Every set of books has to answer one question first: when does a sale count? On the cash basis, a sale counts when the customer pays. On the accrual basis, it counts when you earn it — usually when you deliver and invoice — whether or not the money has arrived. Expenses follow the same rule in reverse. Neither is a trick; they measure different things.
The same month, two answers
In March a design studio invoices a client 10,000 for a finished project, payable in 30 days. It pays 3,000 in March rent, and receives 4,000 for work it invoiced in February.
| March | Cash basis | Accrual basis |
|---|---|---|
| Income | 4,000 (February's invoice, paid now) | 10,000 (work done in March) |
| Rent | 3,000 | 3,000 |
| Profit | 1,000 | 7,000 |
| Owed by customers at month end | Not shown | 10,000 receivable |
Who has to use accrual
- Financial statements prepared under IFRS — used in more than 140 jurisdictions — must use the accrual basis, except for the cash flow statement (IAS 1).
- In the United States, the IRS lets many small businesses use the cash method, but C corporations and partnerships above an inflation-adjusted average gross-receipts threshold (around $30 million in recent years) and most businesses that carry inventory face restrictions (IRS Publication 538).
- In the UK, the cash basis has been the default for most sole traders' income tax since the 2024–25 tax year, and a separate VAT cash accounting scheme exists for smaller VAT-registered businesses.
- Lenders, investors and buyers of a business almost always ask for accrual accounts, whatever the tax rules say.
Cash basis suits you if
- You are a freelancer or a small service business
- You do not hold inventory
- Your tax authority allows it for your size
- Your main question is "how much cash do I have?"
Accrual suits you if
- You sell on credit or buy on supplier terms
- You carry stock
- You need loans, investors or audited accounts
- You want month-to-month profit you can compare
Questions people actually ask
What is the main difference between cash and accrual accounting?
Timing. Cash accounting records income when it is received and expenses when they are paid. Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash moves.
Can I switch from cash to accrual later?
Yes, and most growing businesses do. Some tax authorities require permission or an adjustment in the year you change, so agree the timing with your accountant.
Which method shows a more accurate profit?
Accrual, because it matches income with the costs of earning it in the same period. Cash basis is more accurate about the bank balance.
Where these facts come from
Checked against the following on 15 October 2026. Rules and dates change — if you are reading this long after that date, verify before you act on it.
- IFRS Foundation — IAS 1 Presentation of Financial Statements
- IRS Publication 538 — Accounting Periods and Methods
- GOV.UK — Cash basis
WisoBooks is a bookkeeping and business-management tool, not an accounting, tax or legal advisor. Nothing on this page is tax advice, and tax rules change. Confirm your own obligations with the relevant authority or a qualified advisor.
