11 Mar Cash or accrual accounting for my UK startup: which is best?
UK business start-ups can opt for two main types of recording for accounts; accrual or cash accounting. If you’re planning to set up a business and are wondering how to record sales, debts, and purchases in your accounts, this short SQL summary offers a brief guide:
What is accrual accounting and is it ideal for my UK start-up?
With the accrual system of accounting in place, you’ll run a much tighter ship from a financial perspective. The system will recognise when clients are billed and when you owe money to suppliers. This means it’s a real-time accountancy system that gives you far more insight into the actual financial status of your business.
It can be a more complex system to administer, but you’ll probably appreciate that knowing just what money is due from all invoices and the cash you will need to pay out over the coming months can help ensure tighter controls and transparency.
How does cash accounting work?
Any small business in the UK can use cash accounting methods, just so long as turnover is lower than £150,000 annually. This is a simpler way to keep accounts, but if you do feel your sales will exceed £150,000 in the first year, you may be better advised to use the accrual method from day one.
The simple cash accounting system doesn’t require any accounts receivable/payable lines and just recognises all funds at the time they are paid or received. Where it falls down for growing start-ups is that real-time asset and liability tracking isn’t available, and maintaining accounts receivable/payable records does help companies to organise scaling a little better.
Any business can switch from cash accounting to the accruals system, and some start-ups could be obliged to use accruals from the get-go. Companies legally obliged to opt for accruals accounting include securities dealers and some underwriters.
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