If you’re running a small business, one of the concepts in accounting you’re going to want to wrap your head around as early as possible is your business’ liquidity, and cash basis accounting could be one opportunity to keep the cash flowing as your business’ grows.
Traditionally, cash basis accounting was used by small, unincorporated businesses for working out taxable income. Under this method, you are taxed on the basis of the cash that passes through your books rather than having to undertake complex and time-consuming calculations designed for larger businesses, who generally have to use ‘traditional’ methods for tax purposes.
But from 2017/2018 tax year onwards the goal posts have moved and the eligibility income threshold for using the cash basis has been raised from £83,000 to £150,000, which means that many more growing businesses can now opt for this simplified version of accounting when completing their self-assessment tax return as a sole trader or as a Partner in a business. Furthermore, the exit threshold has been raised to £300,000 , which means that you can continue to use the cash basis method as your business moves to the growth phase.
So, what is cash basis accounting?
The cash method is simple in that the business’s books are kept based on the actual flow of cash in and out of the business. Income is recorded when it’s received, and expenses are reported when they’re actually paid. The cash method is used by many sole proprietors and businesses with no inventory and who may provide a service instead. From a tax standpoint, recording income can be put off until the next tax year, while expenses are counted right away, and so increasing your businesses cash flow in those all important growth years.