What is cash basis accounting and accruals accounting?

There are 2 main methods of accounting - accruals accounting and cash basis accounting.

Accruals accounting also sometimes called 'traditional accounting' means that you or your accountant record your business income or expenses when they occur (e.g. when you invoice your clients or when you are billed for something) rather than when the money is actually sent to your account(s). This is sometimes referred to as traditional accounting.

Cash basis accounting is different as it only records income and expenses for the business once the transactions happen.

Most sole traders use cash basis accounting as this is widely regarded as the easiest method to record business finances. Monzo's Making Tax Digital for Income Tax tool is built for customer who use cash basis accounting and is not currently suitable for customer's who use accruals accounting.

You can learn more about accounting types on HMRC's website here