Should I use Cash-Basis or Accrual Accounting?

If you're running a small business, one of the most important decisions you'll make is choosing the right accounting method.

Cash-basis and accrual accounting are the two most common methods, and each has its advantages and disadvantages. In this blog post, we'll explore the differences between cash-basis and accrual accounting, and help you decide which one is right for your business.

What is Cash-Basis Accounting?

Cash-basis accounting is a method where you record income and expenses when you receive or pay cash. This means that you don't record income until you actually receive payment from a customer, and you don't record expenses until you pay your bills. Cash-basis accounting is straightforward and easy to understand, making it a popular choice for small businesses.

What is Accrual Accounting?

Accrual accounting is a method where you record income and expenses when they are earned or incurred, regardless of when the cash is received or paid. This means that you record income when you send an invoice to a customer, even if they haven't paid you yet. Likewise, you record expenses when you receive a bill, even if you haven't paid it yet. Accrual accounting provides a more accurate picture of your business's financial health, but it can be more complex to manage.

Which Accounting Method Should I Use?

The accounting method you choose will depend on the type of business you run and your personal preferences. Here are some things to consider when choosing between cash-basis and accrual accounting:

  • Business Size: If you're running a small business with a simple revenue stream and few expenses, cash-basis accounting may be sufficient. If you have a larger business with multiple revenue streams and expenses, accrual accounting will give you a more accurate picture of your financial health. You can use cash based accounting if you run a small self-employed business, for example sole trader or partnership and have a turnover of £150,000 or less a year. Limited companies and limited liability partnerships cannot use cash basis.

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000.

  • Type of Business: Some businesses are not allowed to use cash basis. These include Lloyd's underwriters,farming businesses with a current herd basis election, businesses that have claimed research and development allowance and waste disposal. For a full list, take a look at
  • Financial Reporting: If you need to generate financial statements for investors or lenders, accrual accounting is the preferred method. Cash-basis accounting can make it difficult to provide a clear picture of your business's financial health.
  • Complexity: Accrual accounting is more complex than cash-basis accounting, and it requires a deeper understanding of accounting principles. If you don't have the time or resources to manage accrual accounting, cash-basis accounting may be a better choice for your business.

The decision to use cash-basis or accrual accounting ultimately comes down to your business's unique needs and circumstances. If you're not sure which method to choose, it's a good idea to consult with a financial professional to help you make an informed decision. Whatever method you choose, make sure to keep accurate records and stay on top of your finances to ensure the long-term success of your business.

Leave a Comment

Your email address will not be published. Required fields are marked *