Understanding the difference between cash vs accrual accounting is one of the first decisions you need to make when managing your business finances. The accounting method you choose affects how you record income and expenses, when you pay tax, and how clearly you can see your business’s financial health. This guide explains both methods in plain English, who should use each one, how they work in practice, and what the April 2024 rule changes mean for UK sole traders, landlords, and limited companies.
At a Glance
- Cash accounting records income when received and expenses when paid — straightforward and suited to most sole traders and landlords
- Accrual accounting records income when earned and expenses when incurred — required for limited companies and gives a more accurate financial picture
- From April 2024, cash basis accounting is the default method for eligible sole traders and partnerships — you must opt out if you want to use accrual accounting
- There is no longer a turnover threshold for cash basis — the old £150,000 limit was removed
- Limited companies must use accrual accounting — they cannot use cash basis
- Both methods are compatible with Making Tax Digital for Income Tax, which applies from April 2026 for those with qualifying income over £50,000
What is the difference between cash and accrual accounting?
The key difference between cash accounting and accrual accounting is timing — when you record income and expenses in your books.
Under cash basis accounting, you record income when money actually arrives in your bank account and record expenses when money actually leaves it. Under accrual accounting, you record income when it is earned and expenses when they are incurred, regardless of when the money changes hands.
📌 Income example: You complete work for a client in March and send an invoice. They pay in April. Under cash accounting, you record the income in April, when the money arrives. Under accrual accounting, you record it in March, when it was earned.
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📌 Expense example: You receive a bill from a supplier in March. You pay it in April. Under cash accounting, you record the expense in April — when the money leaves your account. Under accrual accounting, you record it in March, when it was incurred.
This timing difference creates very different pictures of your business’s financial performance at any given point. Neither method is wrong — they are simply measuring different things.
Who uses which accounting method?
The accounting method you use depends on your business structure. This is not optional for limited companies — they must use accrual accounting. For sole traders and landlords, cash basis is now the default.
| Business type | Default method | Can they switch? |
|---|---|---|
| Sole traders | Cash basis (from April 2024) | Yes — opt out on Self Assessment return to use accrual accounting |
| Self-employed freelancers and contractors | Cash basis (from April 2024) | Yes — opt out on Self Assessment return |
| Landlords | Cash basis (from April 2024) | Yes — opt out on Self Assessment return |
| Partnerships (without corporate partners) | Cash basis (from April 2024) | Yes — opt out on Self Assessment return |
| Limited companies | Accrual accounting (required) | No — limited companies must use accrual accounting |
| LLPs and partnerships with corporate partners | Accrual accounting (required) | No |
How cash basis accounting works
Cash basis accounting is designed around simplicity. You record income when payment arrives in your bank account and record expenses when payment leaves it. Because you only pay Income Tax on money you have actually received, there is no risk of a tax bill on an invoice your client has not yet paid.
Equipment and machinery costs — computers, tools, and office furniture – are expensed in full in the year you pay for them, so there is no need to work through capital allowance calculations. Cars and vans are treated differently and still require capital allowances. You also do not need to track debtors, creditors, or stock values, which keeps your record-keeping straightforward and your bookkeeping costs low.
💡 Tip: Cash basis accounting works particularly well if your customers pay promptly and you do not hold significant stock. If clients regularly pay 60 or 90 days after invoicing, your monthly profit figures under cash basis may not reflect your actual trading activity.
Cash basis accounting and the 2024 rule changes
From 6 April 2024, cash basis became the default accounting method for eligible sole traders, self-employed people, landlords, and partnerships. You no longer need to opt in; if you are eligible and have not made a specific choice, you are already using it. The previous £150,000 turnover threshold was removed entirely, meaning any eligible business can now use cash basis regardless of how much it turns over. The £500 cap on interest deductions was also removed, so loan interest is now fully deductible, and losses can be offset against other income sources, making cash basis more flexible than it used to be. If you run more than one business, you can use a different accounting method for each. To opt out and use accrual accounting instead, tick the relevant box on your Self Assessment tax return.
