Cash vs accrual accounting: which suits your business?

Published Friday 17 April 2026

Table of contents

• Difference between cash and accrual accounting
• What is cash basis accounting?
• What is accrual basis accounting?
• Examples of cash vs accrual accounting
• How to choose between cash and accrual accounting
• Which accounting method do most businesses use?
• Hybrid methods of accounting
• Making the right choice for your business
• FAQs on cash versus accrual accounting

Key takeaways

• Choose cash accounting if you want simplicity and clear cash flow tracking, or choose accrual accounting if you need an accurate picture of business performance to plan ahead, secure loans, or report to investors.
• Opt out of cash basis accounting if you prefer accrual accounting, as from the 2024/25 tax year, cash basis is now the default method for UK self-assessment.
• Use accrual accounting if you hold stock, plan to apply for loans, or need detailed financial reporting, as banks and lenders prefer it because it shows your business's financial health more clearly.
• Use accounting software to automate accrual accounting tasks such as invoice tracking and bill entry, so you get better business insights without the manual effort.

Difference between cash and accrual accounting

Cash and accrual accounting differ in when you record income and expenses. Cash accounting records transactions when money changes hands. Accrual accounting records them when you earn income or incur costs, regardless of payment timing.

Each method suits different needs:

• Accrual accounting gives you a more accurate picture of business performance
• Cash accounting offers simplicity but shows less detail about how your business is doing

What is cash basis accounting?

Cash basis accounting is a method that records income and expenses only when money actually changes hands. You recognise revenue when you receive payment and costs when you pay bills.

Here's how it works:

• Income: counts only when you receive payment
• Expenses: count only when you pay bills
• Payment method: works with cash, bank transfers, or electronic payments

This method shows your actual cash position, but it only includes money that has already changed hands.

Benefits of cash accounting

• Simplicity: easy to understand and manage, as you just track money in and out
• Clear cash position: shows exactly how much money you have available
• Tax advantages: simpler tax calculations, with no cap on deducting interest from 2024/25 onwards, whereas previously it was capped at £500 per year

Downsides of cash accounting

• Profit timing: shows profit based on cash flow, not on outstanding bills
• Business insights: limited view of overall performance, though you can now offset losses the same way as accrual accounting from April 2024
• Planning: best for tracking current cash, not for forecasting future needs

What is accrual basis accounting?

Accrual accounting records transactions when you earn income or incur expenses, not when money changes hands. You recognise revenue when you complete work and costs when you receive bills.

Here's how it works:

• Income: recorded when you send an invoice
• Expenses: recorded when you receive a bill
• Timing: records transactions regardless of payment timing

This method matches income and expenses to the right period, so you see how your business truly performs.

Benefits of accrual accounting

• Accurate view: shows how profitable you truly are by matching income and expenses to correct periods
• Decide better: provides a complete financial picture so you can plan confidently
• Applying for loans: banks prefer accrual statements because they show how your business performs more clearly

Downsides of accrual accounting

• More complex: requires tracking invoices, bills, and payments separately
• Tax timing: you may pay tax on unpaid invoices, though you can claim refunds if customers don't pay
• Higher maintenance: needs more detailed record-keeping than cash accounting

Examples of cash vs accrual accounting

Seeing both methods in action makes it clearer how they differ. Here's how they work for a small graphic design business.

Scenario 1: You send an invoice

You complete a project and send your client an invoice for £500 in March. The client pays you in April.

• With cash accounting, you record the £500 income in April, when the money actually arrives in your bank account.
• With accrual accounting, you record the £500 income in March, when you earned it and sent the invoice.

Scenario 2: You receive a bill

You sign up for a new software subscription and receive a bill for £50 in May. You pay the bill in June.

• With cash accounting, you record the £50 expense in June, when the money leaves your bank account.
• With accrual accounting, you record the £50 expense in May, when you received the bill and incurred the cost.

