The Institute of Chartered Accountants in Scotland (ICAS) has warned that UK Government plans to introduce of cash-based accounting for unincorporated businesses is misguided and may increase the likelihood of smaller businesses ending up in unexpected financial difficulties.
ICAS’s comments come on the back of the Governments Autumn statement issued today, which confirmed the new cash basis for unincorporated businesses with receipts of up to £77,000 from April 2013.
ICAS director of technical policy James Barbour said it may lead to businesses not "properly knowing their true financial position".
"Focussing on cash may lead to less consideration being given to outstanding debts of the business and provide the owner with a false sense of security. Businesses need to understand their true financial position and only accounts prepared on an accruals basis satisfy that need"
The potential benefits of simplification are likely to be outweighed by the potential risks involved. Although cash-based accounting may seem an appealing prospect, small businesses should be wary of the potential consequences of using it.
It may also hinder their ability to obtain finance and therefore hinder their ability to grow, Barbour said.
Related linkInstitute of Chartered Accountants in Scotland