The Differences Between Cash Accounting and Accrual Accounting and Who Can Use These Ways of Accounting
Under Cash Accounting, records income and expenses only when cash is received or paid, this keeps things simple and reflects actual cash flow.
Under Accrual Accounting, records income and expenses when they are earned or incurred, regardless of when cash is received or paid, it provides a more accurate financial picture.
Who Can Use Each Type in the UK?
Cash Accounting, its usually small businesses with annual turnover below £150,000 can use it for tax purposes. It is available for sole traders and partnerships (not limited companies or LLPs).
Accrual Accounting is required for limited companies and businesses exceeding the cash accounting turnover limit, in the UK they must follow UK Generally Accepted Accounting Principles (UK GAAP) or International Financial Reporting Standards (IFRS).
Main Pros and Cons of Each
| Pros – Cash Accounting | Cons – Cash accounting |
|---|---|
| Simple and easy to manage | Doesn’t show outstanding invoices or debts |
| Good for cash flow management | Can distort financial position |
| Less admin and bookkeeping | Not suitable for larger businesses |
| Pros – Accrual accounting | Cons – Accrual accounting |
|---|---|
| More accurate financial picture | More complex and time-consuming |
| Recognises revenue & expenses when they occur | May not reflect actual cash flow accurately |
| Required for tax and financial reporting (for larger businesses) | Requires accrual adjustments (e.g., prepayments, accruals) |