Question 1

What is the difference between cash and accrual accounting?

Accepted Answer

**When** a transaction is recorded. Cash accounting records it when **money moves**; accrual accounting records it when the **economic event happens**, regardless of payment.

**Cash basis.** Income is recorded when received, expenses when paid.

**Advantages:** simple, matches the bank statement, and requires no judgement. Tax is paid on money actually received, which helps businesses with slow-paying customers.

**Disadvantages:** it distorts periods badly. Invoicing £50,000 in March and being paid in April makes March look terrible and April excellent, though the work all happened in March. It also hides money owed in both directions, so the accounts say nothing about the business's real position.

**Accrual basis.** Income is recorded when **earned** — when the goods are delivered or the service performed — and expenses when **incurred**, whether or not either has been paid.

This requires two accounts that do not exist under cash basis: **receivables** (owed to you) and **payables** (owed by you). It also produces **prepayments** and **accruals** — an annual insurance premium paid in January is spread across twelve months, rather than making January look expensive.

**The matching principle** is the point: costs are recognised in the same period as the revenue they helped generate, so each period shows what actually happened.

**Which you must use.** Rules vary by jurisdiction and size. In the UK, **limited companies must prepare accrual accounts**; smaller unincorporated businesses may use the cash basis for tax, subject to conditions and thresholds that change — check current HMRC guidance.

**The practical consequence that catches people out.** Under accrual accounting, you can owe **tax on profit you have not been paid for**. A large invoice raised before the year end is taxable income even if the customer pays late or never — which is exactly why bad debt relief exists and why year-end invoice timing is worth thinking about.

**Most businesses need both views.** Statutory accounts on the accrual basis show performance; a weekly **cash forecast** shows survival. Running only one is the mistake.

General information, not tax or accounting advice.

Question 2

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 3

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

Question 4

What is the difference between a bookkeeper, an accountant and an auditor?

Accepted Answer

Three distinct roles that differ in what they produce, what qualifications they need, and — crucially — who they are working for. The third distinction is the one that surprises people. A bookkeeper

Question 5

What are management accounts, and how are they different from statutory accounts?

Accepted Answer

Statutory accounts are prepared to a legal standard, once a year, for filing and for tax. Management accounts are prepared for you, as often as you need them, in whatever form actually helps you

Question 6

Why do you need a separate business bank account?

Accepted Answer

For limited companies it is effectively a necessity because the company's money is legally not yours. For sole traders it is not usually a legal requirement and is still the single highest-return

Question 7

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

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