Cash accounting or traditional accounting?

All limited companies must use traditional accounting

Traditional accounting records income and expenses when you invoice your customers or receive a bill.

For unincorporated small businesses cash accounting represents an attractive and cost efficient option. But where credit is given and taken cashflow must still be controlled.

You can use cash basis accounting if you run a small self-employed business, for example sole trader or partnership and have a turnover of £150,000 or less a year.

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000. If you use cash basis and your business grows during the tax year, you can stay in the scheme up to a total business turnover of £300,000 per year. Above that, you’ll need to use traditional accounting for your next tax return.

Cash basis accounting records financial events including tax when payment is made or received.

• All accounting records money when it actually comes in and goes out of your business bank account.

• In a traditional business taking and giving credit traditional accounting allows the business to keep track of what is owed and paid and so show a true and fair position of the business at a particular date as well as control cashflow.

• Traditional accounting records income and expenses when you invoice your customers or receive a bill.

• Cash accounting records as income money at the time it is received, while traditional accounting records income when it is earned and invoiced whether money has been received or not.

• Cash accounting records expenses when they are paid, while traditional accounting records expenses when they are incurred, regardless of when they are paid.