Cash Basis vs Traditional Accounting UK | Which Is Best 2026

What Is the Cash Basis of Accounting?

The cash basis is a simpler method of accounting. Under this method, you record income when you receive it and expenses when you pay them. You only account for the money that has actually moved in and out of your business account.

Key Features of the Cash Basis

• Income: Recorded when you are paid, not when you issue an invoice.
• Expenses: Recorded when you pay the bill, not when you receive it.
• Simpler: You don’t need to track ‘trade debtors’ (money owed to you) or ‘trade creditors’ (money you owe).
• Threshold: From April 2024, you can use the cash basis if your turnover is £150,000 or less. There is also a separate income limit for property businesses.
• Interest: Interest paid on business loans, credit cards, and overdrafts are deductible as an expense.
• Capital Allowances: Instead of capital allowances, you can claim the cost of plant and machinery (excluding cars) as an expense in the year of purchase. From April 2024, there are no restrictions on the value of assets you can claim. For more details, see our guide: Equipment Purchases.
• Losses: You can still carry forward losses to set against future profits.
• Inventory: You can deduct the cost of goods for resale when you buy them, rather than when you sell them (if you’re using the cash basis, you can also do this).

What Is Traditional Accounting (Accruals Basis)?

The traditional accounting method, also known as the accruals basis, is more complex. Under this method, you record income when you issue an invoice, not when you are paid. You record expenses when you receive the bill, not when you pay it.

Key Features of Traditional Accounting

• Income: Recorded when you invoice the customer (or when the work is completed, whichever comes first).
• Expenses: Recorded when you receive the bill.
• Complex: You need to track debtors and creditors.
• Stock: You must account for opening and closing stock.
• Capital Allowances: You must claim capital allowances on assets you purchase. See our guide: Equipment Purchases.
• No Turnover Limit: There is no turnover limit for traditional accounting.

Which Method Should You Choose?

The best method for you depends on your business circumstances. Here’s a comparison to help you decide.

Why Choose the Cash Basis?

• Simplicity: It’s much easier to calculate your profit. You just add up what you’ve been paid and subtract what you’ve paid out.
• Better Cash Flow: You don’t pay tax on money you haven’t yet received. This is a significant advantage if you have long payment terms.
• Less Record Keeping: You don’t need to track debtors and creditors.
• Claiming Expenses: You can deduct the full cost of plant and machinery in the year of purchase, which can be a simple alternative to claiming capital allowances.
• Who it’s best for: Freelancers, contractors, and small businesses with straightforward finances and relatively simple transactions.

Why Choose Traditional Accounting?

• Matches Income and Expenses: It gives a more accurate picture of your business performance in a given year. If you have a profitable year but a large unpaid invoice, the cash basis might show a low profit, even though you’ve had a good year.
• Stock Management: If you hold stock, it’s easier to match the cost of goods sold against the income they generate.
• Who it’s best for: Businesses with stock, larger businesses with complex finances, or those who need a more accurate ‘profit and loss’ picture for lenders or investors.

The New Thresholds for 2026

From April 2024, the cash basis became the default method for sole traders and partnerships with a turnover of £150,000 or less. This means you will automatically use the cash basis unless you actively choose to use the accruals basis.

If your turnover exceeds £150,000, you must use the traditional accounting method.

Example Comparison

Let’s say you are a freelance graphic designer.

• In December 2025: You invoice a client for £5,000 for work completed in December.
• The client pays you in February 2026.

Under the Cash Basis:

• The £5,000 is counted as income in the 2025-26 tax year when you received it in February.

Under the Traditional Basis:

• The £5,000 is counted as income in the 2025-26 tax year when you invoiced it in December.

How to Switch Between Methods

You can normally only switch between the cash basis and traditional accounting once every 5 years. However, if your turnover crosses the threshold, you may need to switch.

When switching, there are specific rules for dealing with stock, debtors, and creditors to ensure a smooth transition.

How We Can Help

Deciding which accounting method to use can be confusing. Our ACCA-qualified accountants can:

• Review your business finances and advise on the best method for you.
• Ensure you use the correct method for your circumstances.
• Handle the accounting and tax return for you, regardless of which method you choose.
• Advise you on the implications of the new 2026 thresholds and how they affect you.

This guide is intended for informational purposes and is based on UK tax regulations as of June 2026. Tax laws and government systems are subject to change. Always consult with a qualified professional regarding your specific financial situation. Right Tax Returns is an ACCA-registered firm.