Last month we looked at what is involved in cash basis accounting. This month we are exploring the alternative: traditional accounting.
What is traditional accounting?
Traditional accounting, also known as ‘accrual’ accounting, involves recording income and expenditure at the point where an invoice was issued, or when a bill was submitted. This is opposed to cash basis accounting, where records are only made when money physically enters or leaves a business.
Who uses traditional accounting?
In practice, traditional accounting may not suit smaller businesses or sole traders. This is because invoices are recorded at the point they are issued, rather than when they are paid.
This means that you may find invoices included in your tax return figures that are yet to be paid. The risk here is that the invoice payment may take some time to come in, or may not even transpire at all. However, that invoice will still count as income for tax purposes. With cash accounting, there is no need to pay tax on anything you have not yet been paid for.
Traditional accounting tends to be more suited to the larger business, although for the smaller business expecting to grow rapidly, it is usually the better option because the turnover limit for cash accounting is £150,000.
Limited companies and limited liability partnerships must use traditional accounting.
What do I need to do if I use traditional accounting?
Traditional accounting requires you to keep records of all income and expenditure. This includes stock and equipment and its value at the end of your accounting period; all payments made to employees such as wages, benefits and bonuses; vehicle and travelling costs associated with the business; any interest accrued on bank and building society accounts, and all income.
What are the benefits of traditional accounting?
Most benefits of traditional accounting come in the form of being able to set off losses against other income, and being able to claim significantly more capital allowances. Cash accounting only allows capital allowances to be claimed against cars.
Traditional accounting, or cash accounting – which is best for your business? If you are in any way unsure as to the best accounting method for your individual circumstances, you are best advised to discuss the matter with your bookkeepers or accountant.