Cash Basis vs Accruals: Which Accounting Basis Fits Your Business?

By John Thomas, Senior Accountant

One of the first accounting decisions a sole trader or partnership makes is also one of the least understood: should you prepare your accounts on the cash basis or the traditional accruals basis? Since the cash basis rules were overhauled from April 2024, with a higher turnover threshold and fewer restrictions, the choice is genuinely open to far more businesses. Here is what each basis means, who each suits, and how to choose.

What the two bases mean

The accruals basis, also called the traditional basis, records income when it is earned and expenses when they are incurred, regardless of when cash changes hands. Invoice a client in March and get paid in May, and the income belongs to the March accounts. It matches income to the work done and gives the truest picture of performance.

The cash basis records income when cash is received and expenses when cash is paid. Invoice in March, paid in May, and the income counts in May. It is simpler, mirrors your bank balance, and means you never pay tax on money you have not yet received.

What changed in April 2024

The reforms made cash basis significantly more attractive. The turnover threshold for using it rose to £150,000, so far more growing businesses qualify. Cash basis became the default for sole traders and partnerships, meaning you use it unless you actively elect for accruals. And several old restrictions were removed, including the cap on interest deductions and the limits on loss relief.

The practical effect: if you are a sole trader or partnership with turnover under £150,000, you are probably already on cash basis unless you opted out. Many businesses are on it without realising, which makes understanding the implications more important, not less.

Who suits the cash basis

Cash basis works best for straightforward businesses where the timing of cash and the timing of work are close together: freelancers, consultants, tradespeople and small retailers who get paid promptly. The big advantage is simplicity and cash flow: you are never taxed on unpaid invoices, which removes one of the nastiest surprises in small business life.

It also suits businesses with simple affairs that do not need sophisticated management information. If your bank balance tells you most of what you need to know, cash basis accounting is honest and adequate.

Who should choose accruals

Accruals basis is the better choice when debtors and creditors are material to the business. If you routinely carry large unpaid invoices, hold stock, or have significant work in progress, accruals gives a far more accurate picture of whether you are actually making money. Banks and investors also expect accruals accounts, so if you plan to borrow or raise finance, accruals is effectively required.

Larger or more complex businesses, anyone approaching the £150,000 threshold, and businesses that need proper management accounts for decision-making should be on accruals. Companies, incidentally, have no choice: limited companies must use the accruals basis.

The tax timing difference

The choice affects when you pay tax, not how much you pay over the long run. A business growing its debtor book will show higher profits under accruals and pay tax sooner. A business with slow-paying customers can defer tax under cash basis. In a year of rapid growth, that timing difference can be worth thousands in cash flow, so the decision deserves more thought than most people give it.

Switching between the two

You can change basis, but there are transitional rules to prevent income or expenses being counted twice or missed entirely. When moving from cash to accruals, opening adjustments bring debtors and creditors into the picture. When moving the other way, similar adjustments apply in reverse. The mechanics are fiddly enough that a switch is worth doing with an accountant, not as a DIY exercise at the year end.

How to decide

Ask three questions. Is turnover under £150,000 and likely to stay there? Are debtors, creditors and stock small relative to turnover? Do you need accounts primarily for tax, rather than for borrowing or management decisions? Three yeses point to cash basis. Any no points to accruals, or at least to a proper conversation about it.

Whichever basis you choose, the records need to be complete and consistent. Finex Outsourcing keeps the books for UK sole traders, partnerships and companies on either basis, and their corporation tax and self-assessment services make sure the basis election, the transitional adjustments and the tax return all line up.

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