As well as it’s availability to use for your business there is also the matter of suitability for your business – just because you can use it that doesn’t mean that you should. Although it is a much easier system to use there are some downsides.
The main downside is that cash basis does not give an accurate view of a business’s financial position. There is not much of a balance sheet (financial statement showing assets, liabilities & owner equity) because fixed assets & stock purchases are written off as an expense when they are paid for as opposed to being held as assets in the accounts and written off bit by bit over their useful life. There is no accounts receivable or payable so the accounts may show a profit but the business owes far more in unpaid bills. For these reasons a lender may not be satisfied with cash basis accounts.
Relief for interest paid on cash borrowing is restricted to £500 per annum (this does not include interest on purchases as long as the purchase is an allowable expense).
Losses can only be carried forward to use against trading profits in the future – not backwards or sideways as you are able to do with accruals.
If you are unsure which method is best for your business you should seek advice from a tax adviser.
If you have decided that you are going to use cash basis then please continue to the bookkeeping section.