Match income to the work that earned it, and costs to the period they belong to. The traditional method that gives the truest picture of profit.
Imagine you spend three months building something for a client, finish it in March, and get paid in May. Did you earn that money in March or in May? The accruals basis gives the answer that matches reality: you earned it when you did the work. This "matching" principle is the backbone of traditional accounting, and although the cash basis has become the default for sole traders, the accruals basis remains the gold standard for any business that wants its profit figure to mean something.
The core idea behind the accruals basis is matching: revenue is recorded in the period it is earned, and the costs incurred to generate that revenue are recorded in the same period. This stops profit from lurching around simply because a customer paid early or you settled a bill late. The number you end up with reflects the trade itself, not the rhythm of your bank account.
To make this work, you track two things the cash basis ignores: debtors (invoices issued but not yet paid) and creditors (bills received but not yet settled). At each period end you also account for prepayments, accruals and the value of stock or work in progress.
The cleanest way to understand the accruals basis is against its simpler sibling, the cash basis:
| Aspect | Accruals basis | Cash basis |
|---|---|---|
| Income recorded | When earned | When received |
| Expenses recorded | When incurred | When paid |
| Tracks debtors/creditors | Yes | No |
| Stock and work in progress | Accounted for | Largely ignored |
| Best for | Stock, manufacturing, financing | Simple service businesses |
Since the 2024/25 tax year, the cash basis is the default for sole traders, so the accruals basis is now something you actively choose. Limited companies have no choice — they must use the accruals basis by law.
Owen runs a small furniture-making business. In 2025/26 he:
| Item | Accruals treatment (2025/26) |
|---|---|
| £8,000 invoice (earned March) | Counted as 2025/26 income |
| £3,500 closing stock | Carried forward, not expensed yet |
| £600 supplier bill (incurred March) | Counted as 2025/26 expense |
On the accruals basis, the £8,000 is income now because the work is done; the unsold timber is held on the balance sheet rather than expensed; and the supplier bill is a cost now because it was incurred. A cash-basis trader would defer the £8,000 income and the £600 cost into 2026/27 and would not formally value stock at all. For a manufacturer like Owen, the accruals figure is the honest one — see how it flows through a profit and loss statement, and estimate the tax with the sole trader tax calculator.
Choose the accruals basis when timing of cash would otherwise distort your profit. That typically means you hold significant stock or work in progress, you manufacture or buy and resell goods, you carry meaningful business borrowing (the accruals basis has historically been more generous on interest deductions), or you need formal accounts for a lender, investor or grant. It also makes year-on-year comparison cleaner because results are not skewed by when invoices happened to be paid. The trade-off is more record-keeping: you must value stock and track who owes what at each period end.
The accruals basis answers 'how is the business actually doing?' rather than 'how much cash moved this year?'. For anything with stock or financing, that distinction is the whole point.
From April 2026, sole traders with qualifying income over £50,000 join Making Tax Digital for Income Tax. The accruals basis is fully compatible: you keep digital records and submit quarterly summaries, but the figures reflect earned income and incurred costs rather than cash movements. You will need accounting software that handles debtors, creditors and stock so your quarterly updates carry the right accrual adjustments.
TapTax connects to your bank, categorises expenses automatically, and submits quarterly updates to HMRC. Free plan, no card required.
