Accruals

Also called Accruals basis, Accrual accounting

Recording income and costs when they happen rather than when the money moves.

What it means

Accruals accounting records a sale when you deliver it, and a cost when you incur it, regardless of when cash changes hands. The alternative — cash basis — records both only when money moves.

Limited companies must use accruals. Sole traders and partnerships under a turnover threshold may use the cash basis, which is simpler.

Why it matters

It is the reason your accounts and your bank statement disagree, which is otherwise one of the most disorienting things about running a business.

It also makes the numbers comparable: a December with three months of invoices in it and a January with none are the same business, and accruals show that.

What it looks like in practice

An accountant will accrue for costs you have incurred but not yet been billed for — the December electricity, the accountancy fee for the year just ended — and will treat something paid in advance, like annual insurance, as a prepayment spread across the year.

What to watch out for

Reading an accruals P&L as if it were a cash statement. It is the single most common cause of "the accounts say we made £40,000, so where is it?" The answer is usually in stock, unpaid invoices, loan repayments and tax.

Where to get proper advice

Your accountant, and specifically the question "can you show me how this year's profit reconciles to what actually happened in the bank?" It is a standard reconciliation and it explains more than any other single conversation.