What is cash basis accounting?

When setting up their financial records, sole traders in the UK have a choice between two methods of accounting — traditional accounting and cash basis accounting. The distinction matters because the two methods treat income and expenses differently, which affects when profit is calculated and how tax is reported. Understanding the difference helps founders choose the method that suits how their business actually operates.

Cash basis accounting records income when cash is actually received and expenses when they are actually paid, rather than when an invoice is raised or received. This makes it simpler to operate for businesses without complex financial arrangements, as the accounting more closely mirrors the business's actual cash position. Traditional accruals accounting, by contrast, records income and expenses when they are earned or incurred regardless of when the cash moves. Cash basis is available to sole traders and some partnerships, but not to limited companies.

Cash basis is simpler to operate but may not give the most accurate picture of business performance for businesses with significant amounts owed to or by them at any given time. Switching between methods is permitted in some circumstances but requires care. Our guide to accounting methods for UK sole traders explains when cash basis is appropriate and how it compares to traditional accounting in practice.