hasn’t paid you.

An example of traditional accounting

You invoice a customer at the end of March 2020 (the 2019-20 tax year). They don’t pay you until May 2020 (the 2020-21 tax year). The invoice is recorded in the 2019 to 2020 tax year accounts, rather than 2020 to 2021.

Traditional accounting requires you to keep records of all income and expenditure. These might include:

Traditional accounting generally suits larger businesses, but it’s worth considering – especially if you predict quick growth for your business.

 
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What is cash basis accounting?

Cash basis accounting is generally more suitable for small businesses with a turnover of £150,000* or less. You can continue using cash basis accounting as the business grows, up to a total business turnover of £300,000* per year.

Unlike traditional accounting, businesses using cash basis accounting only record invoices and expenses when they’re actually paid. This also means that you won’t pay tax on income until your customer pays you.

An example of cash basis accounting

You invoice a customer at the end of March 2020 (the 2019-20 tax year). They don’t pay you until May 2020 (the 2020-21 tax year). The invoice is recorded in the 2020 to 2021 tax year accounts, rather than 2019 t0 2020.

The treatment of some items is also different, depending on which type of accounting you use. For example;

Ask our team of online accountants for help! Get an instant quote for our accounting services today. 

*Information updated February 2020

About The Author

Lee Murphy

MAAT and ICPA accountant, with a passion for making accountancy and bookkeeping accessible. Other interests include cloud-based software development for web and mobile access, keeping fit, reading, and entrepreneurship.

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