Accounting technology / Glossary / Cash basis accounting

What is cash basis accounting?

Definition

Cash basis accounting records income only when money is received and expenses only when they are paid, ignoring when the work was done or the bill arrived. It is simpler than accrual accounting and suits many sole traders and small businesses, but it does not show what customers owe or what is owed to suppliers.

Also calledcash accountingcash methodcash basis

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Income counted: When cash is received
UK: Standard for sole traders and partnerships
US cash method limit: $32 million average receipts (2026)

How cash basis accounting works

An invoice sent in March and paid in May counts as May income under the cash basis; under the accruals basis it counts in March. Tax rules decide who may use it. In the UK, the cash basis is the standard method for sole traders and partnerships without corporate partners for income tax from the 2024 to 2025 tax year, and limited companies cannot use it. In the US, the IRS lets corporations and partnerships use the cash method if their average annual gross receipts over the previous three years do not exceed an inflation-adjusted limit, $32 million for tax years beginning in 2026, with other rules for some businesses. Financial statements prepared under IFRS, US GAAP or FRS 102 must use the accrual basis, so businesses that outgrow the cash basis switch to accruals.

Common questions

What is the difference between cash and accrual accounting?+

Cash accounting records transactions when money moves. Accrual accounting records income when earned and costs when incurred, so it shows receivables, payables and a truer profit for the period.

Can a limited company use cash basis accounting?+

Not in the UK, where companies prepare accrual accounts and pay corporation tax on that basis. In the US, many corporations under the gross receipts limit can use the cash method for tax, though C corporations face extra conditions.

Is VAT cash accounting the same thing?+

No. It is a separate VAT scheme that lets a business account for VAT when it is paid or received rather than when invoiced, and it can be used alongside accrual accounts.