Choosing an Accounting Method in Sage Accounting

When setting up your business accounting in Sage, one of the most critical decisions you’ll make is choosing your accounting method: Cash Basis or Accrual Basis. This decision affects not only your day-to-day bookkeeping but also how you recognize revenue, file taxes, and generate financial reports.

In this comprehensive guide, we’ll walk you through:

• What cash and accrual accounting methods are
• How they impact your financial reporting
• Pros and cons of each method
• Which method to choose based on your business type
• How to configure your accounting method in Sage Business Cloud Accounting
• Tax considerations and reporting flexibility

What is an Accounting Method?

An accounting method determines when income and expenses are recorded in your financial statements.

• The cash method records income and expenses when money actually changes hands.
• The accrual method records income and expenses when they are earned or incurred, regardless of payment.

Choosing the correct method ensures that your Profit & Loss (P&L) and Balance Sheet reflect an accurate picture of your business.

Pros and Cons of Each Method

Cash Accounting – Pros

• Easier to manage for small businesses
• Reflects real cash position
• Simpler tax reporting
• Great for sole traders or cash-based businesses

Cash Accounting – Cons

• Doesn’t show true financial position
• Can be misleading if invoices or bills are unpaid
• Not accepted by some regulators for larger businesses

Accrual Accounting – Pros

• More accurate picture of financial health
• Better for long-term planning
• Required for businesses with inventory or large revenues
• Accepted by investors and regulators

Accrual Accounting – Cons

• More complex to manage
• Requires careful tracking of accounts receivable/payable
• May show profit while cash is low (and vice versa)

How to Choose the Right Method for Your Business

A. Business Size and Complexity

• Cash method is ideal for small, simple businesses.
• Accrual method is preferred for companies with inventory, large AR/AP, or multiple revenue streams.

B. Regulatory Requirements

• Some countries (e.g., the UK, Canada, U.S.) allow small businesses to use cash accounting for tax up to a certain revenue threshold.
• VAT-registered businesses may need to use accrual for compliance.

C. Tax Planning

• Cash method can defer income (and tax) until payment is received.
• Accrual can sometimes overstate income if clients delay payment.

D. Financial Goals

• If you’re seeking investment or a loan, accrual reports provide a better long-term financial picture.

If unsure, start with cash accounting. You can upgrade to accrual later as your business grows.

How Sage Accounting Supports Both Methods

Sage Business Cloud Accounting offers flexibility to work with either method. You record transactions as they occur, but choose how reports are generated—either on a cash or accrual basis.

Sage supports:

• Recording invoices and bills (for accrual)
• Using bank transactions only (for cash)
• Report filters to toggle between methods
• Tax return calculations based on selected accounting method

Configuring and Reporting with Cash or Accrual in Sage

Step-by-Step: Selecting Accounting Method in Sage Business Cloud Accounting

While Sage doesn’t force you to declare one method permanently, it allows you to generate reports using either method.

A. Setup and Preferences

1. Log in to your Sage Business Cloud Accounting account.
2. Go to Settings > Financial Settings or Company Settings.
3. Look for Accounting Method or Reporting Preferences.
4. Select Cash or Accrual as your reporting basis.
5. Save settings.

The method you select does not restrict how you enter transactions. You can still issue invoices and bills, but reports will follow your selected basis.

B. Running Reports Based on Accounting Method

Sage’s key financial reports let you toggle between cash and accrual views:

1. Go to Reporting > Profit and Loss or Balance Sheet.
2. Click on Report Settings or More Options.
3. Choose Accounting Method:
   • Cash
   • Accrual
4. Click Run Report.

You’ll see:

• Cash Basis P&L: Only shows income you’ve received and expenses you’ve paid.
• Accrual P&L: Includes all income and expenses, regardless of payment.

C. Configuring VAT/GST Returns Based on Method

In regions like the UK, Sage lets you choose VAT on Cash Accounting.

1. Go to Settings > Taxes > VAT Settings.
2. Choose Cash Accounting or Standard (Accrual).
3. Save your settings.

This ensures VAT is only paid on received income (cash basis) or on all invoiced income (accrual).

Changing Methods After Setup: What You Should Know

Is it possible to switch from cash to accrual?

Yes, but it comes with implications.

Considerations:

• You may need to adjust historical records.
• Tax authorities may require formal notification.
• You might need to reconcile opening balances and deferred income.

How to switch in Sage:

Since Sage records all transactions, you only need to change your reporting method in settings or filters.

Consult an accountant before switching. They can help with restating financials and ensuring tax compliance.

By understanding the impact of each accounting method and leveraging Sage’s flexible tools, you’ll ensure accurate, insightful, and compliant financial reporting as your business grows.