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← Glossary Business glossary

What is Cash basis?

Accounting for money when it actually moves, rather than when it was invoiced.

Under cash basis you record income when you are paid and expenses when you pay them. Under traditional (accrual) accounting you record them when the invoice is raised, regardless of when the money lands.

For a lot of small businesses cash basis is simpler and kinder: you are not taxed on an invoice a client has not paid yet.

It changes how equipment is treated too: under cash basis most equipment is claimed as an ordinary expense rather than through capital allowances, with cars the exception.

Related terms
Accrual accountingRecording income and costs when they are earned or incurred, not when the money moves.BookkeepingKeeping an accurate record of every pound in and out of the business.Capital allowancesHow you claim tax relief on equipment you buy and keep, rather than as an ordinary expense.
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