Cash vs Accrual Accounting: Which Is Best for Second-Hand Businesses?
The way you track income and expenses in a second-hand business can seriously impact how you manage cash flow, make decisions, and report profits. That’s where the cash and accrual accounting methods come in.
At first glance, they sound like technical jargon, but the difference between them is simple, and choosing the right one can make your life (and your VAT returns) a whole lot easier.
In this blog post, we’ll break down what each method really means, how they affect your business in the real world, and which one might make the most sense for you, especially if you're operating under the VAT Margin Scheme.
Cash vs Accrual Accounting
What is cash accounting for second-hand businesses?
Cash accounting is exactly what it sounds like: you only record income when you actually receive payment, and expenses when you actually pay them.
For second-hand businesses, especially smaller ones, it can make things feel simpler and more in sync with your bank balance.
Let’s say you sell a used car in April, but the buyer doesn’t finish paying until May. Under cash accounting, you don’t report that income until May, when the money hits your account. The same logic applies to your expenses. If you order a batch of watches from a supplier but don’t pay until the following month, the cost only shows up when the payment goes out.
This method is often favoured by smaller second-hand businesses because:
It helps with cash flow clarity, you only deal with money that’s actually come in or gone out
It reduces the risk of paying tax on income you haven’t received yet
It usually involves fewer admins and fewer adjustments at the end of the year
In the UK, HMRC allows businesses with a turnover of £150,000 or less to use the Cash Accounting Scheme for VAT. However, this doesn’t automatically apply to VAT Margin Scheme users, so you need to be sure you're not mixing methods.
For businesses that sell high-ticket second-hand items like cars, luxury watches, or antique jewellery, cash accounting can offer real peace of mind, especially if customers often pay in instalments or you work with delayed payments.
However, while it may seem simpler on the surface, it might not provide a comprehensive financial picture, especially if you’re growing rapidly or require more detailed reporting.
How does accrual accounting work for resale businesses?
Accrual accounting takes a different approach: it records income and expenses when they’re earned or incurred, not when the money changes hands. It’s more detailed than cash accounting, and it gives a fuller view of your business’s actual performance.
Let’s say you sell a piece of second-hand jewellery on credit in June, and the customer agrees to pay in July. With accrual accounting, that sale is recorded in June, the moment the deal is made. The same goes for expenses. If you receive an invoice for vehicle repairs in March but pay it in April, it still counts as a March expense.
Why does this matter? Because accrual accounting shows your business’s true profitability over time. You’re matching income with the costs it took to earn it, regardless of when the cash arrives.
This method is typically better suited for:
Businesses with higher turnover or those planning to scale
Dealers who buy or sell on credit terms
Companies that want to track stock levels, profitability, or VAT more precisely
One key benefit is that it helps you manage your Cost of Goods Sold (COGS) more accurately. You’re accounting for what was sold and what it cost you in the same period, even if no cash has changed hands yet. This is especially useful for second-hand businesses with lots of inventory moving in and out.
Accrual accounting is also required if your business grows beyond the VAT cash accounting threshold (currently £1.35 million turnover). HMRC has detailed VAT guidance on which method to use and when.
While it may involve more paperwork and reliance on accounting software, accrual accounting provides a deeper understanding of your business's financial position, making it easier to plan ahead, identify slow periods, and set realistic growth targets.
Cash vs accrual accounting: pros and cons for used goods dealers
When you’re running a second-hand business, it’s easy to pick whatever accounting method your software came with. But if you’ve ever felt confused by your profit figures, or like your books don’t reflect your actual cash flow, the method you’re using could be the reason.
Let’s say you run a watch dealership. You sell a pre-owned Rolex today, but the buyer asks to pay in two instalments over the next month. If you’re using cash accounting, you’ll only record the sale when the money actually lands in your account, first half now, second half later. Your books match your bank, and it’s easier to track what’s truly “yours.”
But with accrual accounting, the full sale gets recorded today. Even if you haven’t seen the full cash yet, the system treats the deal as done. You’ll also log the cost of that Rolex (what you paid for it) at the same time, giving you a clearer sense of real profit even if the cash arrives later.
Cash accounting is great if:
You like things simple
Most of your customers pay upfront
You don’t want to worry about outstanding invoices
Accrual accounting is better if:
You deal with delayed payments or credit terms
You want to see how profitable a month really was, not just what hit the bank
You're trying to scale and need tighter financial control
In short:
Cash accounting tells you what’s happening in your wallet.
Accrual accounting tells you what’s happening in your business.
Both methods are HMRC-approved, and you can choose whichever suits your current stage just make sure you’re consistent, especially if you’re under the VAT Margin Scheme.
How do I choose the right accounting method for my business?
If most of your customers pay in full, but every now and then, someone pays in instalments. You don’t have an in-house bookkeeper, just a spreadsheet, your bank app, and maybe QuickBooks on a good day. For a setup like this, cash accounting feels natural. It follows your bank balance, keeps admin light, and helps you sleep better knowing you’re not paying tax on money you haven’t received yet.
Now flip the scenario. Business is growing. You’ve just expanded your inventory, taken on a part-time sales assistant, and started offering flexible payment options. You’re also keeping a close eye on your profit margins, because your buying costs are rising and you want to stay competitive. Suddenly, the accrual method makes more sense. It gives you a clearer view of your finances, what’s owed to you, what you owe others, and how profitable each deal really is.
The point is, there’s no one-size-fits-all answer. The right method depends on how you operate now and where you want to take your business. What you can’t do is blend methods like using cash accounting for sales but accrual accounting for expenses. HMRC expects consistency, especially when VAT is involved.
If you’re not sure what method you’re using or whether it’s still working for you, it might be time for a chat with us.
Conclusion
There’s no universal answer when it comes to cash vs accrual accounting; it really depends on how your business runs.
If you’re keeping things lean and mostly deal in upfront payments, cash accounting could keep things simple and stress-free. But if you’re growing, offering flexible payment options, or want a clearer picture of your actual profit margins, accrual might be the smarter route.
At Rhombus Accounting Firm, we help you figure out the method that works best for your reality. We’ll look at how you buy, sell, track stock, and manage VAT, then help you build an accounting system that makes your life easier.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
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