Postby bd6759 » Sat Apr 15, 2017 9:16 am
Cash basis means you acount for what you receive and spend at the time it happens. Conventional accounting uses the matching principle where expenses are matched to income.
For example, in a year you buy £1000 of goods for resale. You sell half of them in one year for £1500 and the other half the following year for another £1500.
Using the cash basis your profit in year 1 is £1500 - £1000 = £500. In year 2 it is £1500 - 0 = £1500.
Using conventional accounting your profit in year 1 is £1500 - £500 = £1000 and in year 2 it is it £1500 - £500 = £1000.
The most prominent difference is that with the cash basis you can deduct expenditure on capital items such as vans and equipment. With conventional you would spread the cost over their useful life, For tax purposes you would claim capital allowances.