Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when it is earned and expenses when they are incurred, regardless of payment. South African companies must prepare annual financial statements on the accrual basis, and SARS taxes companies on income accrued rather than received — so accrual is not optional for a (Pty) Ltd. Cash reporting remains useful alongside it, for a different question.
The two answer different questions. Accrual tells you whether the business is profitable. Cash tells you whether it can pay next week's suppliers. You need both.
The difference in one example
A consulting business in March:
Invoiced R280,000 of work completed in March
Collected R145,000 in March — some of it for February invoices
Incurred R190,000 of costs, including March rent, salaries and subcontractors
Actually paid R240,000 in March, including a February supplier account settled late
| Cash basis | Accrual basis | |
|---|---|---|
| Income | R145,000 | R280,000 |
| Expenses | R240,000 | R190,000 |
| Result | (R95,000) loss | R90,000 profit |
Same month. Same business. A R185,000 difference.
Neither figure is wrong. The cash view says the bank account went backwards by R95,000, which is true and matters. The accrual view says the business earned R90,000 in March, which is also true and is the number that tells you whether the model works.
Running only on cash means you cannot tell a bad month from a slow-paying month. That distinction is the whole point.
What the accrual basis actually does
Three mechanisms do most of the work.
Debtors. Work invoiced but not yet paid is recognised as income and sits on the balance sheet as an asset until collected.
Creditors. Costs incurred but not yet paid are recognised as expenses and sit as a liability.
Matching. Costs are recognised in the same period as the revenue they generated. Pay a subcontractor in April for work that earned revenue in March, and the cost belongs in March.
Prepayments and accruals extend the same idea. Twelve months of insurance paid in one go in January is not a January expense — it is R1 of cost for each of twelve months, with the unused portion sitting as a prepayment. Electricity used in June but billed in July is a June expense.
What the law requires
Companies must prepare annual financial statements in accordance with an applicable financial reporting framework — IFRS or IFRS for SMEs for most small companies. Both are accrual-based. Cash-basis accounts do not satisfy the requirement.
SARS taxes companies on amounts received by or accrued to them. An invoice raised in February for work done in February is taxable in that year even if the customer only pays in May. You cannot defer tax by delaying collection.
The corollary that softens it: costs incurred are deductible when incurred, not when paid. A supplier invoice you have received but not yet settled is generally deductible in the year it relates to.
VAT has its own rule and it is separate from both. Most vendors are on the invoice basis, accounting for VAT when the invoice is issued rather than when payment is received — which is why VAT-registered businesses regularly pay over VAT on invoices customers have not paid. A limited category of vendors qualifies for the payments basis.
Where cash-basis thinking causes real damage
You cannot tell a loss from a collection problem. The single most consequential effect. A business with a genuine margin problem and a business with a debtors problem look identical on a bank statement, and they need completely different responses.
Tax arrives without warning. Profitable on accrual, negative on cash, and a provisional tax payment falls due on a figure you never saw coming. See how to calculate provisional tax.
Nobody will lend to you. Banks, investors and acquirers work from accrual financial statements. Cash-basis records mean the year-end conversion becomes an expensive reconstruction exercise, and the numbers arrive too late to be useful.
Large payments distort everything. Buying R120,000 of equipment shows as a R120,000 cost in one month on a cash basis. On accrual it is an asset depreciated over its useful life, and the month is not artificially destroyed.
Seasonal businesses become unreadable. Collect in December for work delivered across the year and every month looks terrible except one.
Where the cash view is the right one
None of this makes cash reporting useless. It answers a different question.
Will I make payroll on the 25th? That is a cash question and accrual cannot answer it.
A 13-week rolling cash forecast is one of the most valuable reports a small business can run, and it is entirely cash-based.
Understanding why a profitable business has no money. The reconciliation from profit to cash movement — through debtors, creditors, stock and capital spending — is exactly what a cash flow statement does, and it is often the most informative page in a set of accounts.
The right setup for a small business: accrual-based accounting records and monthly management accounts, plus a rolling cash forecast. One tells you whether the business works. The other tells you whether it survives the next quarter.
What about sole proprietors?
A sole proprietor is not bound by the Companies Act, so there is more latitude in how records are kept.
But SARS still taxes on the received-or-accrued basis, so income accrued during the year is taxable whether or not it was collected. In practice, a sole proprietor with debtors, creditors or stock is preparing accrual figures at year end regardless — the only question is whether it happens continuously or in a rush in July.
Where a sole proprietor genuinely gets invoiced and paid on the spot, with no debtors, no creditors and no stock, the two bases converge and the distinction largely disappears.
Practical implementation
Modern accounting software is accrual by default. Xero, QuickBooks and Sage record income when you raise the invoice and expenses when you enter the bill. If you are using them properly, you are already on accrual.
Where it breaks down is usage. Businesses that only capture bank transactions and never raise invoices in the system have effectively built a cash-basis ledger inside accrual software. The bank feed is not the same as the books.
Three habits that make the difference:
Raise every invoice in the system on the day the work is done, not when you think about chasing payment
Enter supplier bills when received, not when paid
Review the debtors and creditors ageing every month — these are the two reports that make accrual worth having
Most software will also produce a cash-basis view on demand, which is the sensible way to get both without keeping two sets of books.
Frequently asked questions
What is the difference between cash and accrual accounting? Cash accounting records income when money is received and expenses when money is paid. Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when payment moves. Accrual shows profitability; cash shows liquidity.
Do South African companies have to use accrual accounting? Yes. Companies must prepare annual financial statements under an applicable reporting framework such as IFRS or IFRS for SMEs, both of which are accrual-based. SARS also taxes companies on amounts received or accrued, so income is taxable when invoiced rather than when collected.
Can a sole proprietor use cash accounting? There is more latitude, since a sole proprietor is not bound by the Companies Act. But SARS taxes on the received-or-accrued basis, so a sole proprietor with debtors, creditors or stock still needs accrual figures at year end.
Which method is better for a small business? Accrual for the accounting records and monthly management accounts, because it shows whether the business is actually profitable. A rolling cash forecast alongside it answers the liquidity question that accrual cannot.
Is VAT on a cash or accrual basis? Most vendors are on the invoice basis, accounting for VAT when the invoice is issued rather than when it is paid. A limited category of vendors qualifies for the payments basis. VAT treatment is separate from your accounting basis.
Why does my accountant's profit figure differ from my bank balance? Because profit is measured on accrual and your bank balance is cash. Unpaid customer invoices, unpaid supplier bills, VAT and PAYE owed to SARS, equipment purchases and loan repayments all move one without the other.
Does accrual accounting mean I pay tax on money I have not received? For a company, yes — income accrued is taxable in the year it accrues, so an invoice raised in February is taxable that year even if paid in May. Costs incurred but not yet paid are deductible on the same principle.
Get both views, monthly
The businesses that struggle are not the ones that chose the wrong basis. They are the ones running on a bank balance alone, unable to tell a margin problem from a collection problem until the year-end accounts arrive nine months late.
Smartbook produces accrual-based monthly management accounts with debtors and creditors ageing, alongside a cash view — so both questions have an answer.
Last reviewed: 27 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples are illustrative. General guidance, not advice on your circumstances.
Primary sources: SARS · Income Tax Act 58 of 1962 · Companies Act 71 of 2008 · IFRS for SMEs — IFRS Foundation