You might sometimes hear traditional accounting referred to as accrual basis accounting. With this method you're required to record all of the invoices you sent and received whether or not they have been paid yet.

So, if you send a customer their invoice at the end of March 2020, and they pay you at the end of April 2020 (the next tax year), the invoice should still be filed under the 2019 to 2020 tax year accounts, rather than 2020 to 2021.

With cash basis accounting, you only have to record a customer or supplier invoice once it's been paid.

Cash based accounts also allow for a slightly different treatment of some items, such as equipment payments being an allowable expense.

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So which method is best for you?

Traditional accrual accounting tends to be better suited to larger businesses, though it's worth considering if your business is likely to grow quickly.

Cash basis accounting is generally used by smaller businesses, such as painters, plumbers, and hairdressers, with a turnover of £150,000 or less.

It's a useful system for smaller businesses because you won't be taxed on income that you haven't received yet. As the business expands you're able to continue using cash basis accounting up to a total business turnover of £300,000 per year.

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