Cash accounting

Cash accounting method or cash accounting basis is a way of recording your sales and purchases when you make a note about them in the ledger at the time money comes to your bank account or leaves it.

Accrual accounting is another way of keeping your financial records and if you follow it, you make a record when the deal is made, regardless of the actual payments. Accrual accounting is seen as traditional in the UK. If you are unsure what way it is better to choose for your type and size of the business, turn to online accounting and bookkeeping services.

Cash accounting basis in the UK

You need your accounting data to pay taxes and HMRC (Her Majesty’s Revenue and Customs) is the authority which deals with it in the UK. The cash basis is not for limited companies and limited liability partnerships. HMRC allows you to use the cash accounting method only if the 2 conditions are met:

  1. You are a sole-proprietor or a partner in a partnership (other than limited liability one);
  2. Your business’ annual income is less then £150,000.

There are, though, some exceptions (those businesses that can’t use the scheme), for example, if you are a farming business with a current herd basis election.

If you have several businesses and choose to use the cash basis for your accounting, you must stick to this method with all of your companies  — and  £150,000 must be the turnover of all of them combined.

If your business turnover goes over the £150,000 threshold but does not exceed £300,000 in the middle of the accounting period, you can keep the cash basis method.

VAT cash accounting scheme

If your business VAT taxable turnover is over £85,000, you must register for Value Added Tax returns with HMRC. In the usual VAT scheme, you report and pay to HMRC even if your invoices have not been paid yet. When you sign up for VAT cash accounting scheme, the VAT return amounts that are due and deductible and that you report, are based on the payments you make and get, and not on the just-issued invoices. To be eligible for this scheme, your business must have a VAT taxable turnover of less than £1.35 million.

In short, the VAT cash accounting scheme allows you to:

  1. Pay VAT on the sales when the customers pay you;
  2. Reclaim VAT on the purchases when you have actually paid your supplier.

Cash vs accrual accounting

Here are the key difference between the two methods:

Cash accounting Accrual accounting
Revenue Recorded when you get cash Recorded when you get cash
Expenses Recorded when you spend cash Recorded when the deal is complete and you are billed
Taxes You pay taxes only on the money you have already received You pay taxes on the revenue on the whole, even if some amount of money is still owed to you
Business type Sole-traders and partners in partnerships with the company having an annual turnover of less than £150,000 For all the businesses
We’re using cookies! What does it mean?