What is the cash basis of accounting?
Definition of the cash basis of accounting
The cash basis of accounting allows certain businesses to work out their profit based on when money comes in and is paid out, rather than on when income is earned and costs incurred.
It's the end of the tax return as we know it! Find out about HMRC’s Making Tax Digital plan and how it will affect you with our free guide.
Cash basis accounting is not available to all businesses, only to:
- sole traders
- partnerships whose partners are all individuals
Limited companies and LLPs may not use the cash basis of accounting.
There are also certain costs that aren’t allowable for tax relief when you’re using the cash basis, such as bank interest over a limit of £500. You can learn more about it from HMRC.
Example of the annual investment allowance:
The Peter and Paul Partnership prepares accounts each year to 5th April. They do some work in March 2015, which they invoice for on 31st March 2015. Their customer pays them on 10th April.
If they are using cash basis accounting, they record that income in the accounts for the year ended 5th April 2016.
If they are not using cash basis accounting, they record that income in the accounts for the year ended 5th April 2015.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.