The short version: Cash basis is an accounting method where you record income when you actually receive the money, and expenses when you actually pay them. Not when you send an invoice or get a bill.
It’s popular with self employed people because it’s simpler and you don’t end up paying tax on money you haven’t received yet.
Why use cash basis?
Chasing late payments is an unfortunate reality when you’re self employed. With traditional accounting, you’d pay tax on income as soon as you invoice it, even if the client takes months to pay. Cash basis avoids that problem.
Any downsides?
If all your clients suddenly pay at once, your income for that period looks artificially high. This can skew your records if you’re trying to show consistent earnings to a lender or investor.
Also watch out for credit card expenses. With cash basis, you record the expense when you pay your credit card bill, not when you make the purchase.
Not everyone can use cash basis. There are some restrictions based on your business type and turnover. Check gov.uk to see if you qualify.
Not sure which accounting method suits you? Ask us and we’ll point you in the right direction.
