What is Traditional Accounting
What Is Traditional Accounting?
Traditional accounting, also called accrual basis accounting, is a method where profits are calculated based on when invoices are issued or received — not necessarily when the money changes hands. This means that income and expenses are recorded at the point they are earned or incurred, regardless of whether payment has been made or received.
In contrast, cash basis accounting records transactions only when money is actually paid or received. This simpler approach is often preferred by sole traders and small businesses because it aligns income and expenses with actual cash flow.
When Should Sole Traders Use Traditional Accounting?
If you’re self-employed, you need to decide between cash basis and traditional (accrual) accounting when you register with HMRC. Here’s how to choose:
- Cash basis accounting is usually the go-to option for sole traders since it’s straightforward and easier to manage. It records income and expenses based on actual cash movement, which makes tax calculations simpler.
- You can only use the cash basis if your annual business turnover is less than £150,000 (this threshold used to be £83,000 but was increased to allow more businesses to use the cash basis).
- If your self-employment income exceeds £300,000 per year, you’re legally required to switch to traditional accounting. This is because accrual accounting provides a more accurate financial picture for larger businesses.
Why Does This Matter?
Choosing the right accounting method affects how you track your finances and calculate tax. Traditional accounting can be more complex since it requires keeping detailed records of invoices and accruals, but it gives a clearer picture of your business’s financial health over time.
For smaller businesses or sole traders with simpler finances, cash basis accounting often makes day-to-day bookkeeping easier and reduces the chance of errors.
Summary
- Traditional (accrual) accounting records income and expenses when invoices are issued or received.
- Cash basis accounting records transactions only when money is actually paid or received.
- Sole traders earning under £150,000 per year can usually use cash basis accounting.
- Businesses with income over £300,000 must use traditional accounting.
- Selecting the right method is important for accurate tax reporting and business management.
If you’re unsure which accounting method suits your business, it’s wise to consult a professional accountant who can help you make the best choice.
Jump straight to : Tax Rebates…Online Self Assessment…Traditional Accountancy Services…VAT…Top
HMRC have published some information on accountants here
