Daily Junction.mobi portalBusiness · July 14, 2025 · Marcus Vale · 5 min
Cash and accrual accounting are two ways of recording when money counts in your books. This guide explains the difference, the pros and cons of each, and which suits a small business.
Two businesses can do exactly the same work and report very different profits in the same month — simply because they record their numbers differently. The reason is the choice between cash and accrual accounting, two methods that disagree about when money should count in your books. The distinction sounds dry, but it shapes how your business looks on paper and even when you pay tax. This guide explains both clearly and helps you decide which fits. This is general business information, not accounting or tax advice.
At heart, this is a question of timing: at what moment does a sale or a cost actually count?
Cash accounting records income and expenses only when money physically moves. You count a sale when the customer pays you, and a cost when you actually pay it. If you raise an invoice today but are paid next month, the income lands in next month's books.
Accrual accounting records income when it is earned and costs when they are incurred, regardless of when cash changes hands. You count a sale when you deliver the work and raise the invoice, even if payment comes weeks later, and you count a bill when you receive it, not when you settle it.
So the same transaction can appear in different periods depending on the method. That single difference ripples through everything else.
Imagine you finish a £2,000 project in March, invoice the client immediately, and they pay in April. You also receive a £500 supplier bill in March that you pay in April.
| Event | Cash basis | Accrual basis |
|---|---|---|
| £2,000 income | Counted in April (when paid) | Counted in March (when earned) |
| £500 expense | Counted in April (when paid) | Counted in March (when incurred) |
Under the cash basis, March looks quiet and April looks busy. Under the accrual basis, both the income and the cost sit in March, when the work and the obligation actually happened. Neither is wrong — they are answering slightly different questions. Cash asks "what is in the bank?", while accrual asks "what did the business actually do this month?"
The cash basis has one overwhelming virtue: simplicity.
That focus on real money is valuable, because plenty of profitable-looking businesses run into trouble when cash arrives too slowly. Our guide to cash flow management explains why timing can matter more than profit on paper.
The trade-off is that the cash basis can paint a misleading picture of performance. A great month's work can look poor simply because the payments have not landed yet, and vice versa. It also handles things like stock, large equipment purchases and credit less neatly.
Accrual accounting takes more effort but tells a fuller story. It matches income to the costs that produced it, in the period the activity happened, which is why it is the standard for larger businesses and a requirement for most limited companies.
Its advantages include:
This is the basis on which key financial statements are built. If you want to see how the pieces fit together, our explainer on the profit and loss statement assumes this kind of matched, accrual view of the numbers, and understanding it also helps when you map out your business model.
The cost is complexity: you must track debtors and creditors, make period-end adjustments, and accept that your reported profit will not match your bank balance at any given moment.
There is no universal answer, but a few principles help.
Many sole traders and freelancers start on the cash basis for its ease and move to accruals as they grow. Crucially, the choice affects the timing of when income and expenses are recognised, which can influence taxable profit in a given period — so it is wise to get tax advice before deciding or switching. GOV.UK sets out the eligibility and mechanics of the cash basis in detail.
Cash accounting records money only when it moves; accrual accounting records income and costs when they are earned or incurred. The cash basis is simpler and mirrors your bank balance, making it popular with small, straightforward businesses. The accrual basis is more work but gives a truer picture of performance and is standard for larger and limited companies. Understand the difference, check which you are eligible for, and pick the one that matches how your business actually runs.
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