Cash Basis vs Accrual Accounting: Which Should Your Small Business Use?

If you've started looking into how to record your income and expenses for Self Assessment, you've probably run into the choice between cash basis and accrual accounting. This isn't just an abstract bookkeeping term - it changes when income and expenses count for tax, how complicated your books are day to day, and which software features actually matter to you. This guide walks through cash basis vs accrual accounting in plain English, so you can pick the method that fits your business and file with confidence.

What is cash basis accounting?

Cash basis accounting records money when it actually moves. You count income when a customer pays you, and you count an expense when you actually pay a supplier or bill - regardless of when the invoice was raised or the work was done. It's the simplest way to keep books, which is why HMRC allows most sole traders and self-employed people to use it for Self Assessment.

The appeal is obvious: your accounts mirror your bank balance. There's no need to track debtors, creditors, accruals, or prepayments. If you invoice a client in March but they don't pay until May, that income falls into the tax year you were actually paid, not the year you did the work.

What is accrual (traditional) accounting?

Accrual accounting - sometimes called "traditional accounting" in HMRC guidance - records income and expenses when they're earned or incurred, not when cash changes hands. Raise an invoice in March for work completed that month, and it counts as March income even if payment lands in May. Likewise, a bill you receive in one period counts as an expense then, even if you pay it later.

This method gives a more accurate picture of how the business is actually performing period to period, because it matches income to the work that generated it. It's also the method limited companies are required to use, and it's the natural fit for a business carrying stock, work in progress, or significant amounts owed to and by it.

The key difference, in one line

Cash basis asks "when did the money move?" Accrual asks "when was the income earned or the cost incurred?" Everything else - eligibility, complexity, and what your accounting software needs to do - flows from that one distinction.

Who can use cash basis for Self Assessment?

Cash basis has been the default method for eligible sole traders and partnerships with no corporate partners since 6 April 2024, with no turnover threshold at all - the old £150,000 entry and £300,000 exit limits have been abolished, so businesses of any size can use it unless they actively choose to opt out and use accrual accounting instead. Limited companies cannot use cash basis - they must use accrual accounting under company law reporting requirements, regardless of their size.

If your business holds significant stock, has complex work in progress, borrows heavily, or you simply want the clearer trading picture that matching income to effort gives you, accrual accounting may suit you better even if cash basis is available. There's nothing stopping a sole trader from choosing accrual accounting if it better reflects how the business runs - see our guide on sole trader vs limited company for how your structure affects this choice more broadly.

Cash basis, accrual accounting, and Making Tax Digital

Whichever method you use, Making Tax Digital (MTD) requires digital records and a digital link between them and your return - it doesn't force a particular accounting method on you. Under Making Tax Digital software built the right way, cash basis and accrual accounting are both just settings: the software timestamps income and expenses the way your chosen method requires, then keeps everything ready for when you choose to file.

That's an important distinction from how some MTD tools are marketed. WDI Billing runs on three modes - Records, Prepare, and File - with Prepare as the default. Your transactions are captured and organised continuously, quarterly summaries and figures are prepared automatically, but nothing is transmitted to HMRC until you actively press file. Nothing streams to HMRC automatically, whichever accounting method you've chosen. For the full regulatory picture, our what is Making Tax Digital pillar guide covers ITSA timelines and quarterly obligations in depth.

A quick example: the same invoice, two different answers

Say you're a self-employed consultant. You finish a piece of work in late March and issue an invoice for £2,000, but the client doesn't pay until the second week of April - which falls into the next tax year.

Under cash basis, that £2,000 counts as income in the tax year you were paid - the new tax year, not the one in which you did the work. Under accrual accounting, the £2,000 counts as income in the tax year you raised the invoice, because that's when it was earned, even though the cash hadn't arrived yet. Neither answer is "wrong" - they're two different, both legitimate, ways of drawing the line between one tax year and the next. But it's easy to see how the method you use can shift which tax year a chunk of income - and the tax on it - actually falls into, especially for invoices issued near the end of a tax year.

Does the method affect your VAT return?

Cash basis and accrual accounting for Self Assessment are separate from how VAT is accounted for. If you're VAT-registered, your VAT return timing is generally governed by the VAT scheme you're on rather than by whether you use cash basis or accrual accounting for your annual profit figures - though many small businesses on a cash-based VAT scheme find their VAT and Self Assessment timing naturally line up. Our MTD VAT software page covers VAT return timing and the digital record-keeping rules in more detail, and it's worth understanding both sets of rules separately rather than assuming one dictates the other.

Pros and cons for small business owners

Cash basis: pros

• Simple to understand and maintain - no need to track who owes you money
• Tax is only due on income you've actually received, which can help cash flow
• Fewer year-end adjustments, faster to prepare your Self Assessment figures

Cash basis: cons

• Some loss relief and interest deduction rules are more restricted
• Doesn't reflect outstanding invoices or bills, so it can understate what the business is really owed or owes
• Not available to limited companies

Accrual accounting: pros

• A truer picture of profitability for the period, matching income to the work that generated it
• Required for limited companies and expected by lenders, investors, and some accountants
• Fewer restrictions on loss relief and finance cost deductions

Accrual accounting: cons

• More to track: debtors, creditors, accruals, and prepayments
• Tax can become due on income you haven't actually collected yet
• Slightly more setup and discipline needed in your bookkeeping

How this choice plays out in your day-to-day books

In practice, the accounting method you pick shapes how you should be recording invoices and allowable expenses throughout the year, not just at tax return time. Under cash basis, you can wait to log an expense until it's paid - useful if you're keeping things lightweight in bookkeeping software built around Records mode. Under accrual accounting, it pays to record a bill or invoice as soon as it's issued, so your books reflect the true state of the business between payment dates.

Whichever you choose, the discipline of getting income and expenses into your books as they happen - rather than reconstructing everything at deadline time - is what actually keeps your MTD quarterly updates painless. Sole traders in particular tend to find cash basis a natural fit alongside straightforward sole trader accounting software, since it removes the need to chase debtor and creditor balances on top of everything else running the business.

Can you switch between cash basis and accrual accounting?

Yes - sole traders can generally move between cash basis and accrual accounting from one tax year to the next, though switching does involve some adjustments to avoid income or expenses being counted twice, or missed entirely, across the changeover. If you're unsure which method suits a change in your business - taking on stock, growing turnover, or considering incorporation - it's worth discussing with an accountant before you switch, and giving them visibility of your books rather than reconstructing everything from scratch when they ask.

Your books, your choice, always under your control

Whichever method fits your business, the point of good accounting software isn't to lock you into one way of working - it's to keep accurate records that are genuinely yours, exportable, and ready whenever you or your accountant need them. WDI Billing supports both cash basis and accrual accounting, keeps every record in Records mode as the honest source of truth, and only prepares figures for filing when you ask it to. Your accountant can be given access when you want a second pair of eyes, without ever losing sight of who owns the data.

Ready to see how straightforward cash basis vs accrual accounting can be when your software does the sorting for you? Start a free trial of WDI Billing and keep your books - and the choice of method - entirely in your hands.