Which of the following payments is considered an allowable payment under the cash basis?

Which of the following payments is considered an allowable payment under the cash basis?

• A. Cash payments for bad debts
• B. Interest on business loans up to £500
• C. Capital expenditure for purchasing buildings
• D. Capital allowances for buildings

Answer: (B)

Under the cash basis of accounting, only payments that represent actual cash outflows during the period are considered. This method is typically used by smaller businesses because it is simpler and easier to manage, focusing on when cash is received and spent. The payment of interest on business loans is an allowable expense under the cash basis, provided it meets the criteria set for such payments. In this case, allowing interest payments up to £500 means they are recognized as they occur, making them deductible in the period they are paid rather than when they are accrued. This aligns with the cash basis, where expenses are only recorded when cash is paid out. In contrast, other payment types listed are not allowable under the cash basis for different reasons. Cash payments for bad debts are not recognized as expenses under this method since they do not involve an actual cash payment in the period. Capital expenditure for purchasing buildings involves significant assets and is capitalized rather than expensed immediately, thus not recognized in the same period under cash accounting. Capital allowances for buildings, which relate to depreciation or tax relief on capital assets, are also typically handled through the accrual basis and not considered immediate payments under the cash basis.

Under the cash basis of accounting, only payments that represent actual cash outflows during the period are considered. This method is typically used by smaller businesses because it is simpler and easier to manage, focusing on when cash is received and spent.

The payment of interest on business loans is an allowable expense under the cash basis, provided it meets the criteria set for such payments. In this case, allowing interest payments up to £500 means they are recognized as they occur, making them deductible in the period they are paid rather than when they are accrued. This aligns with the cash basis, where expenses are only recorded when cash is paid out.

In contrast, other payment types listed are not allowable under the cash basis for different reasons. Cash payments for bad debts are not recognized as expenses under this method since they do not involve an actual cash payment in the period. Capital expenditure for purchasing buildings involves significant assets and is capitalized rather than expensed immediately, thus not recognized in the same period under cash accounting. Capital allowances for buildings, which relate to depreciation or tax relief on capital assets, are also typically handled through the accrual basis and not considered immediate payments under the cash basis.