Cash basis in plain English
Who this guide is for: For sole traders choosing how to recognise income and expenses for Self Assessment.
Under cash basis, you generally count income when money arrives and expenses when you pay them — a money-in, money-out view of the year.
Traditional accounting (sometimes called accruals) counts income when you earn it and expenses when you incur them, even if cash moves later. Amounts still owed to you (debtors) or bills you have not yet paid (creditors) can therefore sit in the profit figure under traditional accounting but often not under cash basis.
| Aspect | Cash basis | Traditional accounting |
|---|---|---|
| Income | When received (subject to specific rules) | When earned (includes debtors) |
| Expenses | When paid (subject to specific rules) | When incurred (includes creditors / accruals) |
| Debtors and creditors | Generally outside the simple cash picture | Included in the profit computation |
| Stock | Special rules / may need adjustments | Stock movements affect profit |
Cash basis is also not the Trading Allowance — that chooses how much expense deduction you claim, not when income and costs are recognised.
Two-period illustration
Period 1: You invoice a client £2,000 in March but are paid in April. Under traditional accounting the £2,000 can fall in Period 1 (earned). Under cash basis it generally falls in Period 2 (received).
Period 2: You pay a £500 supplier bill in April for work done in March. Traditional accounting may place the cost in Period 1; cash basis typically places it in Period 2 when paid.
Simplified illustration only — not a full accounts conversion.
Limitations and switching
- Capital expenditure and finance costs can follow special cash-basis rules.
- Loss relief and certain businesses may make cash basis unsuitable or unavailable.
- Switching basis can create transitional adjustments — check GOV.UK guidance and your figures carefully.
- Keep clear evidence whichever basis you use — see Business Records for Sole Traders.
- What you can deduct is covered in Allowable Expenses for Sole Traders.
Estimate tax on your taxable profit after expenses Use the Self-Employed Tax Calculator