How accrual accounting works
Accrual accounting — also called traditional accounting — records income and expenses when they are earned or incurred, regardless of when cash changes hands. This is the accounting method used by all limited companies and follows generally accepted accounting principles (GAAP).
Under the accrual accounting method, your accounts include:
- Accounts receivable — money owed to you by customers for work completed but not yet paid
- Accounts payable — money you owe to suppliers for bills received but not yet paid
- Prepaid expenses — payments made in advance for goods or services not yet received
- Deferred income — money received in advance for work not yet completed
- Accrued expenses — costs incurred but not yet billed
The accrual method follows the matching principle — income and expenses are matched to the same reporting period in which the business activity occurred. This gives a more accurate picture of profitability and financial performance over time.
Why limited companies must use accrual accounting
Limited companies are required by law to prepare accounts on an accrual basis. This is because Companies House and HMRC require financial statements that comply with UK accounting standards, which are based on GAAP and IFRS (International Financial Reporting Standards). Cash-basis accounting does not provide the level of financial reporting that limited companies need.
📌 Example — the same month, two very different results: A limited company completes £10,000 of work in March. The client pays in May. The company also receives a £2,000 supplier invoice in March, paid in April. Under accrual accounting, March shows £10,000 income and £2,000 expenses — profit £8,000. Under cash basis, March shows £0 income and £0 expenses — profit £0. The accrual method gives a far more accurate picture of what actually happened in March.
The easiest way to record business transactions under accrual accounting is to use accounting software, which automatically records each transaction as double entry.
Cash vs accrual accounting: advantages and disadvantages
Cash basis accounting
| Advantages | Disadvantages |
|---|---|
| Simple to operate — records match your bank account | Profit figures can be misleading if clients pay late |
| Real-time cash flow visibility | Does not give a complete financial picture of outstanding invoices or bills |
| You only pay tax on money actually received | Not suitable for limited companies |
| Lower bookkeeping costs | Harder to secure business loans — banks prefer accrual-based accounts |
| No turnover limit since April 2024 | Can distort profitability if you hold stock |
| Equipment expensed immediately — no capital allowance calculations needed | Cars and vans still require capital allowances |
Accrual accounting
| Advantages | Disadvantages |
|---|---|
| Accurate picture of financial performance in each period | More complex — requires understanding of double-entry bookkeeping |
| Matches income to the expenses incurred to generate it | You may owe tax on invoiced income before the client has paid you |
| Required for limited companies — GAAP and IFRS compliant | Higher bookkeeping costs |
| Better for financial reporting to banks and investors | Profit and cash flow can move in opposite directions — easy to misread |
| Supports better business planning and forecasting | Requires year-end adjustments for accruals, prepayments, and deferred income |
Accounting software for cash basis and accrual accounting
Whether you use cash basis or accrual accounting, good cloud accounting software makes record-keeping straightforward, handles your tax reporting, and keeps you MTD-ready. All three packages below support both accounting methods and are MTD-compatible for VAT and Income Tax.
💡 Tip: Using MTD-compatible accounting software now — even if you are not yet within the mandatory MTD thresholds — means you will be ready when your start date arrives. Xero, QuickBooks, and Sage all handle both cash-basis and accrual accounting and automatically submit quarterly MTD updates.
Which accounting method is right for you?
The right accounting method depends on your business structure, how you get paid, and what you need your accounts to show. Here is a straightforward guide.
Sole traders & landlords
Cash basis is likely right for you if:
- Your customers pay promptly
- You do not hold significant stock
- You want simple, low-cost bookkeeping
- You manage your own accounts
- You want tax based on cash actually received
Sole traders & growing businesses
Accrual accounting may suit you better if:
- Clients pay on 60 or 90-day terms
- You hold stock or work in progress
- You are applying for a business loan
- You want to track profitability accurately
- Your business is growing rapidly
If you run a limited company, the decision is already made — you must use accrual accounting. There is no option to use cash basis regardless of your turnover or business size.
