How to keep your books? Cash Accounting vs Accruals

 

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Non-VAT registered small businesses usually favour using the cash accounting method. If you're using a bookkeeping app, things couldn't be easier.

 

• Sales: If you generate Sales Invoices using a bookkeeping app, then corresponding customer receipts can be matched as and when the app imports the bank transactions.

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• Expenses: The bookkeeping app will import your bank transactions. Your job is simply to categorise each payment, as, for example, "materials/purchases, wages, stationery, motor expenses etc."

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• Keep it simple and run every transaction through your business bank account, and there will be no need for extra cash / "out-of-pocket" expenses to be entered manually.

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VAT registered or larger businesses must use accrual accounting, but, software will help tremendously.

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• Sales: Same as above, Xero users see: Sales and online invoicing in Xero - Xero TV

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• Expenses: You'll need to differentiate between those for which you have a Bill / Purchase Invoice and those paid without a Bill (such as bank charges).

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• VAT: Select the correct VAT code for each transaction (not all zero-VAT transactions are created equally), see our full guide to VAT codes.

 

Some additional tips for Xero users

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• Where a supplier provides a Purchase Invoice (Bill), you should enter these into Xero (I’d advise giving each purchase invoice your own reference number, entering that into Xero, and filing in that order): See: Manage Bills and Purchases in Xero - Xero TV
   

• Next pay your Bills (this can now usually be done by returning to DASHBOARD > BANK > RECONCILE: Xero will make suggestions for payments that seem to match your bills.
   

• Finally, you’ll have some payments left in your bank account for which you haven’t received bills (e.g. bank charges, certain direct debits etc.). Again via RECONCILE, simply complete the boxes Who, What and Why to categorise these payments into the correct Profit & Loss categories (Nb: Try to be consistent as much as possible with where you categorise your expenses)

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