{"id":1112,"date":"2022-02-04T13:25:56","date_gmt":"2022-02-04T13:25:56","guid":{"rendered":"https:\/\/accountants247glasgowsouth.co.uk\/?p=1112"},"modified":"2022-02-04T13:25:56","modified_gmt":"2022-02-04T13:25:56","slug":"calculating-profits","status":"publish","type":"post","link":"https:\/\/accountants247glasgowsouth.co.uk\/?p=1112","title":{"rendered":"Calculating profits\u00a0&#8211; should you use the Cash basis?"},"content":{"rendered":"\n<p>As an unincorporated business (that\u2019s sole traders, self-employed people and normal partnerships) you have the option of using a \u2018cash accounting basis\u2019 when preparing your accounts \u2013 rather than the more usual \u2018accrual basis\u2019.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"683\" src=\"https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-1024x683.jpeg\" alt=\"Calculating profits\" class=\"wp-image-1113\" srcset=\"https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-1024x683.jpeg 1024w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-300x200.jpeg 300w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-768x512.jpeg 768w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-750x500.jpeg 750w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381-1140x760.jpeg 1140w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/02\/ArG4jPiHVTxijd9Mf12SN-pexels-diva-plavalaguna-6147381.jpeg 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Preparing your accounts on the cash basis can be simpler and makes your life easier. But, in practice, you will still need to keep track of things like money due from your customers.<\/p>\n\n\n\n<p>So, is it worth making the switch?<\/p>\n\n\n\n<p><strong>The difference between cash accounting and accrual accounting<\/strong><\/p>\n\n\n\n<p>Your first question is likely to be \u2018What does accrual accounting mean, and why is cash accounting any easier?\u2019. Let\u2019s start by looking at the key differences:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Under the accrual basis, your sales are brought into account when they\u2019re made. Where the customer hasn\u2019t paid, the amount that\u2019s owed is included in the balance sheet as Trade Debtors or Accounts Receivable. On the cash basis, sales are only taken into account when the customer actually pays you \u2013 i.e. once you receive the cash.<\/li><li>Similarly, for purchases and expenses, in accruals accounting the date of receipt or purchase is what counts, with amounts due to suppliers appearing in the balance sheet as Trade Creditors, Accruals or Accounts Receivable. However, under the cash basis, these costs are only offset against profits when the supplier is actually paid.<\/li><li>For capital assets other than cars \u2013 things like plant, equipment, computers etc \u2013 under traditional accruals accounting you claim capital allowances. When making use of the&nbsp;<a href=\"https:\/\/www.gov.uk\/capital-allowances\/annual-investment-allowance\" target=\"_blank\" rel=\"noreferrer noopener\">Annual Investment Allowance (AIA)<\/a>, many businesses claim the full cost in the year of purchase anyway. On the flipside, if you\u2019re using the cash basis, the costs are taken into account to work out your taxable profit when you buy the items.<\/li><li>When you\u2019re operating the cash accounting basis, there\u2019s no need to take things like stock or work-in-progress into account.<\/li><\/ul>\n\n\n\n<p><strong>Changing to the cash accounting basis<\/strong><\/p>\n\n\n\n<p>Using the cash accounting basis does simplify your bookkeeping and accounting requirements, so it\u2019s worth considering whether a switch from the accruals to cash basis is worthwhile.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>If you\u2019re unincorporated and your annual sales are below \u00a3150,000, you can switch from using the accrual basis of accounting to the cash basis. You can continue on this cash accounting basis until your annual sales exceed \u00a3300,000.<\/li><li>If you change from one basis to another, in the first year, the figures need to be adjusted to make sure that transactions are not missed altogether, nor counted twice.<\/li><li>As an example, if you use the accrual basis and are owed money by your customers at the end of the year, the sales value will have been included in your taxable profit \u2013 even though it wasn\u2019t paid. If you change to the cash basis the following year and your customer pays you, if you make no adjustments then you would be taxed on that same sale again. Accordingly, you have to make an adjustment to exclude those receipts from sales in the new year.<\/li><li>A similar (but opposite) adjustment is required in respect of money owed to suppliers at the time of changeover, as the costs or expenses would already have been allowed for.<\/li><li>Because stock and work-in-progress don\u2019t feature under cash accounting, any opening value is treated as an expense at the start of the year in which you change over from the accruals basis. By the same token, if there are unclaimed capital allowances on plant and machinery, these are treated as asset purchases when you switch to the cash basis.<\/li><li>When moving from the cash basis to the accrual basis, similar adjustments are required.<\/li><\/ul>\n\n\n\n<p>Other factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Interest and fees on overdrafts, loans and credit cards can only be included as an expense up to \u00a3500 per year. So, if your costs are higher, the accrual basis may be better. Note that interest on hire purchase agreements is not limited.<\/li><li>If your business is making a loss under the cash basis that isn\u2019t available as \u2018sideways relief\u2019 to reduce other taxable income.<\/li><li>Accounts prepared on the cash basis may not be suitable for lenders if you\u2019re looking for personal or business funding, including to support a mortgage application.<\/li><\/ul>\n\n\n\n<p>If you\u2019re thinking about using the cash basis for your accounts, make sure you talk to us first. We\u2019ll outline the limitations and possible pitfalls, as well as the key benefits for the business. We can also advise you whether or not you\u2019re eligible to use the scheme.<\/p>\n\n\n\n<p>Changing from one basis to the other requires calculation of transitional adjustments, and the tax impact of that can be spread over up to six years. So, working with us to minimise the impact makes sense if you\u2019re aiming to simplify your accounting.<\/p>\n\n\n\n<p><a href=\"\/contact-us\">Get in touch to talk<\/a> about switching to cash accounting.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>As an unincorporated business (that\u2019s sole traders, self-employed people and normal partnerships) you have the option of using a \u2018cash accounting basis\u2019 when preparing your accounts \u2013 rather than the more usual \u2018accrual basis\u2019. Preparing your accounts on the cash basis can be simpler and makes your life easier. But, in practice, you will still [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":1113,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","jnews-multi-image_gallery":[],"jnews_single_post":{"subtitle":"","format":"standard","video":"","gallery":"","source_name":"","source_url":"","via_name":"","via_url":"","override":[{"template":"1","single_blog_custom":"","parallax":"1","fullscreen":"1","layout":"right-sidebar","sidebar":"default-sidebar","second_sidebar":"default-sidebar","sticky_sidebar":"1","share_position":"top","share_float_style":"share-monocrhome","show_share_counter":"1","show_view_counter":"1","show_featured":"1","show_post_meta":"1","show_post_author":"1","show_post_author_image":"1","show_post_date":"1","post_date_format":"default","post_date_format_custom":"Y\/m\/d","show_post_category":"1","post_reading_time_wpm":"300","zoom_button_out_step":"2","zoom_button_in_step":"3","show_post_tag":"1","show_prev_next_post":"1","show_popup_post":"1","number_popup_post":"1"}],"image_override":[{"single_post_thumbnail_size":"crop-500","single_post_gallery_size":"crop-500"}],"trending_post_position":"meta","trending_post_label":"Trending","sponsored_post_label":"Sponsored by","sponsored_post_name":"","sponsored_post_url":"","sponsored_post_logo":"","sponsored_post_desc":""},"jnews_primary_category":{"id":""},"footnotes":""},"categories":[58],"tags":[],"class_list":["post-1112","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Calculating profits\u00a0- should you use the Cash basis? - Accountants247 Glasgow South<\/title>\n<meta name=\"description\" content=\"Are you an unincorporated business? 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