Cash-Basis Accounting

What is cash-basis accounting?

Cash-basis accounting recognises revenue when money is received and expenses when money is paid. If you invoice a client in March and they pay in May, the revenue appears in May under cash-basis — not March.

It is the simplest accounting method and the default for most freelancers, sole traders, and small businesses with straightforward finances.

Cash-basis vs accrual — the practical difference

Under accrual-basis accounting, revenue is recognised when earned (when you deliver the service or send the invoice), regardless of when payment arrives. This gives a more accurate picture of business performance in any given period but requires tracking accounts receivable and accounts payable separately.

Under cash-basis accounting, your P&L matches your bank movements. It is simpler to maintain and understand.

Worked example:

You do a freelance project in January, invoice for £2,000, and get paid in February.

Method	January P&L	February P&L
Accrual	£2,000 revenue	£0 revenue
Cash-basis	£0 revenue	£2,000 revenue

Both are correct — they are just measuring different things.

Who should use cash-basis?

Cash-basis is appropriate for:

Sole traders and freelancers with annual turnover below £150,000 (UK) or with simple finances (US sole proprietors filing Schedule C)
Businesses where income is received before or immediately after delivery
Service businesses without significant inventory

Accrual is required or preferable when:

Your annual turnover exceeds £150,000 in the UK (HMRC requires accrual above this threshold for some tax purposes)
You carry significant inventory (COGS timing matters)
You have a substantial accounts receivable balance — cash-basis will not show you what you are owed
Investors or lenders need GAAP-compliant financial statements

How accounting software handles this

QuickBooks, Xero, and FreshBooks default to accrual but allow you to generate cash-basis reports by toggling the report view. Wave operates primarily on cash-basis for its free tier. QuickBooks Self-Employed is cash-basis by design (suited to Schedule C filers).

The toggle matters at tax time: if you are a UK sole trader filing on a cash-basis, your P&L must reflect cash movements, not invoice dates. Most software will handle this correctly if set up properly — verify with your accountant at your first setup.

UK-specific note

HMRC has an optional cash-basis scheme for small businesses and self-employed individuals with turnover below the VAT threshold (£90,000 as of 2026). Under this scheme, you report income and expenses when money changes hands, which aligns with bank statements and simplifies record-keeping. Eligible businesses can opt in via the Self Assessment tax return.

Source: HMRC guidance on cash-basis accounting — gov.uk/guidance/cash-basis-if-youre-self-employed

US-specific note

Most sole proprietors file Schedule C on cash-basis. IRS Publication 583 (Starting a Business and Keeping Records) covers recordkeeping requirements. Businesses with average annual gross receipts exceeding $27 million (2024 threshold, inflation-adjusted) cannot use cash-basis for tax purposes.

Source: IRS Publication 538 — irs.gov/publications/p538