Cash basis generally follows money received and paid; traditional accounting follows income earned and expenses incurred. The method affects timing, not whether the bank balance is correct. Check eligibility and transition adjustments before changing methods or copying last year’s workings.
Cash basis follows money received and paid
Under cash basis, income is generally recorded when received and expenses when paid, subject to the tax rules. It became the default accounting method for eligible sole traders and partnerships from 2024/25. Businesses can choose traditional accounting where appropriate, and some are not eligible for cash basis.
An unpaid invoice at 5 April can therefore be treated differently from one that has already been paid. The date you completed the work alone does not establish the cash-basis receipt date.
Traditional accounting follows a different timing approach
Traditional accounting generally recognises income earned and costs incurred for the accounting period, including relevant amounts still unpaid. It can involve debtors, creditors, stock and adjustments that do not appear directly in bank transactions.
For example, an invoice issued in March and paid in May should not simply be moved between years without checking the method. Both methods require a consistent, supportable calculation.
Switching needs a proper reconciliation
Changing method can require adjustments so income and costs are neither omitted nor counted twice. Provide the previous accounts and tax computation before a new accountant prepares the next return. Do not switch merely by selecting a different software option.
Equipment, finance costs, losses and unusual receipts can also require specific treatment. An accounting method is not a general permission to deduct everything leaving the bank.
MTD does not choose the tax treatment for you
Keeping records digitally and sending quarterly summaries are separate from deciding the correct annual taxable profit. The accountant still needs to know the method used and any year-end adjustments required.
Tell TaxSimba which method was used previously and supply outstanding invoices, bills and relevant opening balances. Where you are unsure, provide the last accounts rather than guessing. Establishing the method first makes the return easier to review and reduces the risk of the same transaction appearing in two tax years.
Check the home nation used for your tax calculation
Tell the accountant whether you live in England, Scotland, Wales or Northern Ireland, and about any moves during the tax year. Scottish rates differ for wages, pensions and most other taxable income; savings and dividends use UK rules. Welsh rates are set separately. Use the rules for the relevant year and your actual taxpayer status.
See Scottish Income Tax and Welsh Income Tax. These differences do not make a London address or an England-only earnings example appropriate for everyone.
Follow one invoice across the year end
Illustrative preparation example.
An invoice is issued before 5 April but paid afterwards. Keep the invoice and receipt dates visible so the accounting method determines the reporting year. When changing methods, check the transition so the same amount is neither omitted nor counted twice.
Check: Which method applies, and was the amount already brought into an earlier calculation?
| Check | Practical action |
|---|---|
| Which method was used previously? | Locate the prior accounts and return rather than guessing from the software screen. |
| What remains unpaid at year-end? | List invoices, bills and relevant stock or balances. |
| Is a method change proposed? | Prepare the transition reconciliation and confirm eligibility and adjustments first. |
Does using a bank feed mean I use cash basis?
No. A record source does not itself establish the accounting method. Confirm the method applied in the tax calculation.
Can I switch just by moving an invoice into next year's folder?
No. Timing and transition rules need consistent treatment supported by the records.
Download a checklist for this guide
- Find the previous accounting method.
- List unpaid sales invoices and supplier bills.
- Record stock and relevant opening balances.
- Keep payment dates and underlying invoices.
- Confirm any method-change adjustments before filing.