Running an early-stage business means balancing ambitious growth goals with the realities of managing your finances. The accounting approach you choose — specifically, cash vs. accrual accounting — determines how you track income, control expenses, and measure your company’s financial health.
Cash accounting is simple: You record money when it actually comes in or goes out, giving small teams a straightforward view of cash flow. Accrual accounting, on the other hand, tracks income and expenses when they’re earned or owed, offering a more complete view of your finances as your business grows.
This guide explains both methods, when to use each, and how Moss streamlines accounting so you can scale without dozens of spreadsheets.
Cash basis accounting explained
For small businesses or those just starting out, cash basis accounting is often the easiest way to track finances. With this method, you record income and expenses only when money changes hands, noting revenue when received and expenses when paid — and without counting outstanding invoices or unpaid amounts. This gives an accurate snapshot of your cash flow↗ in real time.
Cash basis accounting is ideal for managing accounts payable and accounts receivable, tracking operating cash flow↗, and getting a clear view of day-to-day finances without complex bookkeeping.
In the UK, eligible sole traders and partnerships can use this method to calculate their trading profits, no matter how much they earn. Using the cash basis approach simplifies tax year reporting because you only include payments you’ve actually made or received.
Accrual accounting explained
Accrual accounting — also called accrual basis accounting — records income when you earn it and expenses when you incur them, rather than when money actually moves. For example, you’d record revenue when you send an invoice (even if payment is due in 30 days) and log an expense when you receive a bill, not when the money leaves your account. This approach lets you track what’s owed to you and what you owe others, giving you a fuller picture of revenue, expenses, and overall financial health.
Unlike cash accounting, which only reflects bank activity, accrual accounting reveals a business’ true performance over time. It follows generally accepted accounting principles (GAAP) and highlights profitability and liabilities for better planning.
In the UK, limited companies (and some partnerships, especially those with corporate partners) must use accrual accounting for financial reporting. Smaller businesses also benefit from early adoption, as it supports confident growth and builds credibility with investors and lenders.
Key differences in cash basis vs. accrual basis accounting
Both cash accounting and accrual accounting track income and expenses, but they differ in how and when transactions are recorded. Understanding the difference between cash and accrual accounting helps you choose the right method for your business goals and reporting needs.
Area | Cash basis accounting | Accrual accounting |
Timing of transactions | Records income when you receive payment and expenses when you pay bills. | Records income when it’s earned and expenses when they’re incurred, even if money hasn’t moved yet. |
Complexity | Simple and easy to manage — ideal for small businesses and early-stage startups. | More detailed and structured, better suited for growing businesses that need deeper insights. |
Cash flow visibility | Reflects real-time cash flow, showing how much money is available to spend. | Provides a fuller view of your financial health, including what’s owed and what’s expected. |
Financial reporting | Focuses on actual cash movement during the tax year. | Meets UK GAAP standards and provides more accurate financial statements. |
Compliance and eligibility | The default method for most sole traders and partnerships, regardless of turnover (as of April 2024), with the option to opt out and use accrual accounting instead. | Used by limited companies and larger partnerships for statutory financial reporting. |
Best for | Founders who want a simple overview of their cash and expenses. | Businesses focused on growth, investment, or long-term strategy. |
In short, cash basis accounting helps new businesses stay focused on day-to-day cash flow, while accrual accounting gives a wider, forward-looking view of financial performance.
When to use each method: A practical guide
Your accounting method should grow with your business. What works for a new company handling 10 incoming and outgoing invoices a month might not cut it once you’re managing hundreds of transactions and organising finances for potential investors.
Why small businesses start with cash accounting
If you’re running a lean team, cash basis accounting makes things straightforward: What you see in your bank account is what you work with. It’s a practical fit for founders who want to stay on top of cash flow without dealing with complex bookkeeping or hiring an accountant early on.
As your business grows, however, switching to an accrual accounting method is important for long-term visibility. It also helps you comply with UK GAAP standards and ensures reliable financial reporting↗ for stakeholders.
The shift to accrual accounting for growth
As your business matures, clear and precise financial insights become essential for understanding performance and guiding growth. Accrual accounting captures the full picture of your finances — before cash changes hands.
Accrual accounting is ideal for scaling companies that need to manage accounts payable, receivable, and financial reporting under accepted accounting principles. Because UK limited companies must use this method, many startups switch early to attract investors, precisely forecast growth, and plan confidently.
How Moss simplifies accounting and expense management
Whether you use cash or accrual accounting, managing receipts, invoices, and reports can sometimes feel overwhelming. Moss↗ takes the pressure off by bringing automation and real-time visibility into one platform. Here’s how it streamlines the accounting process:
- Smart bookkeeping: Moss’s AI automatically records and categorises transactions, so you don’t have to chase data or manually update your books.
- Seamless expense management: Every invoice and payment syncs instantly, providing an accurate view of income and expenses, no matter which accounting method you use.
- Instant insights: See your cash flow, accounts payable, and accounts receivable in real time for smarter decisions.
- Connected systems: With native enterprise resource planning systems and accounting software integrations, your data flows smoothly from spending to reporting.
Moss’ proprietary AI improves data accuracy, speeds up month-end close, and reduces the manual work that often slows finance teams down. It’s also evolving to better support the accrual accounting method, helping growing businesses stay compliant and in control.
Let Moss do the heavy lifting
Your accounting method should fit your business’s stage and goals. Cash accounting keeps things simple early on, while accrual accounting offers a clearer view of profitability as you scale.
Whichever method you choose, Moss makes accounting effortless with AI-powered bookkeeping, automated expense tracking, and real-time insights. Plus, as Moss continues to enhance support for accrual accounting, your business stays ready for what’s next.
Book a demo↗ to see how Moss can simplify your accounting and set your business up for smarter growth.
