Accounts: traditional accounting (accruals basis)

Example –traditional accounting (accruals basis) 

Michelle is self-employed and has a furniture shop.  She has an accounting year end of 31 March. When preparing her accounts for the year ended 31 March 2026 under the traditional accounting principles she needs to note the following:

• Michelle invoiced a customer on 31 March 2026, so this invoice should be included as sales income, whether the customer has paid it or not. If the customer has not paid on 31 March 2026 the amount should be included as a debtor.
• Michelle paid her annual insurance bill on 1 October 2025 to cover the period from 1 October 2025 to 30 September 2026, so she only includes half of the cost in the accounts to 31 March 2026 even though she has paid the full amount; the other half would be included in the accounts for the following year as a prepayment.
• Michelle bought nine beds to sell and on 31 March 2026 there are three beds left, so only six beds should 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).

  Not everyone can use the cash basis, some sole traders and partnerships can only use traditional accounting and will need to elect to do so on their self assessment tax return or in their software for Making Tax Digital. A complete list of the businesses that cannot use the cash basis and must use traditional accounting (accruals basis) can be found on GOV.UK.

Example – changing to cash basisfrom traditional accounting (accruals basis) 

Brian has a garden furniture business and has prepared his accounts to 31 March each year using traditional accounting (accruals basis) up to and including his accounts for the year to 31 March 2025. Points to note regarding Brian’s accounts for the year ended 31 March 2025, the details from which were included on his 2024/25 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 2025 he received the payment of £1,000.
2. Brian purchased tools to use in his business in March 2025 and the cost of £300 is included as an expense in his accounts. Brian paid £300 for the tools in May 2025.
3. At the end of the accounting period Brian had closing stock of four chairs which he paid £200 for in February 2025. This closing stock is treated as an asset in his accounts to 31 March 2025 (and not an expense).
4. Brian had a written down value in his plant and machinery general pool of £1,500 at 31 March 2025.

For the 2025/26 tax year, Brian decides to prepare his accounts for the year ended 31 March 2026 using 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 2025 when he received it, but as Brian is moving from using traditional accounting to the cash basis this would result in £1,000 being taxed twice, both in 2024/25 and 2025/26. Therefore, there is a transitional adjustment to the cash basis income in 2025/26 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 2025 this would usually be treated as an expense in his accounts for the year ended 31 March 2026. However, Brian has already received tax relief for the tools in his accounts for the year ended 31 March 2025. Any expenses purchased using traditional accounting 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 2025/26 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 2025 under traditional accounting. Therefore, Brian will make an adjustment to treat the closing stock as a purchase expense and will increase his expenses by £200 in 2025/26.
4. Brian still has a tax written down value left in his plant and machinery general pool for writing down allowances, this 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 2025/26 tax year and no longer claim capital allowances.

  Many small businesses should not be affected by transitional rule 4 above 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.

  The spreading adjustment when moving from the cash basis to traditional accounting is different to the spreading of profits if you are affected by the basis period reform rules.

Example – changing to traditional accounting (accruals basis) from cash basis

Felix runs a small hardware shop and has prepared his accounts to 31 March each year under cash basis rules up to and including his accounts for the year ended 31 March 2025. Points to note regarding Felix’s accounts for the year ended 31 March 2025, the details from which were included on his 2024/25 tax return: 

1. During March 2025, Felix made sales of £1,000 but at the year-end only £400 of these sales had been paid for and therefore the business had debtors of £600. When Felix prepared his accounts for the year ended 31 March 2025, he only included £400 of the March sales, as this was the income he actually received. Felix received payment for the remaining £600 debt in April 2025.
2. Felix purchased some tools to sell in his shop in March 2025. However, he only paid for this stock in June 2025.
3. Felix purchased a new till under hire purchase, which had a capital cost, excluding interest charges, of £1,500 and he had made payments of £400 towards the capital cost of the till by the end of March 2025.

However, Felix decides it would be beneficial to use traditional accounting (accruals basis) due to the regular stock-takes he needs to make and moves to traditional accounting for his accounting year to 31 March 2026 (2025/26 tax year).  The effect of this on the above is as follows:

1. Any sales made under the cash basis where payment was received after moving to traditional accounting must be included as income under traditional accountings tax year otherwise this income will not be taxed. Therefore, Felix needs to account for the income of £600 in 2025/26 even though he is now using the traditional accounting rules because otherwise this income would not be taxed. Felix needs to increase his sales income in 2025/26 by up to £600, depending on his spreading adjustment (as explained under the heading, The spreading adjustment on the page Accounts: cash basis).
2. Any expenses incurred under the cash basis but not actually paid for until the business was using traditional accounting, must be deducted under traditional accounting. Felix would not have included the tool stock as an expense during the 2024/25 tax year as he did not pay for the stock until the following tax year. Therefore, an adjustment must be made under the transitional rules to include this stock as an additional expense in the 2025/26 tax year.
3. Capital expenditure will normally be treated as an expense under the cash basis and upon moving to traditional accounting will be treated as a capital allowance asset with no capital allowances left to claim. The exception to this rule will be when an asset has been bought on hire purchase as only the cash payments made will have been treated as an expense under the cash basis. After moving to traditional accounting, the remainder of the cost of the asset will either be treated as unrelieved expenditure in the general capital allowances pool or be fully written down using the annual investment allowance. 

Therefore, when Felix moves from the cash basis to traditional accounting, he will be able to treat the till as an asset qualifying for capital allowances and will claim either the annual investment allowance for £1,100 (which is the total cost less payments made so £1,500 less £400) or include £1,100 as a general pool asset and claim writing down allowances.