How you record income - whether using the cash or accruals basis - can have implications on your tax liability for a given year, so it's important to understand what these are and why.

 

Cash Basis

 

What is the Cash basis?

Recognising funds once the money reaches your account and expenses when the transaction clears your account. 

 

Why would this be useful to me?

This helps create a more accurate picture of your profit, although it's not an accurate representation of cash flow. The cash basis makes things simpler than the accruals basis, for small businesses.
 

 

Accruals Basis

 

What is the Accrual basis?

Recognising funds when they have been billed, this does to require money to actually reach your account. 

 
Why would this be useful to me?

Depending on when you've recorded this as income, there's a chance that this affects your tax calculation for a given tax year.

For example, if you invoice a client just before the end of the tax year on, say, March 15th 2019 with 30 day terms for payment, you'll expect to be paid on April 14th 2019, which falls into the following tax year. For most sole traders, the default HMRC 2018/19 tax year runs until April 5th 2019.

Using the accruals basis to calculate your tax means you'll be recording this as income for the 2018/19 tax year.

(If you use the cash basis, here's a scenario in which your tax liability would be delayed until the following - 2019/20 - tax year.)


Coconut uses the Cash Basis: 

We're able to use data from your current account to give you an accurate reflection of your tax liability for an inbound payment considered as income.

This applies to sole traders and limited companies, as follows:

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