Under the cash basis, accounts are prepared simply by reference to money received and money paid out. By contrast, under Generally Accepted Accounting Practice (GAAP) profits must be worked out using the accruals basis (sometimes referred to as the ‘earnings basis’) which recognises income earned in a period and expenditure incurred in a period, regardless of when income is received or the payment made.
From 6th April 2017 onwards, the cash basis will be the default basis for most unincorporated landlords where rental income is less than £150,000 a year. However, if the landlord wishes to continue to prepare accounts on the accrual basis, he or she will need to elect to do so. By contrast, property letting companies will need to continue to use the accruals basis to prepare accounts.
The rules for the treatment of capital expenditure under the cash basis have also been reformed from 6th April 2017 onwards. The new rules allow landlords using cash basis accounting to deduct most capital items from rental income when computing profits. However, a deduction is not available in this way for all capital expenditure – notable exceptions include land and cars.
Call us on 01275 852255 to discuss what cash basis accounting means for your property rental business.