Cash basis vs accruals: which does your company use
Learn about the two ways to recognise income and expenses in accounts
There are two ways to recognise income and expenses in accounts. Limited companies must use accruals accounting.
Accruals accounting
Under accruals, income is recorded when it is earned (when you raise an invoice), not when cash is received. Expenses are recorded when incurred (when a bill arrives), not when paid. This means your Profit and Loss (P&L) reflects the activity of the period, not just the cash that moved.
Why this matters for your Xero
In Xero, raise invoices as soon as work is complete, even if payment terms are 30 days. Enter supplier bills when received, even if you have not yet paid them. This keeps your P&L accurate and your VAT return correct.
💡 Good to know: Cash accounting is available for VAT (paying VAT when cash is collected rather than when invoiced). This is a VAT scheme choice, not the same as cash basis accounting for Corporation Tax. Speak to us if you want to explore the cash accounting VAT scheme.
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