Traditional Accounting vs Cash Basis For Landlords

The main benefit of cash basis accounting is its simplicity. You only have to declare money when it comes in and out of your business. This means that you’ll only be paying income tax on the money you’ve received during your accounting period at the end of the tax year. Some further benefits include:

• Easy To Use – as you only have to declare money when it comes in and out of your business, it can be a great time-saver. It’s simple to learn and implement, and you don’t have multiple accounts to track – time efficient. 
• Cheap – as you’re making your own declarations, you can save money by not hiring a traditional accountant to handle your finances. However, you must be careful to declare your finances accurately, or you could receive fines from HMRC. 
• Running Total – as you’re not factoring in money that will come in or out of your business in the future, you get a good idea of how much money you have at present.

In many cases, though you may save money by doing your accounting yourself, you could lose more money via HMRC penalties and investment loss. Take a look at some of the cons of cash basis accounting for landlords: 

• Can Prohibit Investors – when you’re not thinking about your future outgoings and ingoings, it makes it difficult to make important financial decisions. Sometimes it can lead to rash decision-making that may have negative consequences. It can also prevent investors from contributing to your business, as cash basis accounting doesn’t give an illustration of your entire financial situation or any predictions as to how it may look in the future. 
• Accuracy – whenever you take your taxes and finances into your own hands, you must ensure that you’re doing them correctly. This can be difficult when you have a lot on your plate, and landlords often have a large variety of taxes to juggle. If you don’t process everything correctly, you may be subject to fines from HMRC, and it can prohibit you during an audit. 
• Sideways Loss Relief – cash basis accounting can also prohibit you from ‘sideways loss relief’, which is when you have losses that you want to offset against other taxable income.