Cash-basis accounting – the option
In early 2012 the government announced the news that from April 2013 unincorporated businesses with a turnover of less than £77,000 (potentially growing to £150,000) will have the option for using cash-basis accounting for income tax purposes.
While this may not be suitable to all small businesses, it will undoubtedly enable financial statements and tax returns to be prepared more efficiently.
Currently the accruals concept is the optimal choice for preparing financial statements however requires good understanding and knowledge of the concepts involved – basically a nuisance to the smaller businesses owners who have to concentrate their efforts on their business.
Cash accounting is simpler and more manageable with all businesses already having an excellent record of their past cash basis transactions – their bank statements.
So what is cash accounting? Cash based accounting means that sales are recorded when the cash is received and expenses are incurred when the cash is paid. Sounds simple, well it is in comparison to the accruals concept and that is the benefit you’ll get.
– Simplification – paying tax on cash that is collected minus their acceptable operating expenses.
Caution to the wind – Many businesses may lose focus on what their goal really is – profitability
History shows that often in smaller businesses the only time they are faced with true Profit and Loss of their business is their annual meeting, with their accountant when they calculate what tax is to be paid. If this was to become redundant the core aim of the business may be neglected.
Accountants continue to have an opportunity to provide added value to their clients by giving them a real sense of ‘how your business is working’.
What’s right for one client is not necessarily right for another but it is welcomed that the Government is now looking to simplify accounts for small businesses.
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