Cash vs. accrual accounting

Cash accounting records income and expenses when money is received or paid; accrual accounting records them when they are earned or incurred. Financial statements prepared under U.S. GAAP or IFRS must use the accrual basis, so most companies move to accrual as they grow. In the UK, the cash basis has been the default for sole traders and partnerships since April 6, 2024, but limited companies cannot use it.

Cash and accrual accounting are two different methods that companies can use to record and report their financial transactions. While both methods provide useful information about a company’s financial performance, there are some key differences between them.

The differences between cash and accrual

The main difference between cash and accrual accounting is the timing of when transactions are recorded. In cash accounting, transactions are recorded when the cash is actually received or paid out. For example, if a company sells a product, the sale would be recorded when the customer pays for the product. On the other hand, in accrual accounting, transactions are recorded when they are earned or incurred, regardless of when the cash is received or paid out. For example, if a company sells a product, the sale would be recorded when control of the product passes to the customer, often on shipment, even if the customer has not yet paid for the product.

Another key difference between these methods is the way in which they present a company’s financial performance. In cash accounting, the focus is on the actual cash inflows and outflows of the company. As a result, this method can provide a more realistic picture of the company’s current financial situation. On the other hand, accrual accounting is more focused on the underlying economic activity of the company. This means that it can provide a more complete picture of the company’s financial performance over time, including the recognition of revenue and expenses.

One advantage of cash accounting is that it is simpler and easier to understand than accrual accounting because it only involves recording transactions when cash is actually received or paid out.

Accrual accounting is based on the principle that revenue is recognized when it is earned and costs when they are incurred (see revenue recognition methods). This can differ from when the cash is paid, and so can be complicated to keep track of. ScaleXP helps by automating accrued income recognition. 

How do cash and accrual accounting compare?

The two methods differ mainly in timing, which changes what your reports show:

Cash vs. accrual example

As a simple example, a university collects money every term, usually three times per year. However, classes are taught over a 10-month period (September to June). Using cash accounting, the university would record revenue whenever they are paid. Using accrual accounting, the university would recognize revenue equally over the term – it would be classed as accrued revenue until the fees are billed at the end of each term. 

Should you use accrual accounting?

Financial statements prepared under U.S. GAAP or IFRS, including those of all publicly listed companies, must follow the principles of accrual accounting. Cash accounting tends to be used by smaller businesses. 

Overall, cash and accrual accounting are two different methods that companies can use to record and report their financial transactions. While both methods have their advantages and disadvantages, the choice of which method to use will depend on the needs and circumstances of the company, with most companies evolving to accrual accounting as they grow.

What are the rules in the UK and US?

Tax rules decide which method you can use for your tax return; they are separate from the accrual basis required for GAAP or IFRS financial statements.

UK. From April 6, 2024, the cash basis became the default method of accounting for sole traders and partnerships without corporate partners. Before then, it was an opt-in scheme for businesses with turnover of £150,000 or less. Limited companies cannot use the cash basis and use traditional (accrual) accounting instead (GOV.UK, “Cash basis” and GOV.UK, “Cash basis before the 2024 to 2025 tax year”, checked October 4, 2026).

US. For tax years beginning in 2026, a corporation or partnership that is subject to the IRS gross receipts test can use the cash method only if its average annual gross receipts for the previous three tax years are $32 million or less (IRS, Rev. Proc. 2025-32, section .30, checked October 4, 2026).

Moving to accrual accounting means posting accruals every month-end. ScaleXP automates accruals in Xero and QuickBooks: it prepares the journals, and finance reviews and approves them before they’re posted.

Frequently asked questions