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Updated on 6 April 2024

Accounts: accruals basis

Sole traders and partnerships must prepare business accounts to complete their self assessment tax returns. Accounts show income and expenses of the business for the accounting period and can be prepared by using one of two methods: the cash basis or the accruals basis. This page outlines how the accruals basis works.

A pad of white paper with the words 'ACCRUAL-BASED ACCOUNTING' around the pad of paper various stationary can be seen.
Zolak / Shutterstock.com

Content on this page:

General principles

Historically, the accruals basis of accounting was the usual way that accounts were prepared in the UK. The accruals basis, which is also called traditional accounting or the Generally Accepted Accounting Principles (GAAP) basis, uses basic accountancy principles to ensure that only income and expenses which apply to the accountancy year are recorded in that year.

In general terms, this means that all income earned and all expenses incurred during the accounting period are included in the accounts, whether they are paid or not.

For example, if you are self-employed and have an accounting year end of 31 December and have a furniture shop then, when preparing your accounts for the year ended 31 December 2023 under accruals basis principles:

  • If you invoice a customer on 31 December 2023, this invoice would be included as sales income, whether the customer had paid it or not. If the customer has not paid on 31 December 2023 the amount would be included as a debtor.
  • If you paid your annual insurance bill on 1 July 2023 to cover the period from 1 July 2023 to 30 June 2024, you would only include half of the cost in the accounts to 31 December 2023 even though you had paid the full amount; the other half would be included in the accounts for the following year as a prepayment.
  • If you bought nine beds to sell and on 31 December 2023 there are three beds left then only six beds would be treated as a purchase during the year, with the remaining three beds being treated as a stock asset for the following year (see Business expenses allowable for tax under the heading Costs of goods bought for resale or goods used).

If you want to use the accruals basis for your self-employment accounts, then no election is required on your self assessment tax return for tax years up to and including 2023/24. For the 2024/25 tax year onwards you will need to elect on your self assessment tax return that you are using the accruals basis.

Changing to cash basis

If you decide you want to move from accruals basis to cash basis accounting, there are transitional rules to ensure that overall taxable profits are correct by taxing income and deducting all expense payments only once.

The steps you will need to take to move from the accruals basis to the cash basis are made during the first year of using the cash basis. The best way to explain this is by considering an example:

Example-moving from accruals basis to cash basis of accounting

Brian has a garden furniture business and has prepared his accounts to 31 March each year using the accruals basis up to and including his accounts for the year to 31 March 2023. Points to note regarding Brian’s accounts for the year ended 31 March 2023, the details from which were included on his 2022/23 tax return:

  1. At the end of the accounting period Brian had sales income of £20,000 which included £1,000 that had not been paid, so his accounts show his turnover (sales) as £20,000 and records debtors of £1,000. In June 2023 he received the payment of £1,000.
  2. Brian purchased tools to use in his business in March 2023 and the cost of £300 is included as an expense in his accounts. Brian paid £300 for the tools in May 2023.
  3. At the end of the accounting period Brian had closing stock of four chairs which he paid £200 for in February 2023. This closing stock is treated as an asset in his accounts to 31 March 2023 (and not an expense).
  4. Brian had a written down value in his plant and machinery general pool of £1,500 at 31 March 2023.

For the 2023/24 tax year, Brian decides to prepare his accounts for the year ended 31 March 2024 on the cash basis. The effect of this on the above is as follows:

  1. Under the cash basis, Brian would usually account for the £1,000 received in June 2023 when he received it, but as Brian is moving from using the accruals basis to the cash basis this would result in £1,000 being taxed twice, both in 2022/23 and 2023/24. Therefore, there is a transitional adjustment to the cash basis income in 2023/24 to reduce sales income by £1,000.
  2. When Brian is using the cash basis, he should account for all expenses when he actually pays for them and as he paid for the tools in May 2023 this would usually be treated as an expense in his accounts for the year ended 31 March 2024. However, Brian has already received tax relief for the tools in his accounts for the year ended 31 March 2023. Any expenses purchased using the accruals basis but not paid for until using the cash basis should be disregarded as expenses under the cash basis because tax relief has already been allowed. Therefore, the expense of £300 is ignored in the 2023/24 tax year and the total expenses for this year are reduced by £300 as part of the transitional adjustments.
  3. Under the cash basis, stock is deducted as a purchase expense. Brian has not yet received any tax relief for the £200 as it was an asset in his accounts for the year ended 31 March 2023 under the accruals basis. Therefore, Brian will make an adjustment to treat the closing stock as a purchase expense and will increase his expenses by £200 in 2023/24.
  4. As Brian still has a tax written down value left in his plant and machinery general pool for writing down allowances, which means that he has not yet received all the capital allowances for the full cost value of machinery purchased some time ago.  When moving to the cash basis, any amounts which still haven’t received full capital allowances are treated as a cash purchase upon joining the cash basis. Therefore, Brian will be able to treat the £1,500 as an expense in the 2023/24 tax year and no longer claim capital allowances.

However, many small businesses should not be affected by this transitional rule because most plant and machinery capital expenditure will be covered by the annual investment allowance. Also, the small pools allowance means many residual capital allowances general pool balances for writing down allowance purposes are written off. Therefore, most small businesses will probably not have a capital allowances general pool balance. This rule does not apply to capital assets such as cars or land and buildings.

Our guidance on the cash basis explains how you can move from the cash basis to the accruals basis.

More information

Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your 2023/24 tax return when using the cash basis.

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