Digital Tax Returns


What is the accruals concept?

Whilst cash-flow is one of the most important elements of managing a small business, the businesses accounts are often prepared using the accruals basis of accounting. In fact, the financial statements for a company are required to be prepared using the accruals basis rather than the cash basis. The fundamental difference between the accruals basis and the cash basis is that the accruals basis includes costs and revenues on the basis of the period to which they relate as opposed to the period in which the cash transaction actually took place. This may mean that if you maintain your records primarily by recording cash transactions then certain adjustments will be required for the preparation of formal business accounts or financial statements.

Worked Example - Cash vs Accrual Basis of Accounting

Your business pays the rent for its property 3 monthly in advance and has paid £3,000 on 1 January 2014 for the period 1 January to 31 March 2014. The cash basis of accounting will show a £3,000 payment in January and zero payment in February and March. Under the accruals basis of accounting, the P&L for each of the 3 months from January to March will show a £1,000 charge for rent on the basis of the amount of rent due for that period, regardless of when the rent was actually paid. Under the accruals basis, in this example, the rent paid in advance is treated as a prepayment. So the transactions during January will show a credit to cash of £3,000, a debit to profit and loss rent expense of £1,000 and a £2,000 debit to balance sheet prepayments.

Had the rent been paid in arrears on 31 March for the same period the cash basis of accounting would change to show a £3,000 payment in March as opposed to January. Under the accruals basis, the profit and loss account would remain the same. The difference, though, would be that in January and February an accrual would be made to record the £1,000 cost in the P&L - Debit P&L Rent Expense, Credit Balance Sheet Accruals. The accrual representing the amount owed by your business for rent at the end of each month.
Next Steps
Why not get in touch to discuss how we can help you deal with the accounting, tax and finance for your small business. Request a call back to arrange a free consultation: Request A Callback

Written by Accquant Chartered Accountants
Chartered Accountants for the small business. Providing free accounting and business planning software for the small business as well as a full range of accounting, tax and Finance Director services. About Us

Free Online Software

Free online accounting and business planning software to manage the small business. From cashflow management, invoicing and financial reporting to detailed business plan analysis, plan template and PDF report. The online accounting and business planning software is provided for free. Tax, accounting and Finance Director services are available through one of our Pricing Plans

Get started now

Why Choose Accquant Chartered Accountants?

  • Chartered Accountants - we are a firm of Chartered Accountants, registered with, and regulated by, the Institute of Chartered Accountants in England and Wales. Our qualifications and experience ensure we deliver to the highest professional standards.
  • Online Solutions - we believe that professional services, fully integrated with online software, is the future of the accounting profession. That's why our services are based around our own online accounting software. The software was developed specifically for the small or startup business, to be easy to use and free of the unnecessary functional clutter that complicates many of the currently available solutions.
  • Small Business Specialists - we only provide services to small businesses and as such your Chartered Accountant will be able to advise you on all aspects of the accounting, tax and finance that affect your business. We will not be passing you around the various departments within our business or forcing you to deal with people who are not appropriately qualified to assist you.
  • Complete Range of Services - we provide a complete accounting, tax and finance service to the small business owner. Our services are tailored to your requirements, from basic tax returns to a full Finance Director service to manage all of your accounting, tax and finance for you and your business.
  • Low Cost Fixed Price Packages - the online delivery of our services allows us to keep our prices low for our clients. We provide our services either as part of a standard package or bespoke solution. All our prices are fixed so that there are no unpleasant surprises throughout the year.
  • Easy Set-Up & Free Consultation - we offer a free consultation to all of our clients. This can either be provided as a short telephone consultation, if you are looking for a quick and hassle free start, or you can choose a meeting with a Chartered Accountant. We are happy to meet our London clients at their place of business if this is more convenient.