Cash Accounting, what is it and will it work for you?
It's approved by HMRC, benefits cash flow and reduces administration burden, here's why you should be using cash accounting for your VAT returns.
Necessary
You may have already heard, cash accounting will be the default method of accounting for sole traders from April 2024 and, it's already the default method of accounting for individual rental accounts. This isn't a bad thing, in fact, we think it's positive, see our reasons below.
Faster
Cash accounting means that your bank transactions form the basis of your accounts, this means that you can simply run through this bank statements without having to think about any outstanding customer or supplier debts.
Efficient
You might be used to uploading invoices, uploading receipts and working through the bank statements to then find the payment that relates to the invoice/receipt, you're effectively dealing with the same transaction twice. Cash accounting allows you to simply work through the bank statements, and deal with the transaction once.
Accurate
With the accounts being prepared on the basis of the bank transactions, your accounts are based on actuals. This means that you'll only be paying tax on sales that you've actually received and not on your outstanding sales invoices.
Great for small businesses
Cash accounting means that you only pay tax when you've received the money from the customer, so there's no worry about paying the tax before you've been paid! Also, this works the same way for paying your suppliers, you'll receive your tax relief when you've paid the invoice, keeping things simple so you can plan your payments.
Less admin time
As you'll not need to upload your receipts and invoices to then match these off against the bank, you'll save significant time with your admin. As long as you keep your records organised, you'll easily be able to check your records as/when needed, without the need to faff around with scanners, photos and complicated software.
Now we won't say that cash accounting is suitable for every business, however it certainly comes in handy for the majority of small businesses out there.
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Frequently Asked Questions
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