What does 'accrual vs cash accounting' actually mean for me?

The choice in one sentence

Cash vs accrual is a choice about when you record money: the moment it actually moves in or out of your bank (cash basis), or the moment you earn it or owe it, even if the cash arrives later (accrual basis).

That's the entire difference. Same business, same transactions — just two different rules for when each one goes into the books. Everything else you read about the two methods flows from that single question of timing.

So this isn't a lecture you have to pass. It's a genuine fork in the road, and for a lot of UK founders you actually get to pick which path you walk. Let's make the choice feel obvious.

Cash basis: record it when the money moves

The cash basis is the one that matches your instinct. You record income when the money lands in your account, and you record an expense when the money leaves it. No money moved? Nothing goes in the books.

Imagine you do £2,000 of work for a client in March, send the invoice, and they finally pay you in May. On the cash basis, that £2,000 is May's income — because May is when the cash actually arrived. March looks like nothing happened, even though that's when you did the work.

The appeal is honesty about your bank account. Your books and your bank balance move together, so the picture you see is genuinely the money you can spend. It's simple, it's intuitive, and there are no clever entries for "money I'm owed but haven't got yet."

The catch is that it can flatter or punish a month for reasons that have nothing to do with how the business actually did. A quiet month where three old invoices happen to get paid looks like a boom. A brilliant month where everyone pays late looks like a disaster. Cash basis tells you about your bank account, not always about your performance.

Accrual basis: record it when it's earned or owed

The accrual basis (also called the accruals basis) ignores when the cash moves and instead records things when they actually happen — when you earn the income or take on the cost.

Same example: you do £2,000 of work in March and get paid in May. On the accrual basis, that £2,000 is March's income, because March is when you earned it. The fact that the cash didn't arrive until May is tracked separately, as money you're owed (accounts receivable — money owed to you). Likewise, a bill you've received but not yet paid counts as a cost now, sitting in accounts payable (money owed by you), even though your bank hasn't moved.

The appeal is a truer picture of performance. Accrual accounting lines up income with the costs that earned it, in the period the work actually happened — so each month reflects what the business really did, not just who happened to pay when. It's why a balance sheet built on the accrual basis shows what you own and owe in full, including the money in transit. (See: What is a balance sheet?)

The catch is that your books and your bank balance no longer move in lockstep. You can show a profitable month while your account is nearly empty because the cash hasn't landed yet — which is exactly why a profitable business can still run short of money, and why this trips up so many founders.

Why the same month can look completely different

It's worth sitting with how stark the gap can be, because it's the thing that confuses people most.

Take one month: you complete £10,000 of work, send the invoices, but customers only pay £3,000 of it before month-end. You also receive a £4,000 supplier bill that you don't pay until next month.

• On the cash basis, that month shows £3,000 in and nothing out for the bill — looks like a £3,000 month.
• On the accrual basis, the same month shows £10,000 earned and £4,000 of cost — a £6,000 profit, with £7,000 still owed to you and £4,000 still owed by you sitting on the balance sheet.

Two honest pictures of the identical month. Neither is "wrong" — they're answering different questions. Cash basis asks what hit my bank? Accrual asks what did my business actually do? Knowing which question you're looking at is half the battle.

Who each one suits

So which should you care about? It depends on how your business runs and what you need your numbers to tell you.

Cash basis tends to suit you if you're a sole trader or a small, simple business; you get paid at or near the point of doing the work; you don't carry much stock or hand out long payment terms; and you mainly want your books to mirror your bank account. For a freelancer or a small service business, cash basis is often genuinely all you need, and it's blessedly simple.

Accrual basis tends to suit you if you invoice now and get paid later (or the reverse); you carry stock or have meaningful amounts owed in either direction; you want to understand your true monthly performance rather than just your cash timing; or you're growing and starting to plan ahead. The moment "money owed to me" and "money I owe" become real numbers, the accrual picture stops being optional — it's the only one that shows them.

There's no prize for picking the "advanced" one. The right method is the one that answers the questions you actually need answered.

The UK rules (the part that's a must-know)

In the UK, you don't get an unlimited free choice — your business type and size set the rules. Here's the plain-English version.

Sole traders and partnerships. You can usually use the cash basis for your Self Assessment, and in recent years it's become the default for most unincorporated businesses — you'd actively opt out if you wanted the accruals basis instead. It's designed to keep things simple for smaller businesses: record income and expenses as the money moves, and that's what you report to HMRC. Most sole traders find it perfectly adequate.

