Accruals basis vs cash basis accounting
The difference between the accruals (accrual) basis and the cash basis of accounting — and which one your business should use.
This walkthrough explains the difference between cash basis and accruals basis accounting, covering how each method records income and expenses and why accruals basis gives a truer picture of financial performance. It suits small business owners and accountants managing month-end close in Xero.
The accruals basis and the cash basis are two ways of deciding when to record income and expenses.
Cash basis
Record income when money comes in and expenses when money goes out. Simple, but it can distort performance — a big prepaid cost or a late invoice skews the period.
Accruals basis
Record income when earned and expenses when incurred, regardless of cash timing. This matches costs to the revenue they help generate, giving a truer view — and it's what accruals, prepayments and deferred income are all about.
Side by side
| Cash basis | Accruals basis | |
|---|---|---|
| Records income | When received | When earned |
| Records expenses | When paid | When incurred |
| Accruals/prepayments | Not used | Central |
| Best for | Very small businesses | Most companies |
If you're on the accruals basis
Then accruals, prepayments, deferred income and depreciation are part of every close — and WorkWithLottie automates them on top of Xero.
Related: What is an accrual? · What is a prepayment?
Frequently asked questions
What is the accruals basis of accounting?
Recognising income and expenses when they're earned or incurred, regardless of when cash changes hands. It's required for most companies and gives a truer picture of performance.
Can small businesses use the cash basis?
In the UK, eligible small unincorporated businesses can use the cash basis for tax. Most limited companies must use the accruals basis.
More on Accruals
All guidesWhat is a reversing journal (and when to use one)?
A plain-English guide to reversing journals — what they are, why accruals use them, and how to avoid double-counting.
ReadWhat is an accrual? Definition & examples
A plain‑English definition of an accrual, how it differs from a prepayment, and common examples in month‑end accounting.
ReadHow to record accrued expenses in Xero
How to accrue for costs you've incurred but not yet been billed for in Xero — with the journal, the reversal, and a worked example.
ReadLet Lottie handle this for you
Automate accruals, prepayments and deferred income on top of Xero. Start your free 7-day trial.
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