Comparison Guide · Updated June 2026
Cash Basis vs Accruals Accounting for Sole Traders 2026/27
From April 2024, cash basis became the default accounting method for most sole traders and property businesses. Understanding the difference — and knowing when to elect for accruals instead — can save you tax, simplify your bookkeeping, or ensure your accounts meet lender requirements.
| Feature | Cash Basis | Accruals |
|---|---|---|
| Default from April 2024 | Yes | Must elect in |
| Income recognised | When cash received | When earned (invoice date) |
| Expenses recognised | When cash paid | When incurred |
| Debtors/creditors | Not reported | Reported |
| Interest deduction cap | £500 per year | No cap (wholly & exclusively) |
| Capital expenditure | Deducted when paid (no CA) | Capital allowances apply |
| Stock | Deducted when purchased | Matched to revenue (COGS) |
| Suitable for bank lending | May not satisfy lenders | GAAP-compliant |
Cash Basis: The 2024 Default
Under cash basis, income is recognised when cash is received and expenses are recognised when cash is paid. There are no debtors, creditors, accruals or prepayments. Capital expenditure (other than cars) is deducted immediately when paid rather than claimed as capital allowances over several years. This makes bookkeeping simpler and reduces the risk of errors for small businesses without an accountant.
The main restriction is the £500 annual cap on finance and interest deductions. Businesses with significant overdraft interest, business loans, or hire purchase finance above £500 per year lose the excess deduction entirely under cash basis. From April 2024, the turnover threshold was removed — any size sole trader can use cash basis.
Accruals: Better for Larger and More Complex Businesses
The accruals basis matches income and expenses to the period they relate to, regardless of when cash changes hands. Outstanding invoices (debtors) are income; unpaid bills (creditors) are expenses. Stock on hand is carried forward as a balance sheet asset rather than expensed immediately. Capital expenditure is treated via the capital allowances system (AIA, WDAs).
Accruals produces a more economically accurate profit figure and is required by banks and trade lenders who want GAAP-compliant accounts. It is better for businesses with large stock movements, pre-paid expenses, or significant outstanding invoices at year end — where the cash basis profit may be misleadingly high or low.
Worked Example: Builder with Large Debtors and Materials on Order
Tom is a self-employed builder. At 5 April 2026 he has: £20,000 of unpaid invoices from clients; £30,000 of materials purchased but not yet used in jobs; and £800 of overdraft interest.
Under cash basis: the £20,000 debtors are not income yet; the £30,000 materials are expensed when purchased; overdraft interest deduction is capped at £500 (£300 disallowed). Tax is deferred on the debtors but the materials are fully expensed.
Under accruals: the £20,000 is income now; the £30,000 materials on hand are stock — only materials consumed are expensed; the full £800 interest is deductible. Tax is higher this year but the profit figure more accurately reflects the state of the business.
For Tom, cash basis defers tax on the debtors but restricts the interest deduction. If the debtors are reliable and he has significant stock, switching to accruals may give a lower profit in some years once stock adjustments are made. The right answer depends on year-end balances — model both approaches before deciding.
Verdict
For most simple sole traders — freelancers, consultants, tradespeople without significant stock — cash basis is simpler and the default makes sense. For those with significant unpaid invoices, stock, pre-paid expenses, finance above £500, or lender requirements: elect for accruals. Review your position annually, particularly if your business is growing rapidly or you are planning to seek bank finance.