Cash Basis vs Accrual Accounting
There are two ways to record your business income and expenses, and which one you use changes which tax year a payment lands in. Cash basis counts money when it actually moves; accrual counts it when the work is done, whether or not you have been paid. For most freelancers the choice is simpler than it sounds, and often already made for you by default. This guide explains the one real difference, the pros and cons, which method a freelancer usually wants, the rules in the UK and US, and how it affects your invoicing. It is general business information, not accounting or tax advice, and the thresholds mentioned change, so confirm the current rules and your own position with your accountant or revenue authority.
The one difference, in a line
Everything else follows from a single question: when do you record a sale or a cost?
Cash basis records income when the money arrives in your account and expenses when you actually pay them. Accrual accounting (also called traditional accounting) records income when you earn it, usually when you invoice, and expenses when you incur them, regardless of when cash changes hands. That is the whole distinction. Cash basis follows your bank balance; accrual follows the work.
For a freelancer the practical effect is about timing and admin. Cash basis is simpler because you only track money that has moved, and you never owe tax on an invoice a client has not paid yet. Accrual gives a truer picture of how the business is really doing, because it counts money you have earned even if it is still sitting in unpaid invoices.
The timing example that makes it click
Say you invoice a client 5,000 on 15 December, and they pay you on 8 January. If your tax year ends on 31 December (as it does in the US and many countries), the work, the invoice and the payment straddle the year end. Which year is that 5,000 income?
Under cash basis, it is income in the new year, because that is when the money arrived. Under accrual, it is income in the old year, because that is when you did the work and raised the invoice. Same 5,000, same client, different tax year, purely because of the method. If your tax year ends on a different date, such as 5 April in the UK, the same logic applies around that date instead. Multiply it across a handful of invoices near your year end and you can see why the choice matters for your tax bill timing.
The same logic runs the other way for costs. A bill you receive in one tax year but pay in the next is an expense of the earlier year under accrual and the later year under cash basis. Whichever method you use, you have to use it consistently for both income and expenses.
Pros and cons of each
| Cash basis | Accrual | |
|---|---|---|
| Records income | When paid | When invoiced |
| Simplicity | Simpler, follows the bank | More work, tracks unpaid invoices and bills |
| Tax on unpaid invoices | No, only on money received | Yes, income counts when invoiced |
| Picture of the business | Cash in hand only | Truer view of what you have earned |
| Best suited to | Most solo freelancers | Larger or growing businesses, stock, lenders |
The headline trade-off is simplicity versus a complete picture. Cash basis keeps your books close to your bank statement and protects your cash flow, because you are generally only taxed on income you have actually received. Accrual is more effort and can tax you on invoices before the client pays (though most countries allow bad-debt relief if a client never pays), but it shows the real state of the business and is what banks and investors often expect to see.
Cash basis vs accrual: which should a freelancer use?
For most solo freelancers and small service businesses, cash basis is the natural fit. You get paid, you count it; you spend, you count it. There are no unpaid invoices to track for tax, your books match your bank, and you generally do not owe tax on money you are still waiting for. If your work is straightforward and you do not hold much stock, cash basis usually wins on simplicity alone.
Accrual starts to make sense as you grow or as the business gets more complex: if you carry significant stock or inventory (which can complicate cash basis), run large projects that span a tax year, give clients long payment terms, need financial statements for a lender or investor, or are legally required to use it (see below). If you are weighing this up, it is a good point to talk to an accountant, because switching methods later has its own rules (the UK has transitional adjustments, and the US generally needs Form 3115).
Cash vs accrual accounting rules by country
This is where it stops being a free choice, so check your own country's current rules rather than assuming.
United Kingdom. Since the 2024/25 tax year, cash basis is the default for sole traders and partnerships: you are on it automatically unless you choose to opt out into accrual. The previous turnover limits for entering cash basis were removed, though the detail still changes, so check gov.uk. Limited companies cannot use cash basis at all; they must use accrual (traditional accounting) by law.
United States. Most small businesses can choose cash basis if their average annual gross receipts over the prior three years stay under an inflation-adjusted limit (around 31 million dollars for recent years, but confirm the current IRS figure). Solo freelancers filing a Schedule C are usually on the cash method unless they have formally elected accrual, and switching methods generally means filing IRS Form 3115. See the IRS guidance on accounting methods.
Elsewhere. Many countries let small or unincorporated businesses use cash basis and often require companies to use accrual, as the UK does, but the thresholds and definitions vary widely. Some systems tax income when it is earned (accrued), not when it is received, so cash basis may not be a free choice at all. Treat the UK and US examples as illustrations, not a global rule, and confirm what applies where you are with a local accountant or your revenue authority.
How it affects your invoicing
Your method does not change how you send an invoice, but it changes when that invoice counts as income. On cash basis, an invoice only becomes income when the client pays it, so an unpaid invoice sits outside your taxable income until the money lands. On accrual, the moment you issue the invoice, that income is on your books for the year, paid or not. One thing your income-tax method does not decide is sales tax: VAT or GST has its own timing, usually tied to the invoice date, and a scheme like the UK's cash accounting for VAT is separate from the cash basis for income, so if you are registered, treat the two questions apart and check your local rules.
Either way, clean records make the method work. Keep every invoice numbered in a tidy sequence so income is easy to match to payments, and keep a statement of what each client owes. With Remit you can create invoices in any currency and a statement of account that lists what is outstanding, which is exactly the view you need to reconcile cash basis to your bank or to see your accrual position at a glance. Our guide on how much to set aside for tax covers the next step once you know which income counts when.
The bottom line
Cash basis counts money when it moves and suits most freelancers; accrual counts it when you earn it and suits larger or more complex businesses. In several countries, including the UK, cash basis is now the default for sole traders, so you may already be on it without deciding. The one thing to get right is consistency: pick a method, use it for income and expenses alike, and keep your invoices and statements clean so the numbers reconcile.
This article is general business information, not accounting or tax advice, and the rules and thresholds change. Confirm the method you are allowed to use, and the one that suits you, with your accountant or revenue authority.
