Glossary · UK
What is Cash Basis Accounting?
A simplified accounting method for small businesses that records income when received and expenses when paid, rather than when they are earned or incurred.
Full Definition
Cash basis accounting lets small self-employed businesses and landlords calculate their taxable profits using money actually received and paid in the tax year, rather than the more complex accruals basis that matches income and costs to the period they relate to. From April 2024, cash basis became the default for unincorporated businesses — sole traders and partnerships automatically use it unless they actively opt out. The previous entry threshold of £150,000 turnover has been removed, so any size of unincorporated business may now use cash basis. There is no longer an exit threshold either. Under cash basis, capital expenditure on equipment and machinery is generally deductible in full in the year of purchase (rather than through capital allowances), and stock movements do not need to be tracked. However, there is a cap of £500 on interest deductions for loans. Accruals accounting remains mandatory for limited companies, and businesses that find it more beneficial — such as those with large stock or debtors — can opt out of cash basis. For most micro-businesses, cash basis is simpler and reduces the administrative burden of tracking debtors, creditors and prepayments.