Cash Basis or Accruals? Choosing How You Report Under MTD

Before you send your first quarterly update, you need to know which accounting basis you're on. It decides when income and expenses count. Your quarterly updates use the same basis as your year-end figures, so it's worth getting right from the start.

The cash basis

Under the cash basis, income counts when you're paid and expenses count when you pay them. It follows your bank account, which is why many small businesses find it straightforward. Since April 2024 it has been the default for sole traders and landlords, and there is no turnover limit, although you can choose to opt out.

• Income is recorded when the money arrives.
• Expenses are recorded when you pay them.
• An unpaid invoice doesn't count as income until it's settled.
• You usually don't need to track debtors and creditors.

Accruals (traditional accounting)

Under accruals, income counts when you earn it and expenses count when you incur them, whether or not money has changed hands. If you invoice in March and are paid in May, the income belongs to March.

• Income is recorded when you invoice or earn it.
• Expenses are recorded when you receive the bill.
• You need to track what customers owe you and what you owe suppliers.
• It can give a truer picture of the period, especially with long payment terms.

Which should you choose?

For most sole traders and landlords the cash basis is simpler and matches how they think about money. Accruals can suit a business with large unpaid invoices, stock, or lenders who want accruals accounts. If you're unsure, ask your accountant before you submit your first update, because changing basis later can mean adjustments.

How AppyTax handles it

AppyTax reports on whichever basis you are on, cash or accruals, so your quarterly figures follow your choice.