Sarah Bradford explains which businesses can use the cash basis to work out their profits and outlines the implications of doing so.
The cash basis is a simpler way for businesses to work out their taxable profits and losses, as it takes account only of cash in and cash out.
Unlike the traditional accruals basis, there is no need to work out debtors and creditors or prepayments and accruals or to account for stock or work in progress. Instead, under the cash basis, income is recognised when it is received and expenses are recognised when they are paid.
By contrast, under the accruals basis, income and expenditure are matched to the period to which they relate.
Example: Cash vs accruals basis