Unpaid invoices at company year end: why cash is not profit

In short: Company accounts recognise income and costs when they are earned or incurred, not when cash moves: completed work invoiced but unpaid at the year end counts as this year's income, and unpaid supplier bills for the year count as this year's costs. Limited companies cannot use the cash basis available to some sole traders (GOV.UK: Cash basis), and their trading profits for Corporation Tax follow generally accepted accounting practice (Corporation Tax Act 2009, section 46). In the example below, a £15,000 cash surplus becomes £17,400 of profit.

A limited company's annual profit cannot usually be worked out by subtracting bank payments from bank receipts. Its accounts need to recognise income and costs in the appropriate periods, including amounts not yet paid. Government guidance on accounting methods.

That is why a company can show a profit while still waiting for customers to pay. It is also why a large payment just before year end does not necessarily belong entirely in that year's expenses.

Do unpaid invoices count in this year's accounts?

Yes, if they belong to the period: company accounts recognise income for completed work and costs for services received in the period they relate to, even if unpaid at year end. For each unpaid invoice, look at the underlying goods or services, not just the date printed at the top.

Were the goods supplied or the relevant work completed? Does an advance payment cover something to be delivered later? Is there a dispute or credit note?

For costs, accruals recognise expenses belonging to the period that remain unpaid; prepayments separate amounts paid for a later period. These adjustments affect both the profit and loss account and the balance sheet. ACCA: accruals and prepayments.

Do not add a manual adjustment if your bookkeeping already includes it. First inspect the underlying ledger.

Why is company profit different from the cash in the bank?

Unpaid customer invoices, unpaid supplier bills and prepayments move income and costs into the period they belong to: in the example below, a £15,000 cash difference becomes £17,400 of profit. Limited companies cannot use the Income Tax cash basis available to eligible sole traders, so their accounts must include amounts not yet paid.

Assume a small service company has a 31 March 2026 year end. Its draft figures below are cash-based summaries, not finished accounts. All amounts exclude VAT; there are no opening debtors, creditors or prepayments, and no stock, asset purchases or other adjustments.

The cash difference was £15,000. The illustration's accounting profit is £43,000 - £25,600 = £17,400.

The same review identifies a £3,000 customer receivable, £1,200 supplier payable and £600 prepayment. They help explain the difference; they are not extra cash in the bank. If opening balances existed, this simple bridge would need further adjustments.

How do you record a payment that arrives after year end?

Match a payment received after year end against the existing receivable or payable, rather than recording a second sale or expense. When the customer pays the March invoice in April, match the receipt against the existing receivable. Do not create a second sale. Similarly, paying the March supplier bill should settle the payable rather than create the same expense again.

Give each working-paper line the invoice reference, relevant period, amount outstanding and later settlement reference. Then someone reviewing the accounts can follow the item without reconstructing it from bank descriptions.

If a customer is unlikely to pay, investigate recoverability separately. Late payment and an irrecoverable debt are not interchangeable labels. Long-term contracts, deposits and disputed work may also need a more detailed recognition assessment.

What should you collect before preparing the CT600?

Collect the evidence behind each year-end balance and reconcile it to the final trial balance. HMRC's company-record requirements include debts owed to and by the company, invoices, contracts and calculations needed for the accounts and return, so a bank export alone is not the whole evidence pack (HMRC: company accounting records). Collect:

• A dated list of customer balances at year end.
• A dated list of supplier balances at year end.
• The invoices issued and received just before and after year end.
• Any annual bills whose period crosses the year end.

After your figures have been reviewed, ask Taxley how to enter the resulting balances for your period. Confirm period support before paying. A filing form cannot decide whether an unpaid invoice reflects completed work. For a general first view, take the 30-second check to see whether Taxley fits your company.

Frequently asked questions

Is the illustrative £17,400 the taxable profit?

Not necessarily. The Corporation Tax computation can require further adjustments to accounting profit, such as adding back disallowable costs. This example explains accounting timing — which period income and costs belong to — not the final tax charge.

Can a limited company use the cash basis?

No. Limited companies cannot use the Income Tax cash-basis method available to eligible sole traders. Their accounts need to recognise income and costs in the periods they belong to, including amounts not yet paid at year end (government guidance on accounting methods).

What is a prepayment in company accounts?

A prepayment is an amount paid in this period for something that belongs to a later period, so it comes out of this year's costs and sits on the balance sheet instead. In the example, £600 of insurance covering the following year is removed from expenses (ACCA: accruals and prepayments).

What if a customer is unlikely to pay an invoice?

Investigate recoverability separately. Late payment and an irrecoverable debt are not interchangeable labels, so an overdue invoice is not automatically removed from income. Long-term contracts, deposits and disputed work may also need a more detailed recognition assessment.

General UK accounting information. Apply the company's actual accounting framework and obtain qualified review of material year-end adjustments.