Cash Basis Note

Cash Basis Note

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When preparing under the cash basis I presume I need to change my notes to the accounts:-

The accounts have been compiled on a basis that enables profits to be calculated in accordance with UK Generally Accepted Accounting Practice and that provides sufficient and relevant information to enable the completion of a tax return.

To something like:

The accounts have been compiled on a basis that enables profits to be calculated in accordance with UK Cash Basis Accounting Practice and that provides sufficient and relevant information to enable the completion of a tax return.

Any thoughts?

Replies (8)

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By johngroganjga
11th Aug 2014 11:49

But what you produce won't really be "accounts" in any meaningful sense will it?  Won't it just be a analysis of receipts and an analysis of payments?

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Replying to Duggimon:
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By SunTzu
11th Aug 2014 12:33

I guess so. What would you put under the accounting basis note then?

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By johngroganjga
11th Aug 2014 13:06

Well if I were doing them they wouldn't be accounts so the question of disclosing the accounting basis wouldn't arise.

I would assemble the figures on a piece of paper (reconciling the opening and closing bank balances) headed something like "Schedule of receipts and payments prepared for tax purposes", which I would get the client to sign to record his agreement.

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Euan's picture
By Euan MacLennan
11th Aug 2014 14:08

What accounting basis note?

We have never produced self-employed accounts with an accounting policy note.  The only notes we include are analyses of balances, such as fixed assets and capital account, if not shown on the face of the balance sheet.

You appear to be quoting the standard text in IRIS for a 'Basis of Preparation' note, but the default in IRIS is not to show any such note, so take the hint - accept that it is not necessary and leave it out.

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Replying to taxinfo:
By johngroganjga
11th Aug 2014 16:45

Good practice

Euan MacLennan wrote:

... so take the hint - accept that it is not necessary and leave it out.

Just because it is not strictly necessary does not mean that it is not good practice.

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By Paul Soper
11th Aug 2014 14:21

Accounting basis or not...

Accounts produced on a cash basis are accounts, they are simply prepared on an assumption which is not the same as accounts produced on an accruals basis.  As they reflect cash flow through a business they could arguably be said to be just as meaningful, if not more so, that a set of accounts painstakingly compiled using GAAP - and correct me if I'm wrong, but you want to adopt FRSSE then you would have to disclose that fact in a note to the accounts.

Cash Accounting was introduced to deal with the problem of very small traders for whom a set of accounts produced in accordance with GAAP is as much use as chocolate teapot.  The vast majority were producing accounts on a cash basis anyway but running the risk of challenge by the revenue bases on the FA2002 requirement (reflected in ITTOIA and CTA) for ALL persons to report income in accordance with GAAP - see Smith v HMRC for an example of the horror that can occur from that.

You don't need accounts to file a self-employed return and a statement produced to assist i that process does not need any form of note or qualification from the person producing it.  Documents to support bank loans and mortgages are, of course, a different matter.  If you suspect that a client may use such a document for those purposes, with or without, more dangerously, your permission then some sort of contemporaneous qualifying note is obviously a good idea.

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By johngroganjga
11th Aug 2014 16:40

Chocolate teapot?

Why are full accounts "as much use as a chocolate teapot".  Do you think businessmen are indifferent as to whether their businesses are profitable or solvent and are not interested in finding out?

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By Paul Soper
11th Aug 2014 17:36

Small business

The cash basis is designed for window cleaners, gardeners, odd-job men - by definition people with a low turnover - the OTS recommended a threshold of £30,000 but HMRC wanted to keep it simple so aligned it with the three-line accounting threshold.  It isn't designed for anyone with a business that could benefit from a more sophisticated accounting system.  Having said that I can remember a set of accounts produced by an accountant many, many years ago, including a full balance sheet with one asset, the lawn mower, which was religiously written down every year at a rate which was not the same as the available capital allowances at the time.

For some reason every-time the subject of cash accounting comes up we get comments about the desirability of reporting to accounting standards to businesses which frankly don't need it.  However if challenged by HMRC the lack of using accounting standards exposes them to the danger of discovery assessments being raised for up to 20 years!  There are a very significant number of self employed peoiple out there who don't need accountants but do need to be allowed to use the basis they understand.

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