Cash Basis vs Accrual Accounting: UK Bookkeeping Guide

3 min read

Table of Contents

Cash basis and accrual accounting compared
Cash-basis example
Accrual-accounting example
Who can use cash basis?
Why cash basis is simpler
Why accrual accounting gives more information
VAT is a separate decision
Loans, assets and finance costs
Changing accounting method
Making Tax Digital
Which method should a business choose?
Frequently asked questions
Official source

Cash-basis bookkeeping records income when money is received and expenses when they are paid. Accrual—or traditional—accounting records income when earned and costs when incurred, regardless of payment date.

For UK sole traders and partnerships without corporate partners, cash basis is now the standard Income Tax method unless they elect to use traditional accounting. Limited companies cannot use the Self Assessment cash-basis regime.

Cash basis and accrual accounting compared

Point	Cash basis	Accrual/traditional accounting
Sales	Recorded when customer pays	Recorded when earned or invoiced
Expenses	Recorded when paid	Recorded when incurred
Customer debts	Not income until collected	Shown as debtors
Supplier debts	Not an expense until paid	Shown as creditors
Prepayments/accruals	Generally not used in the same way	Allocate costs to the relevant period
Stock	Can be less suitable for complex holdings	Closing stock matched against sales
Financial position	Simpler but less complete	Shows amounts owed and owing

Cash-basis example

A designer sends a £3,000 invoice on 20 March 2027 and receives payment on 15 April 2027. Under cash basis, the £3,000 is income of the tax year beginning 6 April 2027 because that is when payment arrived.

If the designer pays a £600 software bill on 28 March 2027, the qualifying expense is recorded in the tax year ending 5 April 2027.

Accrual-accounting example

Under traditional accounting, the £3,000 income is generally recognised in the period in which the work was performed and the income earned, even though the customer paid later. The unpaid balance appears as a debtor at the reporting date.

An annual insurance premium paid in advance may be split between periods as a prepayment rather than charged entirely when paid.

Who can use cash basis?

HMRC describes cash basis as the standard method for sole traders and partnerships without corporate partners. Some businesses cannot use it, including limited companies and certain other excluded entities.

A business using Self Assessment can choose traditional accounting instead and indicates that choice on the tax return. Accrual accounting can be more appropriate where the business:

has significant stock or work in progress;
offers substantial customer credit;
has long-term contracts;
needs finance or investor reporting;
wants a fuller view of assets and liabilities; or
plans to incorporate or grow in complexity.

Why cash basis is simpler

Cash basis can reduce year-end adjustments because it follows bank movements. It can also prevent Income Tax becoming due on customer invoices that have not yet been paid.

However, simple does not mean that a bank statement is sufficient. The business must still keep accurate sales, expense, VAT, PAYE and personal-income records and retain invoices and receipts.

Why accrual accounting gives more information

Traditional accounts show debtors, creditors, stock, prepayments and accrued liabilities. This helps assess:

true trading performance for the period;
customer collection problems;
bills and tax still owed;
working-capital requirements;
gross margins and stock movement; and
the financial position required by lenders.

Read how bookkeeping affects financial statements.

VAT is a separate decision

The Income Tax cash basis should not be confused with the VAT Cash Accounting Scheme. A business may use cash basis for Income Tax but account for VAT under standard invoice accounting, or use accrual accounts while qualifying for VAT cash accounting.

VAT rules determine the tax point and when output and input VAT enter the VAT Return.

Loans, assets and finance costs

Special tax rules apply even under cash basis. Loan receipts are not sales, and capital repayments are not ordinary expenses. Qualifying equipment costs, cars and finance charges must be treated under the specific cash-basis and capital-allowance rules.

Do not assume every bank payment is deductible simply because cash basis is used.

Changing accounting method

Switching can create adjustment income or expenses so that amounts are neither taxed twice nor omitted. Consider:

unpaid sales invoices;
unpaid supplier bills;
stock and work in progress;
prepayments and accruals;
capital assets; and
losses and finance costs.

Keep a clear transition calculation and apply HMRC’s spreading rules where relevant.

Making Tax Digital

MTD for Income Tax changes how qualifying sole traders and landlords keep digital records and submit information. It does not remove the choice between cash basis and traditional accounting where the taxpayer is eligible.

The chosen software must consistently apply the accounting basis and support year-end adjustments. See our 2026/27 MTD guide.

Which method should a business choose?

Cash basis is often suitable for a small service business with straightforward, promptly paid transactions. Traditional accounting may be better for businesses with stock, finance requirements, unpaid invoices or plans to scale.

Compare both the tax timing and the usefulness of the resulting accounts. A short-term tax deferral should not be the only consideration.

Frequently asked questions

Is cash basis the same as single-entry bookkeeping?

No. Cash basis determines when income and expenses are recognised for tax. Double-entry records can still be maintained.

Can a limited company use cash basis?

No. GOV.UK lists limited companies among businesses that cannot use the Self Assessment cash-basis regime.

Does cash basis mean tax is based on the bank balance?

No. Profit is qualifying cash income less allowable cash expenses, with tax adjustments. Capital introduced, loans and drawings are not ordinary income or expenses.