Switch accounting basis in FreeAgent

This article explains how to switch between accruals and cash basis accounting in FreeAgent.

From 6th April 2024, the cash basis of accounting will be the default accounting method for self-employed businesses and partnerships with trading income, with an opt-out for accruals.

If you chose the wrong accounting basis when you set up your FreeAgent account, you can follow the steps below to switch your accounting basis, provided you have no account locks in place. Please note that this process will affect your whole FreeAgent account, including all historical data. Therefore, it won't be possible to switch if your business has been filing Self Assessment tax returns on one basis in FreeAgent and is now switching to a new basis. In this scenario, we’d recommend that you set up a new FreeAgent account instead.

Your accounting basis is different to the basis used to prepare your VAT returns, so please check with your accountant if you’re unsure which basis you should be using for your accounts. You’ll need to have full (level 8) access to your FreeAgent account to switch your accounting basis.

Please note that if you’re currently preparing your accounts using accruals basis accounting, the option to switch to cash basis accounting will only be available if you have a sole trader, partnership or unincorporated landlord account type. It’s not possible to use the cash accounting basis to prepare accounts in FreeAgent for a limited company or limited liability partnership, as this is not permitted by UK law, nor is the cash accounting basis available in FreeAgent for non-UK-based business accounts. 

When preparing your accounts using the cash accounting basis in FreeAgent, the following functionality won’t be available:

• Payroll
• Stock

Therefore, if you’re currently preparing your accounts using accruals basis accounting and using any of these features in FreeAgent, the option to switch to cash basis accounting will not be available.

Before you get started

Once you switch your accounting basis, FreeAgent will automatically adjust your accounting reports to make sure all of your bills and invoices are accounted for in the correct accounting period (for the basis you have switched to). However, if you have any other items that have been entered in a way that is only applicable to one particular basis type, you may need to adjust these to be correct for the basis you’re changing to.

Below is a list of all the checks you should make before switching from accruals to cash basis accounting or from cash to accruals basis accounting in FreeAgent.

Switching from accruals to cash basis accounting

1. Check your bank transactions

Check if there are any bank transactions explained as ‘Receipt from Initial Debtor’ or ‘Payment to Initial Creditor’ as these payments would not be applicable under cash basis accounting. Find out how to search for bank transactions.

Bank transactions that are explained as ‘Receipt from Initial Debtor’ should be re-allocated to the relevant income category and bank transactions that are explained as ‘Payment to Initial Creditor’ should be re-allocated to the relevant cost category instead. Find out how to edit a bank transaction explanation.

There also shouldn’t be any trade debtor or trade creditor entries in your opening balances. Find out how to edit your opening balances. If you’re not sure which categories to allocate the bank transactions to, or which opening balances are required, please speak to your accountant.

2. Check your journal entries

Check that all journal entries will make sense when you switch to cash basis accounting as FreeAgent will not make any changes to journal entries when you switch.

For example, if you’re switching to cash basis accounting and have bank transactions explained as ‘Sales’ but you have then created journal entries to record income which are dated on the date that the income was earned rather than the date the payment was received, you’ll need to edit these journal entries. If you’re unsure which journals are required or if you need to edit them, please speak to your accountant.

3. Check your Show Transactions report

Check your ‘Show Transactions’ report to see if there are any entries in either ‘998 - Contra Account’ or ‘999 - Suspense Account’, as these might not be applicable when you switch to cash basis accounting.

Bank transactions or journal entries that have been allocated to the contra account should be allocated to the relevant categories instead. An entry in the suspense account can be removed by editing your opening balances and entering any that are missing. If you’re unsure where to allocate the entries to, or which opening balances are required, please speak to your accountant.

4. Check your opening balances

Check that all of your opening balances will make sense when you switch to cash basis accounting. If you’re unsure whether your opening balances will be relevant under cash basis accounting, please speak to your accountant.

Switching from cash to accruals basis accounting

1. Check your income and costs

Check that your income and costs are recorded on the correct dates for accruals basis accounting. If you’re unsure how to record income or costs correctly, please speak to your accountant.

Income should be recorded on the date that it was earned rather than the date the payment was received. FreeAgent will adjust your accounting records to include all of your invoices in the correct accounting period to reflect this. However, if you’ve recorded income which doesn’t relate to invoices, find out how to move income backwards or forwards.

Costs should be recorded on the date they were incurred rather than the date the payment was made. FreeAgent will adjust your accounting records to include all of your bills in the correct accounting period to reflect this. However, if you’ve recorded costs which don’t relate to bills, find out how to record an accrual or prepayment.

2. Check your journal entries

Check that all journal entries will make sense under accruals basis accounting as FreeAgent will not make any changes to journal entries when you switch.

For example, if you’re switching to accruals basis accounting but you have created journal entries to record income which are dated on the date that the payment was received rather than the date the income was earned, you’ll need to edit these journal entries. If you’re unsure which journals are required or if you need to edit existing ones, please speak to your accountant.

3. Check your Show Transactions report

Check your ‘Show Transactions’ report to see if there are any entries in either ‘998 - Contra Account’ or ‘999 - Suspense Account’, as these might not be applicable when you switch to accruals basis accounting.

Bank transactions or journal entries that have been allocated to the contra account should be allocated to the relevant categories instead. An entry in the suspense account can be removed by editing your opening balances and entering any that are missing. If you’re unsure where to allocate the entries to, or which opening balances are required, please speak to your accountant.

4. Check your opening balances

Check that all of your opening balances will make sense when you switch to cash basis accounting. If you’re unsure whether your opening balances will be relevant under cash basis accounting, please speak to your accountant.

How to switch accounting basis

Select 'Settings' from the drop-down menu in the top-right corner and then select 'Accounting Basis'.

Select ‘Start changing to [X] basis’ at the top-right. Please note that this option will only be available if you have no account locks in place in FreeAgent.

Next, carry out the relevant checks mentioned above to make sure everything will be correct when you switch to the new basis.

Tick the checkbox to confirm that you’ve checked your accounts and you understand that some items may be removed from your FreeAgent account if they don’t fit with the new basis and all your FreeAgent data from your FreeAgent start date will be recalculated.

Select ‘Change to [X] basis’ to complete the process.