VT Transaction+

If you account for all your income and expenses by only entering payments and receipts from your bank statement, then you are using cash basis accounting.

If you enter/create sales invoices in the customers ledger, and/or enter purchase invoices in the suppliers ledger, then you are using accruals basis (traditional) accounting.

If you need an explanation of each accounting basis, please read the information below. Otherwise you can ignore this topic.

Cash basis accounting

Under the cash basis, both income and expenditure are accounted for when payment is received or made.

For unincorporated businesses, this is the default accounting basis for the purpose of calculating taxable profit for income tax. However, an unincorporated business can opt to use accruals basis (traditional accounting) by ticking the relevant box when doing their self-assessment return (or final declaration if they are on Making Tax Digital).

Limited companies cannot use the cash basis and must use the accruals basis.

Under the cash basis sales and purchases are entered as shown below.

Entering a sale under the cash basis

Income is accounted for when payment is received, by entering a receipt for a non-credit sale. This records the following accounting entries (ignoring any VAT for the purpose of example):

In this example, payment for a sale was received on 17/05/2026. This transaction accounts for income of 100.00 on that date.

Entering a purchase under the cash basis

The expenditure is accounted for when payment is made, by entering a payment for a non-credit purchase. This records the following accounting entries (ignoring any VAT for the purpose of example):

In this example, payment for a purchase was made on 20/06/2026. The expenditure of 50.00 is accounted for on that date.

Accruals basis accounting

Under the accruals basis (traditional accounting), income is accounted for when earned and expenditure is accounted for when incurred, regardless of when payment occurs.

For example, if you sell goods on credit to a customer in March 2026 and receive payment in April 2026, the income is accounted for in March 2026 regardless.

Limited companies must use the accruals basis. Unincorporated businesses can opt to use accruals basis by ticking the relevant box when doing their income tax return.

Entering sales on credit under the accruals basis

If you sell goods or services on credit, the income is accounted for when the sale occurs, by entering a sales invoice or raising a sales invoice to an account in the customers ledger.

This records the following accounting entries (ignoring any VAT for the purpose of example):

In this example, the invoice date is 31 March 2026, therefore the income of 100.00 is accounted for on that date.

Entering payment received for a sales invoice

Separately, you would account for the payment received by entering a payment received for a sales invoice.

This records the following accounting entries:

In this example, payment was received on 15 April 2026. Income is not affected.

Entering purchases on credit under the accruals basis

If your business purchases goods or services on credit, the expenditure can be accounted for by entering a purchase invoice to an account in the suppliers ledger.

The records the following accounting entries (ignoring any VAT for the purpose of example):

In this example, the invoice date is 31 March 2026, therefore the expenditure of 100.00 is accounted for on that date.

Entering payment of the purchase invoice

Separately, you would account for the payment of the invoice by entering a payment paid for a purchase invoice.

This records the following accounting entries:

In this example, payment was made on 15 April 2026. Expenditure is not affected.

Year-end adjustments

When doing accruals basis accounting, adjustments to income and expenditure are normally required at the year end to ensure that all income and expenditure relating to the period is accounted for, and to exclude any that relates to other periods. Examples of such adjustments are Accruals and prepayments.

Using the cash basis in VT Transaction+

If you account for income and expenditure under the cash basis, the customers and suppliers ledgers should not be used.

Instead, record your sales when payment is received, using the method shown in Enter a receipt for a non-credit sale.

Similarly, purchases should be recorded when payment is made, using the method shown in Enter a payment for non-credit purchase.

Alternatively, if your bookkeeping needs are simple, you can use the free program VT Cash Book, which records only payments, receipts and bank transfers.

VAT Cash Accounting Scheme

Cash basis accounting should not be confused with HMRC's VAT Cash Accounting Scheme.

Cash basis accounting refers to the method of accounting for income and expenditure when payment for the transaction is received/paid.

VAT Cash Accounting refers the method of accounting for VAT when payment for the transaction is received/paid.

The two are separate things, so using the VAT Cash Accounting Scheme does not automatically mean you use the cash basis accounting for income and expenses, as it is possible for a business to account for income and expenditure under the accruals basis, but account for VAT under the Cash Accounting Scheme. This means that when a transaction is entered, the income/expense is accounted for, but accounting for the VAT is deferred until payment for the transaction is made.

Unincorporated businesses changing from the accruals basis to the cash basis

If you want to change from the accruals basis to the cash basis you will need to make the necessary adjustments to convert your accounts. Adjustments to any accounts in VT Transaction+ can be made by entering a journal entry (JRN). Adjustments to convert accounts from the accruals basis to the cash basis can be complex and VT Software cannot provide any advice on this. You should therefore speak to an accountant.

Alternatively, it may be easier to continue to use the accruals basis.