Cash vs accrual accounting

Short answer

Cash basis records income when money arrives and expenses when you pay. Accrual accounting, also called traditional accounting, records income and expenses by the date you invoiced or were billed. The difference is when profit appears in your records.

Cash basis has been the default for eligible sole traders and partnerships since 6 April 2024. You can choose traditional accounting instead. Limited companies cannot use cash basis for this purpose.

Cash vs accrual accounting in plain terms

An unpaid invoice can count towards profit under accrual accounting before the customer pays. With the cash accounting method, it counts when payment arrives. A supplier bill follows the same distinction.

Example: a payment crosses the tax year end

This illustrative sole trader example uses the 2026/27 tax year, ending 5 April 2027. A customer is invoiced £5,000 on 20 March 2027 and pays on 30 April 2027. A supplier bill for £1,200 arrives on 25 March 2027 and is paid on 10 April 2027.

• Cash basis: neither item falls in 2026/27. Both fall in 2027/28, moving the net £3,800 into that year.
• Traditional accounting: both fall in 2026/27, adding £3,800 to that year's profit.

This shows a timing difference. It does not show that either method saves tax overall, or establish the result for your business.

Sole traders and partnerships

From 6 April 2024, cash basis became the default for sole traders and partnerships without corporate partners who are eligible. The former £150,000 entry and £300,000 stay-in turnover limits applied before 2024/25; they are not current cash basis limits.

Who cannot use cash basis?

• Limited companies and limited liability partnerships.
• Partnerships with one or more corporate partners.
• Lloyd's underwriters.
• Farming businesses with a current herd basis election.
• Farming or creative businesses with a fluctuating profit averaging claim.
• Businesses that claimed business premises renovation allowance in the previous seven years.
• Mineral extraction trades.
• Businesses that have ever claimed research and development allowance.

These businesses use traditional accounting. Eligible businesses can choose traditional accounting too, and must say so on their Self Assessment return. GOV.UK gives high stock levels and the need for finance as reasons a business might choose it: a bank could ask for traditional accounts before agreeing a loan. It requires more records. If you have more than one business, you can choose per business.

Under cash basis, all payment types count. You can choose a consistent way to date receipts and payments, such as when money enters your account or a cheque is written, but must use the same method each return. Equipment you keep and use is normally an allowable expense rather than a capital allowance; cars still use capital allowances unless simplified expenses are used. If VAT-registered, you can record both income and expenses including VAT or both excluding VAT.

See GOV.UK's cash basis guidance. For the separate question of business structure, read our sole trader vs limited company guide.

Landlords and property businesses

GOV.UK says property businesses can use cash basis if they meet the criteria. If you qualify but prefer standard accounting, tick the box on your return to opt out. Check the GOV.UK rental income guidance for your circumstances. A company landlord cannot use the sole trader cash basis described above.

For what belongs in the income figure, see what counts as rental income.

Limited companies use accrual accounting in practice

Limited companies cannot use cash basis. In practice, their accounts use accrual accounting: directors must be satisfied that accounts give a true and fair view, and the small-company accounting rules require income and charges relating to the year to be included regardless of receipt or payment. Trading profits for Corporation Tax start from generally accepted accounting practice, subject to tax adjustments.

For example, a limited company with a 31 March 2027 year end that issues a £10,000 invoice on 28 March 2027 and is paid on 15 April 2027 records the sale in the year to 31 March 2027, with the unpaid amount in debtors on the balance sheet until the cash arrives.

Sources: Companies Act 2006, section 393, Small Companies Regulations 2008, Schedule 1 paragraph 14 and Corporation Tax Act 2009, section 46.

The VAT Cash Accounting Scheme is separate

This scheme changes when VAT is paid and reclaimed. You pay VAT on sales when customers pay you and reclaim VAT on purchases when you have paid suppliers. It is a separate decision from the method used to calculate business profit.

Illustrative example: a £5,000 plus £1,000 VAT invoice is dated 20 March 2027 and paid on 30 April 2027. Under standard VAT accounting, the £1,000 goes on the return covering 20 March; under the Cash Accounting Scheme, it goes on the return covering 30 April.

A VAT-registered business can join if it expects VAT taxable turnover of £1.35 million or less in the next 12 months. It must leave if turnover exceeds £1.6 million. You join at the start of a VAT accounting period without telling HMRC. Eligibility and transaction exclusions apply, so check the GOV.UK VAT Cash Accounting Scheme guidance.

How the choice affects bookkeeping

In general bookkeeping terms, accrual accounts track debtors (customers who owe you), creditors (amounts you owe), accruals (costs relating to the period that have not yet been billed) and prepayments (payments covering a later period). These help allocate income and costs to the period they relate to, rather than simply following the bank balance.

Our essential business records guide covers the supporting paperwork. Profit and available cash are different; see cash flow explained for that distinction.

Switching from cash basis to accrual accounting

You can choose traditional accounting, but switching may require adjustments. Say on your Self Assessment return that you used traditional accounting, and check the treatment of the change before submitting. An authorised accountant can deal with HMRC for you.

Check the rules before filing

Rules can change. Check the linked GOV.UK guidance and get advice on your circumstances before choosing or changing a method. RR Accountants is not HMRC. These examples explain the methods; they do not determine your tax position.