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What’s the difference?
The difference between accrual vs cash accounting is the difference between when you record revenue and expenses. Accrual accounting is far better for managing a business, but cash accounting also has its advantages.
Accrual basis accounting
Accrual basis accounting shows business revenue and equivalent expenses when they are generated—not when money changes hands. This means revenue is recorded on billing and expenses when the company is invoiced.
Accrual accounting makes the relationship between revenue and expenses clearer. It also offers a more accurate picture of a company’s assets and liabilities on its balance sheet providing better insight into profitability.
Pros and Cons
- You can make financial decisions with far more confidence, and it is essential if applying for business finance
- You could end up paying tax on income before being paid to you
– if the customer reneges on the invoice, you can claim the tax back on your next return
Cash basis accounting
Cash basis accounting is mainly used by small businesses and organisations that pay taxes via the owner’s personal tax returns.
Under the cash basis method, revenue and expenses are recorded solely on cash flow. Revenue is recorded when cash is received from a customer, and expenses are recorded when cash is paid out. Bookkeeping under the cash basis accounting method is very straightforward and keeping track of cash flow is easy.
You can use cash basis if you:
- Are a sole trader or a partnership
- have a maximum turnover of £150,000
(If you have more than one business and use a cash basis for one, you must use a cash basis for all your businesses with a combined turnover of less than £150,000).
Pros and cons
- It could incorrectly show your business as in profit because outstanding bills aren’t paid
- It is not much help in making long term management decisions
- It’s simple to do and shows how much cash is immediately available
- It’s an easier way for tax calculation if the business is allowed to use this method
Differences made clear
Cash accounting | Accrual accounting |
When cash has been received (revenue) it is recognised as income | Income is recorded as earned (revenue) when an invoice is issued |
When cash has been spent it is recognised as an expense | Expenses are recorded when an invoice is received. |
Taxes are not payable on cash that hasn’t been received | Taxes are due on income recorded but not received |
Mainly used by small businesses and sole traders with no inventory | Required for businesses with revenue over £150,000 |
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Disclaimer: Information provided by Kidwells Accountancy on our website is for informational purposes only. It is provided in good faith but we make no guarantee of any kind regarding the accuracy, reliability, or completeness of any information on our site. We always recommend businesses seek independent legal and financial advice before working with us or acting on any information on our website.