Two ways to work out your profit for tax. Here is the difference in plain terms, and which one tends to suit smaller businesses.
Cash basis means you count income when money actually comes in and costs when they go out. Accruals, or traditional accounting, means you count income when you earn it and costs when you incur them, even if the cash moves later.
For many small businesses the cash basis is simpler and is now the default for sole traders, but accruals can give a truer picture for others. Here is how they compare.
The cash basis often suits smaller sole traders with simple affairs and no stock, who want to be taxed only on money actually received. It is the default for most sole traders for good reason.
Accruals often suits growing businesses, those carrying stock, or limited companies, where a truer picture of performance and more flexibility on losses and reliefs is worth the extra bookkeeping. Companies use accruals as standard.
For many small sole traders the cash basis is the simplest and sensible choice. As you grow, carry stock, or operate as a company, accruals usually gives a better picture and more flexibility. We will recommend the right basis for your business and keep the records to match.
Tell us a little about your situation and we will give you a straight, no obligation steer, then a fixed fee if you want us to handle it.