Key takeaways
What this article covers, in order:
- Same month, two different profits
- How cash bookkeeping works
- How accruals bookkeeping works
- The middle ground most small businesses use
- Which should you use day to day?
- Switching from cash to accruals
Cash bookkeeping records income when money arrives and costs when money leaves. Accruals bookkeeping records income when you earn it and costs when you incur them, whatever the bank says. In cash vs accruals accounting, cash is simpler; accruals tells you more about how the business is really doing month to month. This post is about the day-to-day bookkeeping side only. Which basis you use for tax is a separate decision for you and your accountant.
Same month, two different profits
Sophie runs a small design studio in Brighton. On 28 Mar 2026 she finishes a brand identity job and invoices the client £3,000. The client pays on 20 Apr 2026. In the same stretch, she gets a £600 printing bill dated 25 Mar 2026, which she pays on 15 Apr 2026.
Ask Sophie what her profit was in Mar 2026, and the answer depends entirely on the basis she uses.
| Cash basis | Accruals basis | |
|---|---|---|
| Mar 2026 income | £0 | £3,000 |
| Mar 2026 printing cost | £0 | £600 |
| Mar 2026 profit from this job | £0 | £2,400 |
| Apr 2026 income | £3,000 | £0 |
| Apr 2026 printing cost | £600 | £0 |
| Apr 2026 profit from this job | £2,400 | £0 |
Over the two months, the total is identical: £2,400 either way. The difference is purely when it shows up. But if Sophie looks at her Mar 2026 P&L on a cash basis, she'll think she had a dreadful month, when actually she did the work and earned the money. She just hadn't been paid yet.
How cash bookkeeping works
On a cash basis you only record something when it hits the bank (or petty cash). The bank statement is effectively your ledger.
For Sophie's job, there's no entry in Mar 2026 at all. In Apr 2026:
| Date | Account | Debit | Credit |
|---|---|---|---|
| 15 Apr 2026 | Printing (expense) | £600.00 | |
| 15 Apr 2026 | Bank | £600.00 | |
| 20 Apr 2026 | Bank | £3,000.00 | |
| 20 Apr 2026 | Sales | £3,000.00 | |
| Total | £3,600.00 | £3,600.00 |
What's good about it:
- Simple. If you can read a bank statement, you can do cash bookkeeping.
- Your profit and your bank balance move together, roughly, which some people find reassuring.
- Fewer things to keep track of. No debtors or creditors to manage in the books.
What's not:
- Monthly profit can swing wildly depending on when customers happen to pay.
- You can't see who owes you money from the books alone, so you need a separate list.
- A big unpaid bill sitting in a drawer isn't in your numbers at all, which can make the business look healthier than it is.
How accruals bookkeeping works
On an accruals basis, you record the sale when you invoice and the cost when you receive the bill. The payment later just clears the amount owed.
For Sophie:
| Date | Account | Debit | Credit |
|---|---|---|---|
| 25 Mar 2026 | Printing (expense) | £600.00 | |
| 25 Mar 2026 | Trade creditors | £600.00 | |
| 28 Mar 2026 | Trade debtors | £3,000.00 | |
| 28 Mar 2026 | Sales | £3,000.00 | |
| 15 Apr 2026 | Trade creditors | £600.00 | |
| 15 Apr 2026 | Bank | £600.00 | |
| 20 Apr 2026 | Bank | £3,000.00 | |
| 20 Apr 2026 | Trade debtors | £3,000.00 | |
| Total | £7,200.00 | £7,200.00 |
By 20 Apr 2026, debtors and creditors are both back to zero, sales are £3,000, printing is £600 and the bank is up £2,400. Same end result as cash, but Mar 2026 now shows the work Sophie actually did.
What's good about it:
- Monthly profit reflects the work done and the costs incurred in that month.
- Your balance sheet shows exactly who owes you and who you owe, so the aged debtors and creditors reports are reliable.
- Lenders, investors and buyers of businesses expect accruals figures.
- Limited companies need accruals-based accounts at year end anyway, so doing it day to day saves conversion work later.
What's not:
- A little more to do. Invoices and bills need entering, and payments need matching to them.
- Profit and bank balance can drift apart. You can be profitable and short of cash at the same time, which surprises people the first time it happens.
The middle ground most small businesses use
In practice, many small businesses end up with a sensible hybrid without really meaning to. They raise invoices and enter bills in their software (which is accruals for sales and purchases), but they don't bother with fiddly month-end adjustments for small things.
That's a perfectly reasonable place to be. Accruals doesn't mean accruing every £12 phone bill. It means getting the big items into the right month.
The month-end adjustments that tend to be worth it:
- Large bills that arrive late. If a quarterly energy bill covers three months, spread it.
- Annual costs paid up front. A £1,440 insurance premium covering twelve months is £120 a month of cost, not £1,440 in one month and nothing in the other eleven.
- Big jobs straddling month end. If you've done most of a project but won't invoice until it's finished, your accountant may want that work recognised.
Small, regular costs can usually just be booked when the bill arrives. The distortion is trivial.
Which should you use day to day?
A rough guide, not a rule:
| You are... | Day-to-day basis that usually suits |
|---|---|
| A sole trader, mostly paid on the spot, few bills | Cash is often fine |
| A sole trader who invoices on 30-day terms | Accruals for sales at least, so you can track debtors |
| A limited company | Accruals, since year-end accounts need it |
| Holding stock | Accruals, so costs match the sales they relate to |
| Planning to borrow or sell the business | Accruals |
And once again: this is about the books you look at every month. How your profit is worked out for tax is a decision with its own rules, and it's one your accountant should make with you. Clean books on either basis make that conversation much easier.
Switching from cash to accruals
If you've been keeping cash books and want to move, the cleanest time is the start of a new financial year. At that point you'll need to bring in:
- Every unpaid sales invoice, as opening debtors
- Every unpaid supplier bill, as opening creditors
- Any big prepayments or accruals your accountant identifies
From then on, invoices and bills go into the books as they're raised, and payments are matched against them. It's a small change in habit and a big improvement in what your reports tell you.
How HelloBooks helps
HelloBooks lets you raise invoices and enter bills, and tracks who owes what in the aged debtors and creditors reports, all on the Free plan. When a customer's payment comes through the bank feed or a CSV import, you match it to the invoice in the review list so debtors stay accurate.
The P&L, balance sheet and cash flow reports sit side by side, so you can see profit and cash separately rather than guessing. Our invoice software page covers billing, cash flow management covers the cash side, and freelancers can read how it fits their work on the freelancers page.
FAQs
Is cash bookkeeping wrong?
No. For a small business with simple, immediate payments it's a sensible choice. It just tells you less about who owes you and how each month really went.
Can a limited company keep cash-basis books day to day?
It can keep whatever working records it likes, but the year-end accounts must be on an accruals basis. Most companies find it easier to keep accruals books all year rather than convert.
Does accruals bookkeeping mean I pay tax on money I haven't received?
That's a tax question, and the answer depends on your circumstances. Speak to your accountant. This post is only about how you keep the books.
What's an accrual, in one sentence?
A cost you've incurred but haven't been billed for yet, recorded so it lands in the right month.
What's a prepayment?
The opposite: a cost you've paid in advance, held on the balance sheet and released into the P&L month by month as you use it.
If your monthly profit looks like a heart-rate monitor, try reading it on an accruals basis for a quarter and see whether it calms down.
Start free, no card needed. Try HelloBooks Free
