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Main difference between accounting methods
The key difference between accruals and cash accounting is the timing of when revenue and expenses are recognized.
Cash accounting method
This accounts for revenue only when the money is received and for expenses only when the money is paid out. It is most used by small businesses and for personal finances. Limited companies, limited partnerships and those with revenue >£166,000 per year are ineligible.
Accruals accounting method
This accounts for revenue when it is earned and expenses for goods and services when they are incurred regardless of when the actual money is received or paid out. Accrual accounting is the most common method used by businesses that are more complex, e.g. you have high levels of stock or equipment to claim capital allowances on, want to claim expenses on interest/ bank charges >£500, need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan, have losses that you want to offset against other taxable income.
Changing accounting methods
The self-assessment tax form has boxes to tick if you want to change accounting methods and working sheets to calculate the figures that you need to enter to adjust for the change in methodology.