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1. Debts owed by customers

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have included amounts the business had earned but not received by the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business is not taxed twice.

Example:

In the first tax year using the cash basis, the business receives 拢32,000 from customers. 拢1,750 of the 拢32,000 had been owed by customers at the end of the last tax year, in respect of sales made last year (so that 拢1,750 had been taxed in the last tax year).

Transitional adjustment:

	Amount
Total cash receipts from customers	拢32,000
Less: last year鈥檚 year end debtors	(拢 1,750)
Adjusted cash basis receipts	拢30,250

2. Amounts owed to suppliers

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have included amounts the business had not paid by the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business does not get relief twice on the same item of expenditure.

Example:

In the first tax year using the cash basis, the business pays 拢14,000 to suppliers.

拢950 of the 拢14,000 had been owed to suppliers at the end of the last tax year, in respect of purchases made last year (so that 拢950 had been included as a deduction in the last tax year).

Transitional adjustment:

	Amount
Total cash payments to suppliers	拢14,000
less: last year鈥檚 year end creditors	聽 (拢聽950)
Adjusted cash basis purchases	拢13,050

3. Trading stock

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have been adjusted for the value of stock held by the business at the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business gets tax relief on the cost of that stock.

Example:

At the end of the last tax year before the cash basis, the business had goods that had cost 拢475 in its year end stock. In working out last year鈥檚 business profits on the accruals basis, the 拢475 cost of that stock would not have been included as an expense. In the first tax year using the cash basis, the business pays 拢18,000 to suppliers.

If an adjustment was not made in the first cash basis tax return, the business would not get tax relief for that 拢475. The adjustment is done by adding this to the amounts paid for purchases in the cash basis period.

Transitional adjustment:

	Amount
Total cash payments to suppliers	拢18,000
plus: last year鈥檚 closing stock	拢聽 聽 聽475
Adjusted cash basis purchases	拢18,475