Office Assistants on the Benefits of Cash Basis Accounting
Many small business owners choose to use cash basis accounting rather than traditional accounting. Here Essex bookkeepers Office Assistants look at why that is, and how cash basis accounting works so you can decide whether it's for you.
With cash basis accounting, you only need to declare money when it comes in and leaves your business. So, at the end of the tax year, you only have to pay Income Tax on the money you have received during your accounting period.
Is cash basis accounting right for me?
There are some instances when cash basis accounting won't be the right choice for you. For example, if you run a business that is not straightforward, for example with extensive stock levels; if you wish to claim bank charges or interest in excess of £500 per year as an expense; if you have losses that you wish to offset against other taxable income, and if you have a need to obtain business finance, because you may be asked for accounts drawn up using traditional accounting.
Who can use cash basis accounting?
Any small self-employed business such as a sole trader or partnership can use cash basis accounting providing their annual turnover is £150,000 or less. If you run multiple businesses, then if you use cash basis accounting for one of them, then you must use it for the others. If the combined turnover for all your businesses exceeds £150,000 then you cannot use this accounting method.
You can however remain within the cash scheme if your income rises during the current tax year. So for example if you commence the tax year earning £140,000, but by October your turnover has increased to £200,000 then you can continue to use cash basis accounting for the rest of that tax year, providing your turnover does not exceed £300,000. If it does, then your next tax return will need to use traditional accounting.
Limited companies and limited liability partnerships are not permitted to use cash basis accounting. There are also certain other exceptions, a list of which can be found here: https://www.gov.uk/
Can I switch from traditional accounting to cash basis accounting?
If you qualify for cash basis accounting then you can switch from traditional accounting, however there may be some adjustments that need to be made, for which it is likely you will need professional guidance.
If you are in any doubt as to whether cash basis accounting is right for your business, talk to your bookkeepers. They will be able to advise you on an individual basis and guide you as to the best accounting method depending on your current and future needs.
Office Assistants offers bookkeeping services and much more to clients throughout the south east of England from their base in Rainham, Essex. For more information visit http://www.officeassistants.org.