The money basis is often a simpler way of exercising taxable profits when compared to traditional accruals method. The bucks basis takes account only of income in and money out – wages are recognised when received and expenses are recognised when paid. In comparison, the accruals basis matches income and expenditure for the period this agreement it relates. Consequently, where the cash basis is employed you shouldn’t have to determine debtors, creditors, prepayments and accruals, as they are true underneath the accruals basis.
Example
Ben is often a self-employed plumber. He prepares accounts to 31 March annually. On 28 March 2019 he fits a whole new shower, invoicing the client ?600 on 29 March 2019. The buyer pays the balance on 7 April 2019.
He purchased the shower for ?400 on 25 March 2019, receiving a bill from his supplier dated exactly the same date. He pays the balance on 8 April 2019 after he has been paid with the customer.
On the cash basis, the income of ?600 and expenditure of ?400 fall around to 31 March 2020 – they may be recognised, respectively, when received and paid (in April 2019). By contrast, under the accruals basis, the wages and expenditure is categorized as year to 31 March 2019 since this is once the work was over and invoiced.
Who can use the cash basis?
The cash basis is accessible to small self-employed businesses (such as sole traders and partnerships) whose turnover computed about the cash basis is below ?150,000. Once a trader has elected to work with the money basis, they could keep doing so until their turnover exceeds ?300,000. These limits are doubled for universal credit claimants.
Limited companies and limited liability partnerships cannot utilize cash basis.
Advantages of the cash basis
The benefit of the cash basis is its simplicity – there are no complicated accounting concepts to get to grips with. Because earnings are not recognised until it can be received, this means that tax isn’t payable for the period on money that’s not actually received in this period. This too provides automatic relief for financial obligations without needing to claim it.
Not for all
In spite of the advantageous linked to its simplicity, the bucks basis is not for everyone. The cash basis might not be the right foundation for you if:
you want to claim a deduction for bank interest or charges of more than ?500 (a ?500 cap applies under the cash basis);
your company is more advanced, as an example, you have high levels of stock;
your need to obtain finance – banks as well as other institutions often request accounts prepared around the accruals basis;
you need to claim sideways loss relief (i.e. set an investing loss against your other income) – this is not permitted under the cash basis.
Need to elect
When the cash basis is for you, you’ll want to elect for it to apply by ticking the appropriate box within your self-assessment return.
For additional information about Birmingham Accountants have a look at this site.