📌 Example — which method fits? A self-employed plumber who invoices on completion and is paid within a week will find cash basis straightforward and accurate. A freelance consultant who works on large projects with 60-day payment terms, or a retailer carrying significant stock, may get a more accurate and useful financial picture from accrual accounting — even if cash basis is the simpler option.
How to switch from cash basis to accrual accounting
If you decide that accrual accounting better suits your business, here is how to make the switch. The best time to change is at the start of a new tax year.
- Choose your start date. Pick the first day of a new tax year or accounting period to keep things clean.
- Record what you are owed and what you owe. At the switchover date, list all unpaid invoices you have sent (accounts receivable) and all unpaid bills you have received (accounts payable). These become your opening balances under accrual accounting.
- Record any stock. If you hold stock or work in progress, record its value as an asset at the switchover date.
- Adjust for prepayments. If you have paid in advance for anything — insurance, subscriptions, rent — record the unused portion as a prepayment asset.
- Note the change on your Self Assessment return. You do not need to contact HMRC separately. Indicate on your Self Assessment that you are using traditional accounting rather than cash basis.
- Update your accounting software. Xero, QuickBooks, and Sage all allow you to change your accounting method in settings.
💡 Tip: Switching accounting methods can affect your tax bill in the transition year because some income or expenses may be counted differently. If your accounts are complex, it is worth speaking to an accountant before switching. Check GOV.UK for the current rules on transitional adjustments.
⚠️ Warning: If you switch to accrual accounting, you may owe tax on invoiced income before your clients have actually paid you. Make sure you understand the cash flow impact before switching — particularly if you have significant outstanding invoices at the transition date.
Tax implications and Making Tax Digital
How each method affects your tax
Under cash basis accounting, you pay Income Tax on money you have actually received in the tax year. If a client has not paid an invoice before 5 April, you are not taxed on that income until it arrives. Under accrual basis accounting, tax is based on income earned in the period, regardless of whether the client has paid, which can create a cash flow challenge if you have large outstanding invoices at the year-end.
Both methods also affect when VAT is due. The VAT cash accounting scheme — which is separate from cash basis Income Tax accounting — allows VAT-registered businesses to account for VAT when money changes hands rather than when invoices are issued. The two schemes are independent and can be used in combination.
Making Tax Digital for Income Tax
Making Tax Digital for Income Tax is being introduced in phases for sole traders and landlords. Both cash basis accounting and accrual accounting are compatible with MTD requirements.
| Phase | Date | Qualifying income threshold |
|---|---|---|
| Phase 1 | 6 April 2026 | Over £50,000 |
| Phase 2 | 6 April 2027 | Over £30,000 |
| Phase 3 | 6 April 2028 | Over £20,000 (confirmed October 2024 Autumn Budget) |
Qualifying income means gross income (before expenses) from self-employment and property rental combined. Income from PAYE, dividends, and pensions does not count. When MTD applies, you will need to keep digital records and submit quarterly updates to HMRC using compatible software, replacing the traditional Self Assessment tax return with a Final Declaration.
Frequently asked questions
Summary of Cash vs Accrual Accounting
- Cash basis accounting records income when received and expenses when paid — ideal for most sole traders, self-employed people, and landlords
- Accrual accounting records income when earned and expenses when incurred — required for limited companies and provides a more accurate financial picture
- From April 2024, cash basis is the default for eligible sole traders and partnerships — opt out on your Self Assessment return if you prefer accrual accounting
- The old £150,000 turnover threshold for cash basis was removed from April 2024
- Limited companies must use accrual accounting — there is no option to use cash basis
- Accrual accounting gives a more complete picture of profitability and is preferred by banks and lenders
- Both methods are compatible with Making Tax Digital for Income Tax
- Switching from cash basis to accrual accounting takes preparation — transitional adjustments apply and may affect your tax bill
- Always check GOV.UK for the latest rules on accounting methods and MTD
Related pages on Business Accounting Basics
- Cash basis accounting
- Accrual accounting
- Self-employed bookkeeping
- Making Tax Digital
- Free Excel cash book template
- Best accounting software
- VAT cash accounting scheme
Last updated: June 2026
