Accruals basis

Definition

The accruals basis is the accounting method that records income when earned and costs when incurred, regardless of when cash moves. It is required for limited-company accounts and underpins the matching principle.

In plain terms

Under the accruals basis a sale counts when you deliver, and a cost counts when you receive the benefit — not when the money actually changes hands. It gives a truer picture of performance than the cash basis.

Why it matters for your company

Because companies use the accruals basis, their reported profit differs from their cash position — which is why a profitable company can still be short of cash. Understanding this explains the need for working-capital finance.

In practice

For a small UK limited company, the accruals basis shows up most clearly at month end and year end, when the bookkeeper or accountant works through what has been delivered or received but not yet paid for. An invoice raised to a customer counts as income as soon as the work is done or the goods are shipped, even if payment is still awaited. Equally, a supplier bill or a utility charge for the period is recorded as a cost as soon as the benefit has been received, whether or not the invoice has actually landed or been settled.

This means the profit and loss account for a given month can look quite different from the bank balance for the same month. A director reviewing figures needs to hold both pictures in mind at once: the accruals-based P&L for how the business is performing, and the cash position for what can actually be spent. Directors who only watch the bank account risk missing a run of accrued costs that are about to fall due, or overlooking recognised income that has not yet turned into cash in hand.

How lenders read it

When a lender reviews accruals-basis accounts, they are looking at reported performance rather than the timing of cash receipts and payments, so they typically read the accounts alongside separate evidence of cash flow — bank statements, aged debtor and creditor positions, or management information showing when accrued income is expected to convert to cash. A company can show healthy accruals-basis profit while still facing a tight period for actual cash, and an experienced reader of accounts expects to see that gap explained rather than ignored.

This is one reason working-capital finance exists as a distinct need from profitability: the timing mismatch between when income and costs are recognised and when cash actually moves is a normal feature of accruals accounting, not a sign that something is wrong. Understanding this distinction helps a director explain their own figures clearly when discussing funding, rather than assuming profit and cash should always match.