The accrual method gives you a more accurate picture of your profitability for a specific period. This helps you understand how your business actually performed each month or quarter, regardless of when payments arrived.

How to choose between cash and accrual accounting

The right accounting method depends on your business size, type, and what you plan for the future. Consider these factors when choosing:

• Business size and turnover: cash accounting is simpler, so many small businesses and sole traders use it. In the UK, turnover thresholds for using the cash basis—previously set at £150,000 to join and £300,000 to leave—have been removed entirely from the 2024/25 tax year onwards
• Business type: if you hold stock, you need to use accrual accounting to track your assets and the cost of goods sold
• Future plans: lenders and investors usually want financial reports on an accrual basis. This shows your business's financial health more clearly
• Tax requirements: from 2024/25, cash basis is the default method, and businesses will need to opt-out unless they choose accrual accounting or are excluded. Speak to a tax professional to check your options

Which accounting method do most businesses use?

Most growing businesses use accrual accounting. It provides the financial detail needed to plan, secure funding, and decide confidently.

Cash basis works well for very small businesses and sole traders who want simplicity. It's also the default method for UK self-assessment from the 2024/25 tax year onwards, a change expected to impact an estimated 250,000 businesses transitioning into using the cash basis.

Technology has made accrual accounting much more accessible. What once required you to work manually now happens automatically with the right software.

How technology simplifies accrual accounting

Accounting software removes much of the complexity from accrual accounting. Modern tools automate the tracking that used to require manual effort:

• Automated bill entry: reads and records expenses automatically
• Invoice tracking: records income when you create invoices
• Flexible reporting: lets you switch between cash and accrual views instantly
• Reduced workload: handles most record-keeping tasks automatically

With tools like Xero, accrual accounting becomes almost as straightforward as cash basis, while giving you much better insight into how your business is performing.

Hybrid methods of accounting

Hybrid accounting combines cash and accrual methods to serve different needs within the same business. Some businesses use accrual to decide about management but cash basis for tax reporting.

Common uses include:

• Deciding financially: use accrual when you plan for business or apply for loans
• Taxes: use cash basis to calculate taxes more simply
• Reporting: switch between methods based on audience needs

Hybrid systems have complex rules. Speak to an accountant to make sure you follow the regulations.

Making the right choice for your business

Accrual accounting gives you the full story of your business, showing how profitable you truly are and where you stand financially, which is vital when you plan and grow. For a quick look at money in the bank, cash accounting is useful.

You don't have to be an accounting expert to get it right. Accounting software makes it easy to manage your books on an accrual basis, automating much of the work.

Xero records income when you create an invoice and expenses when bills arrive. You get real-time insights with less effort. Get one month free and try Xero for your business.

FAQs on cash versus accrual accounting

Below are answers to common questions about cash and accrual accounting methods.

How do I know if I'm using cash or accrual accounting?

Check when you record transactions. If you record income when you receive payment and expenses when you pay bills, you're using cash accounting. If you record them when you earn income or incur costs (such as when you send an invoice or receive a bill), you're using accrual accounting.

Do banks prefer accrual or cash basis accounting?

Most banks and lenders prefer accrual accounting. It shows your business's financial health over time, including money owed to you and bills you need to pay. This gives them a clearer picture when they assess whether to approve your loan.

Can I switch from cash to accrual accounting?

Yes, you can switch from cash to accrual accounting. Many businesses do this as they grow. You'll need to adjust for income and expenses not yet recorded, so work with an accountant to make sure you follow tax rules.

Do I need an accountant to use accrual accounting?

You can use accrual accounting without an accountant. Modern accounting software automates most of the tracking and record-keeping. However, an accountant can help you strategise, plan taxes, and make sure your records are accurate.

What happens if I don't choose the right method initially?

You can change your accounting method later if needed. Many businesses start with cash accounting for simplicity, then switch to accrual as they grow. Speak to an accountant about how to transition and what it might mean for your taxes.