What is cash basis accounting?
Definition of cash basis accounting
Cash basis accounting is an accounting method that allows certain businesses to record their income and costs at the date the money comes in or is paid out, rather than the date displayed on an invoice they issue or bill they receive.
Cash basis accounting can be used by the following types of businesses, as long as their turnover is under £150,000 a year:
- sole traders
- unincorporated landlords
- partnerships in which all the partners are individuals
Limited companies and limited liability partnerships (LLPs) can’t use cash basis accounting, and must use accruals basis accounting instead.
When a business uses cash basis accounting, certain costs are not allowable for tax relief, such as bank interest over a limit of £500.
You can find out more about the difference between cash basis accounting and accruals basis accounting in our dedicated guide.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.