Should my small business use the cash basis or accruals basis for accounting?

Full answer

Choosing between the cash basis and accruals (traditional) basis affects both how much administrative work is involved in your bookkeeping and, in some cases, how much tax you pay in a given year, so it is worth understanding the practical differences before committing to one. **How the cash basis works** Under the cash basis, you record income when payment is actually received from a customer, and expenses when you actually pay a supplier or bill -- not when the invoice is raised or the work is done. This is simpler for many small traders to understand and administer, since it broadly mirrors the movement of money in and out of a business bank account, and it can smooth out cash flow problems around tax, since you are not taxed on income you have invoiced but not yet actually been paid for. **How the accruals (traditional) basis works** Under the accruals basis, income is recorded when it is earned (typically when an invoice is raised or the service/goods are provided, regardless of when the customer actually pays) and expenses are recorded when they are incurred (when a bill is received or a cost obligation arises), regardless of when cash actually changes hands. This gives a more accurate view of a business's true profitability in a given period, since it matches income and costs to the period they relate to, but requires tracking debtors (money owed to you) and creditors (money you owe) more carefully. **Who can use the cash basis** The cash basis is available to most sole traders and partnerships (not limited companies) with turnover below a set threshold (self-employed cash basis is now the DEFAULT method for most eligible businesses under recent simplification, rather than something you have to actively elect into, though you can opt out and use accruals instead if you prefer or if your turnover exceeds the eligibility limit). **Why cash basis can be simpler for small traders** Because you only need to track money actually received and paid, cash basis accounting requires less complex bookkeeping (no need to track debtors/creditors balances in the same detail) and can make preparing a Self Assessment return more straightforward, particularly for businesses with simple, mostly cash-based transactions and few large unpaid invoices at year end. **Why accruals might suit some businesses better** Businesses that regularly extend or receive significant credit terms (invoicing customers who pay much later, or receiving goods/services on credit before paying suppliers) may find the accruals basis gives a much clearer, more accurate picture of actual trading performance in a given accounting period, since large timing differences between cash basis and true economic activity can otherwise distort the apparent profitability shown by simple cash accounting. Certain loss relief and interest relief rules are also more restricted for cash basis users, which can matter for businesses that regularly make losses or have significant loan interest costs. **Worked example** A self-employed graphic designer invoices a large client £8,000 in March 2026 for work completed, but the client does not actually pay until May 2026 (the following tax year). Under the cash basis, this £8,000 is taxed in the 2026/27 tax year (when the money is received), potentially helping cash flow if the designer's tax bill lands in a year when they have the cash in hand. Under the accruals basis, the £8,000 would instead be taxed in 2025/26 (when the invoice was raised/work completed), regardless of when the client actually paid, potentially creating a tax bill before the cash has even been received. **Practical tip** Most small, straightforward sole traders with turnover comfortably below the cash basis eligibility threshold and few large unpaid invoices at year end find the cash basis simpler with little practical downside, but businesses considering claiming relief for a loss, paying significant loan interest, or with large invoicing timing gaps should discuss the choice with an accountant before committing, since switching between the two bases involves specific transitional adjustment rules.

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