When you register as self-employed with HMRC you’ll have to choose which type of accounting you prefer: cash basis or traditional.
Cash basis is suitable for most sole traders and can make life much easier - especially when it’s time to pay tax. Cash basis accounting is a straightforward approach where you record transactions when money changes hands.
This means that you record income when you receive payment, and expenses when you pay for them.
For example, if you complete a job for a customer and receive payment immediately, you would record the income in your accounts at that time. Similarly, if you purchase materials for a job and pay for them with cash or a bank transfer, you would record the expense at that time.
Cash basis accounting is a popular method for sole traders because it's easy to understand and implement. It's particularly useful for businesses with low levels of transactions or turnover. However, it does have some limitations. For example, you cannot claim tax relief on expenses until you have actually paid for them.
Overall, cash basis accounting is a useful tool for sole traders who want to keep their accounts simple and straightforward.
You can find more information about cash basis accounting from HMRC website, link: https://www.gov.uk/simpler-income-tax-cash-basis. If you’re unsure about anything related to your bookkeeping, it’s best to seek professional advice for example from your accountant.