Many small businesses in the UK are Using the cash basis for tax. This is a simple and straightforward way of accounting for your business income and expenses.
In this video I’ll explain how to use the cash basis for tax and highlight some of the benefits it offers. If you’re thinking about using the cash basis for your business, watch to find out more!
Small business owners have a lot on their plate, and tax season is no exception. If you’re looking for an easy way to keep your taxes organised and filed on time, the cash basis might be the right option for you. In this video, I’ll take a look at what the cash basis is , and contrast that tom the traditional method of calculating profits. Watch to find out more!
Calculating tax profits – Traditional accounting versus cash basis
When it comes to calculating your tax profits, there are two main ways of doing things: the traditional accounting method, and the cash basis. The table below illustrates the 2 methods.
| Year 1 | Invoices issued | Invoices unpaid at start of the year | Invoices unpaid at end of the year | Cash received/paid |
|---|---|---|---|---|
| Turnover | £40,000 | £0 | £3,000 | £37,000 |
| Materials | £10,000 | £0 | £2,000 | £8,000 |
| Other costs | £5,000 | £0 | £0 | £5,000 |
| Profits | £25,000 | £24,000 | ||
| Traditional accounting | Cash accounting |
| Year 2 | Invoices issued | Invoices unpaid at start of the year | Invoices unpaid at end of the year | Cash received/paid |
|---|---|---|---|---|
| Turnover | £40,000 | £3,000 | £1,000 | £42,000 |
| Materials | £10,000 | £2,000 | £1,000 | £11,000 |
| Other costs | £5,000 | £0 | £0 | £5,000 |
| Profits | £25,000 | £26,000 | ||
| Traditional accounting | Cash accounting |
Conclusion
So, what have we learned? the cash basis for tax is a way for businesses to measure their performance over a specific period of time. This method can be used by sole traders and partnerships, and has some advantages, like being simple to understand and easy to use.
However, it does have its drawbacks, like not considering bad debts or late payments. Businesses that want to start using the cash basis of measuring profits should speak with an accountant first. Make sure you are eligible and learn about any other considerations they need to take into account. Thanks for watching! Don’t forget to subscribe so you don’t miss future videos on this topic or others in the series.
But if you’d still rather leave it all to the professionals, that’s no problem either, Contact us .
For more details on the tax return, what to claim, and payments on account check out my previous blog on this topic, more words, and details. Furthermore, a FREE online tax calculator, use the slider to show what your tax you may have to pay.
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