Cash basis in plain English
Who this guide is for: For sole traders choosing how to recognise income and expenses for Self Assessment.
| 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 — get advice if figures are material.
- 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