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When I was a very young girl (aged just 16) starting out in the world of accountancy, I was taught about some basic concepts of accounting – the foundation of all that I now know about accountancy.

These concepts were:

Going concern concept – assumes that the business would continue in ‘operational existence’ for the foreseeable future

Accruals concept – income and costs to be recognised as they were earned or incurred, not as money is received or paid, and matched with one another

Consistency concept – accounting treatments should be applied consistently within accounts and from one year to the next.

Prudence concept – required that revenue and profits were not anticipated

These concepts apply today as they did when I was a girl and are used throughout accountancy.

A History Lesson

This may come up in a quiz some time – so listen very carefully!

Just for the nerdy types amongst you (I too admit that I am one of those) these concepts were documented in what was called a Statement of Standard Accounting Practice – an SSAP.  In fact they were in SSAP2 ‘Disclosure of Accounting Policies’.

Now I always remember that because you would think that the basic concepts of the topic that you studied would be in SSAP1 but that was in fact Accounting for the results of associated companies.

SSAP2 was replaced by a FRS – a Financial Reporting Standards but I digress now. But if you do want to read more on this have a look at the ICAEW web site ‘Knowledge guide to UK Accounting Standards’ – click here

Throwing it all away

Why am I telling you this?

The proposed new cash accounting scheme announced by the Government in the March 2012 budget throws away three out of the four of these concepts and has left me feeling that the rug has been pulled from my very foundation of accounting knowledge and learning.

By electing for a system of cash accounting the foundation concept of accruals accounting is cast aside. Transactions will be accounted for when the cash is received.  So destroying another concept – that of prudence.

For example if cash is received for a sale before the stock has to be paid for then profits are anticipated and not those actually earned.

Add into this mix the option of being able to change from one system to another each year (yet to be clarified if this will be allowable) then bangs goes the consistency concept.

Of course the Cash Accounting Scheme is only at consultation at the moment and, if introduced, will only apply to a certain number of businesses – estimated at being JUST 3 million!

Hang up my abacus?

Am I now too old to learn new tricks or are there some fundamental flaws with what is being proposed?

I have read the consultation document and by golly it is a can of worms which if followed by an unsuspecting business could easily lead to more tax being paid – more on that another time!

Surely it is the system of taxation that needs to change and not the way that accounting is done?

Are HMRC proposing to change the wrong rules?

In fact having read the consultation document it seems to be that a whole load of news rules are being introduced!

For those of you who would like to read the whole Consultation document it is here:

Simpler Income Tax for the Simplest Small Businesses

Don’t worry it is only 34 pages.


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Original blog and title posted by Elaine Clark of CheapAccounting.co.uk on the date at the top of the blog. All blogs are date and time stamped at the point of creation and publication.

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2 Responses to “New cash accounting proposal throws away the very basis of accounting”

  1. If this is a real consultation then the powers that be will soon realise their naivety but perhaps it will be yet another thing they implement before the end of the consultation period.

    The prospect is so scarey I’m going to hide under the bed (with my abacus)

  2. I agree. I responded to this when the first consultation took place along the same vein. Accounts are there to help people manage a business and not fall into insolvency.

    Other accountants have suggested they will make more fees out of the additional work this will require …..

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Copyright

The copyright of these blogs belongs to Elaine Clark of CheapAccounting.co.uk and MUST NOT be reproduced without her express permission.

We are seeing numerous copies of our blogs appearing on the web sites and blogs. We’re afraid that it is now time for me to take a tough stance on breaches of my copyright!

Any breaches of copyright will result in a charge to the copier of £5,000, payable immediately for use of our content.


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