Understanding cash basis accounting: A simple guide

Cash basis accounting is a popular choice among small and medium-sized businesses (SMBs) in the UK, offering a simplified approach to bookkeeping and tax reporting. 

Limited companies, partnerships with a corporate partner and limited liability partnerships cannot use the cash basis and should use the accruals basis for their accounts.  

In accounting methodology there are two main approaches to preparing business accounts in the UK:  

• Accruals basis / UK GAAP accounting, also known as ‘traditional accounting’ 
• Cash basis 

Prior to 5th April 2024, many businesses chose the accruals basis as the cash basis was only available for turnovers below £150,000 and had restrictions on interest relief and loss relief. See our article about the rules which changed here. 

Since 6th April 2024, the cash basis has become HMRC’s default accounting method for sole traders and partnerships with no corporate partners.    

Until recently, not everyone could use the cash basis for accounting. This meant a lot of businesses did not prepare their accounts in this way. Following the easing of the restrictions, many businesses will be considering: 

• what cash basis accounting is 
• whether they should use it, and 
• how it works.  

What is cash basis accounting? 

Cash basis accounting is recording income and expenses when they are paid and received. In contrast, accruals basis accounting is recording income and expenses when they are incurred. For example, by the invoice/bill date, regardless of when they are paid or received.  

SMBs may want to take advantage of using this method as it is a straightforward way of preparing accounts.  

Choosing the right method of accounting for your business is important. Consider the overall picture and how you plan to use your accounts to determine the most effective approach.   

Key features of cash basis accounting 

• Income recognition: Income is recorded only when cash is received from customers. 
• Expense recognition: Expenses are recorded only when cash is paid to suppliers or for business costs. 
• Simplified bookkeeping and reporting: Cash basis accounting simplifies bookkeeping. 
• Capital assets: Under cash basis accounting, the cost of capital equipment is usually included in the accounts as an expense. Assets purchased and reported under the accruals basis are not included in the profit and loss (P&L) account. Instead, they are included as capital expenditure on the balance sheet and relieved via capital allowances. A person using the cash basis is not entitled to claim capital allowances. 

Should I use cash basis accounting? 

With the removal of the restrictions, the cash basis is open to most businesses. The method is simpler but that doesn’t necessarily mean it’s suitable for your business. 

Advantages of cash basis accounting 

1. Only pay tax on income received: Accounting for income on a cash basis means you only pay tax on income that’s been received. This is particularly beneficial to businesses who have a high level of debtors or have slow paying customers. 
2. Simplified accounts: When using the cash basis, your annual accounts will require fewer accounting adjustments. For example, there’ll be no requirement to include accruals, prepayments and so on. This will save you time, particularly for businesses reporting quarterly under Making Tax Digital (MTD). 
3. Alignment with cash flow tracking: Accounting for income and expenses on a cash basis allows direct monitoring of cash inflows and outflows. This can assist businesses particularly susceptible to cash flows, for example those that are growing and have large spends. 

Disadvantages of cash basis accounting 

1. Limited picture of financial health: Accounts without debtors and creditors may not provide a complete picture of a business’ financial health, and position. Businesses that are less straightforward may need accruals basis accounting to enable them to make appropriate business decisions. 
2. Difficulty attracting investors: When accessing funding and financial assistance, such as loans and mortgages, accounts prepared under the cash basis may not be an acceptable method as they lack certain details required. 
3. Switching is complex: Transitioning between the accruals basis and the cash basis needs extra adjustments, so taking professional advice is sensible.    

How do I implement cash basis accounting? 

Reporting 

From the 2024/25 tax year, the cash basis is the default method of accounting. If you used the cash basis for the 2023/24 tax year, you would have needed to tick a box to say so on your self-assessment tax return. From 2024/25, you no longer have to tick a box on your tax return; you don’t need to do anything to tell HMRC you have used the cash basis. By contrast, if you use the accruals basis you will need to elect to do so on your tax return. 

Adjustments 

For businesses that have previously used the accruals basis, on the first set of accounts under the cash basis you’ll need to make some adjustments. This includes removing all the previous accounting adjustments that took place under accruals accounting. 

If you do not complete these adjustments successfully, there may be some duplication in the accounts. For example, not removing debtors previously provided for would result in income being taxed twice. Seek professional help to ensure this technical process is properly carried out. 

How we can help 

Our accountants are experts and can advise you on which accounting method is most suitable for your business. Once decided, we can carry out bookkeeping to meet your requirements as well as preparing your business accounts and self-assessment tax return.

Last updated: 6th November 2025