Limited companies (Ltd) and LLPs. Different story. For your statutory accounts at Companies House and your Company Tax Return, you must use the accruals basis. It's not optional — UK company accounting standards require income and costs to be recorded when earned and incurred, not when the cash moves. So if you've incorporated, the accrual picture is the one your official accounts are built on, whether you find it intuitive or not.

VAT is its own thing. Don't confuse all this with VAT, which has its own cash vs accrual choice — the Cash Accounting Scheme lets some smaller businesses pay VAT to HMRC only once customers have actually paid them, rather than when invoices are raised. That's a separate decision from how you keep your books, even though it uses the same words.

The honest summary: if you're a sole trader, you can probably keep it simple with cash basis. If you've formed a company, your accounts are on the accruals basis by law — so it's worth understanding what that picture is showing you.

You don't have to choose between understanding them

Here's the reassuring part. Even when the rules pin you to one method for your official filings, good software can show you both views of the same numbers — your real cash position and your true earned-vs-owed performance — without you re-entering anything. The choice of reporting basis is one setting. The understanding it gives you is yours either way.

The goal was never to make you fluent in accounting theory. It's to make sure you're never blindsided by the gap — the profitable month with the empty bank account, or the quiet month that was really fine. Once you know the two methods are just two clocks for when money counts, that gap stops being a nasty surprise and becomes something you can see coming.

The short version

Cash vs accrual is purely about timing. Cash basis records money when it moves through your bank — simple, intuitive, and a true mirror of your account. Accrual basis records money when it's earned or owed — a truer picture of performance, but one where your books and your bank balance can drift apart. Cash suits simple, paid-promptly businesses; accrual suits anyone carrying real amounts owed in either direction. In the UK, sole traders can usually use cash basis (it's now the default), while limited companies must use the accruals basis by law. Pick the one that answers your questions — and let your software show you both.

---

Ready to stop second-guessing which number is real? In Ledgers, your accounts are kept accurately on the right basis for your business — and you can see both your true cash position and your earned-vs-owed performance side by side, without learning the theory behind either. See your numbers without learning accounting → start free.

This is the trap behind the whole topic — read it next: Profit vs cash — why you can be profitable and still broke →

Raising soon? Make sure your numbers are on the right footing: Get your startup financials investor-ready in a weekend →

Frequently asked questions

What is the difference between cash and accrual accounting?

Timing. Cash basis records income and expenses when the money actually moves through your bank account. Accrual basis records them when they're earned or owed, even if the cash hasn't moved yet.

Can I use cash basis accounting in the UK?

If you're a sole trader or partnership, usually yes — it's now the default basis for Self Assessment for most unincorporated businesses. Limited companies and LLPs, however, must use the accruals basis for their statutory accounts.

Which method is better for a small business?

Neither is universally better. Cash basis is simpler and suits freelancers and small service businesses who get paid promptly. Accrual basis gives a truer view of performance and is the right choice (and often the legal requirement) once you carry stock or have meaningful amounts owed in either direction.

Is the VAT Cash Accounting Scheme the same thing?

No, though it uses the same words. The VAT Cash Accounting Scheme is a separate option about when you pay VAT to HMRC — when customers pay you, rather than when you invoice them. It's a different decision from how you keep your books.

See your numbers without learning accounting

Ledgers does the bookkeeping — bank feeds, VAT, year-end — and keeps your accountant in the loop. Free for pre-revenue founders.

Start free →

Get the next guide by email

Plain-English accounting for founders — a couple of new guides a week. No spam, unsubscribe anytime.

Subscribe

Keep reading · “What is…” basics

“What is…” basics

Debits and credits explained (so you never have to think about them)

Debits and credits explained in plain English — what they actually mean, why every entry has two sides, and the honest truth: with modern software, you shouldn't have to think about them at all.

6 min read“What is…” basics

Gross vs net: which number actually matters?

Gross vs net explained in plain English — profit, pay and VAT. What each word means, where you'll meet them as a UK founder, and which number to actually look at and when.

6 min read“What is…” basics

Profit vs cash: why you can be profitable and still broke

Profit on paper and money in the bank are not the same thing — and the gap catches out almost every founder. Here's the difference in plain English, with a worked £ example.

6 min read