Cash Basis Of Accounting Flashcards
Cash Basis: How are trading profits calculated?
Total cash receipts
MINUS
Total allowable business expenses paid
Cash Basis: Approach to arrive at trading profits
Same as accruals basis:
- Adjust figure for tax purposes
- Basis periods
Cash Basis: Adjusting profit for tax purposes: General rule
Same as accruals basis
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Owner removing goods for personal use without paying arms-length price
‘Just and reasonable’ amount added back
E.g. cost
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Amounts received from sale of P&M: Classification
Taxable trading receipts
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Amounts received from sale of P&M: Exception
CARS
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Receipts on sale of non-depreciating assets
E.g. land and buildings
(Still) Not taxable trading receipts
(So CGT)
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Trader ceases to use capital asset for trade
I.e. takes for private use
Taxable receipt
Of MARKET VALUE
Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Trader ceases trade
Taxable receipt of
inventory
At Market Value
Cash Basis: Adjusting profit for tax purposes: Allowable expense payments: General rule
Same as accruals basis
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire P&M
Allowable
(No capital allowances claimed)
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire P&M: Exception
CARS
But not vans or motorcycles
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: P&M (except cars) bought under a hire purchase agreement
Deduction allowed for each payment
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Capital expenditure on non-depreciating assets (e.g. land and buildings)
Not allowable
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire cars
Not allowable
(Capital allowance/Fixed rate mileage allowance claimed on cars in the normal way)
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Leased cars: What to remember
15% restriction for high emission cars does not apply
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Interest paid on a loan
Allowable
Even if not all for trade purposes
Subject to a maximum of £500 p.a.
Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Bad debts
Not allowable
(Because income only taxed when cash received from customer)
Cash Basis: Condition for joining
Must have cash receipts for the TY not exceeding the limit
OBT limit = Combined receipts £150,000 - £300,000 recipients of universal credit) (Time apportioned)
Cash Basis: Does it apply to all the sole trader’s businesses when selected?
Yes
Cash Basis: Can a trader change to it from accruals basis?
Yes (If criteria met)
Cash Basis: Changing to it: Can you stop claiming fixed rate mileage allowance
No (Must continue to be claimed)
Cash Basis: First year: Capital allowances
Deduction
Made for proportion of any TWDV on CA pools relating to P&M (Other than cars)
Cash Basis: First year: Capital allowances: On cars
Continues to be claimed
(Unless using a fixed rate mileage allowance)
Cash Basis: First year: How to deal with double-counting income and expenditure that was accrued for but not yet paid?
Net adjustment:
Opening debtors
PLUS
Opening stock
MINUS
Opening creditors
Cash Basis: When does it end?
- Change in circumstances meaning
Calculating profits using GAAP is more appropriate
AND trader elects to do so - Trader’s receipt exceed the limit (OBT: £300,000)
(Time apportioned & Combined receipts)
Cash Basis: Leaving: Treatment of unreleaved P&M expenditure: ONLY when acquired but not fully paid for
E.g. Hire purchase
Allocated to Capital Allowances Pool in the next period
Cash Basis: Leaving: Treatment of capital asset sold (except cars and non-depreciating assets)
Proceeds increase trading profits
EVEN IF cash basis no longer applies
PROVIDING expenditure was originally deducted under C.B.
Cash Basis: Leaving: How is the net adjustment for income/expenditure accounted for?
- Adjustment expense deductible in full
In first accounting period after leaving C.B. - Adjustment income spread equally over 6 years
Taxed in the 6 tax years after the one they leave
Cash Basis: Leaving: Income/expenditure adjustment: Adjustment income: Can the trader elect to pay the tax sooner?
Yes
Cash Basis: Impact on: Partnerships
No partner can deduct from the total income:
Interest paid on a loan to:
1 .Invest in the Pship
Or
2. Buy P&M
Cash Basis: Impact on: Capital gains tax
Exempt
(Because proceeds from sale of P&M are taxable as trading receipts under the cash basis)
Cash Basis: Impact on: VAT
Must also use the VAT cash accounting scheme
(If registered for VAT)
Cash Basis: Impact on: (Class 4) NICs
Use tax adjusted profits as calculated under cash basis
