Cash basis and accounting with untied
Cash basis vs accrual accounting
When working out your business profits, there are two main accounting methods: the accrual basis and the cash basis. Both are valid - but one is usually much simpler for small businesses.
Accrual accounting (the traditional approach)
Accrual accounting is typically required to be used larger companies which need to follow specific accounting standards.
Under this method, income and expenses are recorded when they are earned or incurred, not when the money actually changes hands. The aim is to give a very accurate picture of how the business performed over a specific period. If you buy goods to resell, they go into stock and can't be claimed as an expense until you sell them.
Accrual accounting usually involves:
- A balance sheet
- Tracking unpaid invoices (debtors and creditors)
- Stock or inventory (including working out cost of sales)
- Capital allowances on assets
This can be very precise - but it also adds complexity, admin, and systems to keep on top of it.
For example:
- A graphic designer orders software licences costing £600 in March but pays the invoice in April. Under accrual accounting, the £600 is treated as an expense in March, because that’s when the cost was incurred.
- The designer completes a £2,000 project in March but is paid in May. The £2,000 is counted as income in March and shown as money owned until it’s paid.
The cash basis (simpler and now the default approach for HMRC)
For many people, this level of detail isn’t necessary - and HMRC agrees.
The cash basis is now the default method for self-employed people, with no turnover limit.
With the cash basis, you simply follow the money:
- If money comes in, it’s income
- If money goes out, it’s an expense
So using the same designer example:
- The £600 software licence is an expense when it’s paid in April
- The £2,000 project is income when the client pays in May
You don’t need to produce:
- A balance sheet
- Stock or inventory calculations
- Cost of goods sold figures
You can still keep your own records if you want, but they’re not required for HMRC reporting.
One key exception: cars bought for business use still need to be spread over time using capital allowances.
How untied fits in
untied is built specifically for the cash basis (though if you want to use it for the accruals basis you can do)
That means:
- No balance sheet
- No inventory or stock tracking
- No formal cost of sales calculations
For many smaller businesses, especially those buying and selling in close to real time, this works well.
untied still gives you:
- A clear overall view of profitability
- Powerful filtering of transactions
- The ability to use custom tags if you want to track things
Moving from accrual accounting to the cash basis
If you switch from accrual accounting to the cash basis, HMRC uses transitional adjustments to make sure income and expenses are only taxed or deducted once.
All adjustments are made in the first year you use the cash basis.