Cash basis and traditional accounting

Cash basis and traditional accounting recognise business transactions differently, so the method affects which records and adjustments are needed. Cash basis became the default for eligible self-employed businesses from 2024–25, with an option to use traditional accounting where appropriate.

Check eligibility and any transition adjustments before switching. These self-employed rules should not be applied to a limited company simply because it uses a cashbook.

Understand what changes in the timing

Under cash basis, the receipt or payment of money drives the ordinary recording of income and expenses, subject to the applicable rules. Traditional accounting uses a different approach and needs information about amounts earned or incurred but not yet settled. HMRC explains both approaches and the ability of eligible businesses to choose traditional accounting. ^[1] Neither method makes the underlying documents unnecessary.

Take a customer invoice issued near the year end and paid afterwards. Keep both dates and ask how the chosen method treats it. Repeat the exercise for an unpaid supplier bill and an advance customer payment. These concrete transactions make the difference clearer than selecting a software option called cash without understanding what it will do to the reported figures.

Check eligibility before comparing convenience

Identify the business structure and activity and apply the current eligibility rules. Cash basis for self-employed income should not be confused with a limited company's bookkeeping routine or a VAT accounting scheme. A company may use a cashbook as an operational record while still needing accounts prepared under a different framework.

Where an individual has several businesses or a partnership is involved, explain the complete arrangement to the accountant. Ask whether any restrictions or consistency requirements affect the choice. Do not assume the method can be selected independently for every spreadsheet tab merely because the software permits it. Preserve the conclusion and the facts that support it with the tax preparation record.

Consider what the business needs from its accounts

A business with substantial stock, unpaid customer balances or financing needs may require information that goes beyond a simple receipts-and-payments view. HMRC notes practical reasons for choosing traditional accounting, including complexity and lender requirements. ^[1] Compare the reporting needs of management and external users alongside the tax preparation process.

Cash visibility remains useful under either approach. A profit report does not replace a cash forecast, and a cash-based tax record does not necessarily show every outstanding obligation. Keep customer and supplier information that supports collection and payment decisions. The method should be understood as part of the accounting design, rather than a reason to stop recording facts the business still needs to operate responsibly.

Plan a transition without omissions or duplication

If changing method, identify opening customer balances, supplier bills, stock, prepayments, assets and other items requiring review. Ask the accountant to prepare the relevant transition adjustments. An amount already accounted for under one method should not be inadvertently counted again or lost when the records move to the other method.

Keep a transition schedule linked to the earlier return and the new year's records. Explain each material adjustment and who will enter it in the software. Use Accounting records when changing software if a software migration is happening at the same time. A new system's opening balance import and a tax-method transition are different tasks and should not be assumed to correct each other's gaps automatically.

Keep expense choices separate from the main method

Simplified expenses for vehicles or homeworking have their own conditions and interactions. Choosing cash basis does not by itself settle whether a particular flat-rate expense method is appropriate. Review the relevant cost category, earlier claims and private use separately, with enough evidence to explain the result.

Use Working from home as a sole trader for homeworking and Business mileage records for self-employed people for vehicle records. Keep a short method register showing the main accounting approach and any separate expense choices. This is useful when an adviser changes or a new bookkeeper takes over, because the system may contain several settings whose labels appear similar but have different tax consequences.

For Sole trader accounts preparation, provide the current method, recent accounts, outstanding balances and reasons for considering a change. Ask for a comparison based on eligibility, reporting needs, transition work and the actual tax periods affected. Avoid making the decision solely from one year's apparent tax result without understanding the following year's timing and record requirements.

After the first period under the chosen approach, reconcile a sample of transactions across the boundary and review any unexpected result. Keep the final adjustment schedule with the return. A deliberate, documented transition is easier to maintain than a method change discovered only when the year-end figures no longer reconcile with the previous accountant's working papers.

Illustrative scenario

A sole trader moves from traditional accounting to cash basis. They identify unpaid customer invoices and supplier balances from the previous year so amounts are not counted twice or omitted during the transition.

Preparation checklist

• Confirm eligibility
• Record the chosen basis
• List opening balances
• Review transition adjustments