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.
