Accrual accounting records a cost when it's incurred, not when it's paid.
Cash accounting records it when the money moves.
Order £4,000 of materials in March, receive the invoice in March, pay it in April. Under accruals the cost is March's. Under cash it's April's.
That's the whole distinction. Everything else follows from it.
Why it exists
Cash accounting is simpler and tells you less. If your costs land in the month you happen to pay them, your monthly figures track your payment run schedule rather than your business.
A month where you paid two months of invoices looks terrible. A month where you delayed a payment run looks great. Neither reflects what actually happened.
Accruals match costs to the period they belong to, so the numbers describe trading rather than treasury. This is why it's mandatory for most companies above a certain size — the accounts are supposed to be comparable year to year.
Where the two diverge
| Cash basis | Accruals basis | |
|---|---|---|
| Supplier invoice | When paid | When received |
| Sales invoice | When customer pays | When issued |
| Annual insurance | All in the month paid | Spread across twelve |
| Goods received, invoice not yet arrived | Nothing | An accrual is raised |
| Stock | When purchased | When sold |
The fourth row is the one that catches people. Under accruals, if goods arrived in March and the invoice turns up in April, March still owns the cost. Somebody has to raise an accrual for it — an estimate of a cost you know you've incurred but haven't been billed for.
Why this makes invoice processing time-critical
Here's the practical consequence, and it's the reason this matters beyond bookkeeping.
Under cash accounting, an invoice sitting unentered for three weeks is a filing problem. The cost lands when you pay it either way.
Under accruals, that same invoice is a reporting problem. If it belongs to March and you're still entering March's post in the third week of April, March's accounts were wrong every day until you got to it — and somebody may have made a decision on them. An invoice stuck in an approver's inbox has exactly this effect and produces no signal at all.
This is most of why month-end close takes as long as it does. The close can't finish until every cost belonging to the period is either entered or accrued, and the ones that haven't arrived yet have to be estimated.
Businesses that process invoices on arrival have a much shorter close, not because entry is faster but because there's far less unknown at the cut-off.
Accruals and prepayments
Two adjustments do the period-matching work:
An accrual is a cost you've incurred but not been billed for. Goods delivered on the 28th, invoice due in a fortnight. You estimate it and post it to the period it belongs to.
A prepayment is the reverse — you've paid for something that belongs to a future period. Annual insurance paid in January is eleven-twelfths a prepayment; each month releases one month of cost.
Both reverse in the following period, so the real invoice replaces the estimate when it arrives — which is why a supplier statement reconciliation before the cut-off is worth more than one after it.
Which basis applies to you
Rules vary, but the pattern is consistent: limited companies generally must use accruals, while smaller unincorporated businesses and sole traders can often elect cash accounting below a turnover threshold.
VAT is a separate election again — you can be on the accruals basis for accounts and cash accounting for VAT, which is common and frequently confusing. Worth confirming with your accountant once and writing down which combination you're on.
The practical version
If you're on accruals, three habits do most of the work:
Enter invoices on arrival, so the period they belong to is known while it's still open.
Know your cut-off date and what happens to anything arriving after it.
Keep a short list of expected-but-not-arrived costs near period end — the deliveries you know about and the invoices you know are coming. That list is your accruals, and maintaining it through the month beats reconstructing it in the close.
Cribble reads invoices as they arrive rather than in a monthly batch, so costs are in the ledger while the period they belong to is still open — which is where most of the pressure in an accruals close actually comes from.