Traditional accounting is an accounting method used where you include business income and expenses that were invoiced or billed during your accounting period on your tax return. It is also known as the accrual basis in accounting. It means you’ll pay tax and national insurance whether your client has paid you or not. It means you’ll need to calculate accounting adjustments like:
- Trade debtors
- Trade creditors
- Accruals
- Prepayments
When it comes to filling in your tax return, you can choose to use cash accounting instead, which means you only include business income and expenses paid during your accounting period on your return.
Traditional accounting can be a bit more complicated to use if you are DIY-ing your business finances. Still, it can be beneficial in certain circumstances, helping to reduce your tax bill if you have been billed for expenses that you haven’t paid for example. But in others, say you have clients who haven’t paid you, you’ll end up paying tax on money you haven’t received.
More Reading: Should You Use Cash or Traditional Accounting for Your Tax Return?
