What tax year should income and expenses be recorded in?

Understanding what a “tax year” really means

When people ask, “What tax year should income and expenses be recorded in?”, they’re usually trying to avoid one of two headaches: reporting something in the wrong period and having their tax return not match their records, or accidentally shifting income or deductions in a way that causes penalties, interest, or confusion during an enquiry. At its core, the question is about timing. Tax law needs a consistent way to decide when money counts as earned and when costs count as incurred, because governments tax and relieve amounts by reference to periods.

In many places, the tax year is a fixed 12-month period defined by law (sometimes aligned to a calendar year, sometimes not). For businesses, the accounting period might be different from the individual tax year, and tax reporting may follow either the business’s accounting period or a mandated tax-year basis. That’s why the “right” answer depends not only on what happened (a sale, a service, a purchase), but also on who you are (individual, sole trader, company), what method you use (cash basis or accrual basis), and the specific rules that apply to your situation.

Even if you keep immaculate records, confusion can arise when payments are late, deposits are taken in advance, invoices are issued near year-end, refunds arrive after the year closes, or expenses are billed in one year but paid in another. The key is to anchor each transaction to the correct period using the rule that applies to your accounting method and entity type.

The two main approaches: cash basis vs accrual basis

Most tax systems allow (or require) one of two broad approaches to determining which year income and expenses belong to: a cash basis or an accrual basis (often called “accrual accounting,” “income earned/expenses incurred,” or “accounts basis”). Everything else in this topic flows from understanding which basis you’re on.

Cash basis in plain language

Under the cash basis, you generally record income when you actually receive the money and record expenses when you actually pay them. If a customer pays you on 2 April, that receipt typically belongs to the tax year that includes 2 April, even if you performed the work in March. Likewise, if you pay a supplier on 28 March, that cost is usually in the tax year that includes 28 March, even if the bill was dated in February.

This is appealing because it tracks real cash flow and can be easier for smaller businesses. However, “cash basis” can still have wrinkles. Some items may be treated differently under tax rules (for example, large capital items might be handled with capital allowances or depreciation-like rules rather than being deducted immediately). In addition, there can be special rules for prepayments, advances, and certain finance charges.

Accrual basis in plain language

Under the accrual basis, you record income when it is earned (or when the right to receive it arises) and record expenses when they are incurred (or when you become obligated to pay them), regardless of when cash changes hands. That usually means income and expenses are linked to the period in which the underlying activity occurred, not the payment date.

For example, if you deliver a project in March and invoice the customer in March, the income is normally treated as belonging to the period that includes March—even if the customer pays in May. Similarly, if you receive a supplier invoice in March for materials used in March, the expense usually belongs to that period—even if you pay it in April.

Accrual accounting aims to match income with the expenses incurred to generate that income, giving a more accurate picture of profitability over time. This can produce smoother and more meaningful financial statements, but it requires careful attention to cut-off at year end.

So which basis should you use?

The honest answer is: use whichever basis your tax rules require or allow for your type of taxpayer, and then apply that basis consistently. Some jurisdictions require companies above certain sizes to use accrual accounting for tax, while allowing smaller unincorporated businesses to use a cash basis. Some require accrual for most businesses but allow simplified methods. The method you use determines the tax year in which you record income and expenses.

Even where you have a choice, switching methods is not as simple as flipping a switch. Moving from cash to accrual (or the reverse) can create transitional adjustments so that income is not taxed twice and expenses are not deducted twice. If you are considering a change, it’s wise to understand the “bridging” rules that apply where you live.

Recording income in the right tax year

Income is not just “money that arrives.” Depending on your situation, it could include sales revenue, service fees, interest, rents, royalties, commission, grants, tips, reimbursements, digital platform payouts, and more. The timing question is: in which year is that income recognised for tax?

Income timing under the cash basis

Under the cash basis, the starting point is simple: the income belongs to the year you receive it. “Receive” typically means the money is available to you, not necessarily the day it is deposited into your bank. For instance, if a payment hits your merchant processor on 31 March but is transferred to your bank on 2 April, the “receipt” date may be the processor availability date, depending on how your local rules define receipt and how your accounts are kept.

Here are common cash-basis timing scenarios:

1) Customer pays you before year-end: record income in that year, even if you deliver the goods or service after year-end, unless your tax rules carve out advance payments in a special way.

2) Customer pays you after year-end: record income in the year you receive it, even if you did the work earlier.

3) Payment in kind: if you receive something of value instead of money (barter), you may need to record the fair value of what you received when you receive it.

4) Refunds and chargebacks: if you refund a customer, you typically reduce income in the year the refund is paid (cash basis), though the details can vary when the original sale was in a different year.

Income timing under the accrual basis

Under accrual accounting, income is recorded when it is earned and measurable, often when you deliver the goods, perform the service, or otherwise satisfy the relevant performance obligation. In many simple businesses, this aligns with the invoice date, but not always. The invoice date is a clue, not a rule.

Common accrual-basis timing scenarios include:

1) You deliver goods in March and invoice in April: many accrual systems treat the income as earned in March because delivery occurred then. You may record “accrued income” or “accounts receivable” at year-end.

2) You invoice in March for work completed in April: depending on the nature of the arrangement, the income may not be “earned” until April. In that case, the March invoice could be booked as deferred income (a liability) and recognised as income in April when the work is performed.

3) Long projects spanning multiple periods: income may be recognised over time rather than at a single point. The right approach often depends on whether the work is delivered continuously and whether progress can be measured reliably. Tax systems sometimes have specific rules for construction, manufacturing, software development, or long-term service contracts.

4) Retainers and deposits: amounts received in advance can be treated as income immediately or deferred until earned, depending on the tax and accounting rules that apply to you.

Invoices, delivery, and the “right to payment”

One of the most practical ways to identify income timing under accrual accounting is to ask: when did you do the thing that entitled you to be paid? If you sell products, this is often when you ship or deliver. If you provide services, it’s often when you perform the service. If your contract says you can only bill after acceptance, the acceptance date may matter. If your contract states milestones, those milestones may drive recognition.

This does not mean you can choose any convenient date. If your accounting records and contracts show that you earned the income in one period, trying to move it to another period by delaying an invoice may not succeed under scrutiny. Consistency and supporting documentation are key.

Recording expenses in the right tax year

Expenses can be just as tricky as income, and sometimes more so because they include a wide range of costs: rent, utilities, office supplies, software subscriptions, travel, advertising, professional fees, wages, contractor costs, insurance, interest, repairs, and more. The timing question is: in which year is the expense deductible?

Expense timing under the cash basis

Under the cash basis, the starting point is: deduct expenses when you pay them. If you pay on 30 March, the expense is typically in that year. If you pay on 10 April, it’s typically in the next year. That simplicity is part of the appeal.

However, cash-basis expense timing can still be influenced by special rules:

1) Prepayments: paying for a benefit that extends into the next year (such as a year of insurance paid upfront) may be subject to rules that spread or limit the deduction to the period the benefit relates to.

2) Capital expenditure: buying equipment or improving a property often isn’t deducted in full when paid. Instead, tax rules usually require a capital treatment with deductions spread over time (via capital allowances, depreciation-like deductions, or amortisation rules).

3) Personal vs business element: paying an expense doesn’t make it deductible if it is personal or only partly business-related. Allocation may be required.

Expense timing under the accrual basis

Under accrual accounting, you record expenses when they are incurred—usually when you receive the goods or services, or when you become obligated to pay for them, not when you pay the bill. The central idea is matching: costs should be recognised in the period they help generate revenue.

Common accrual scenarios:

1) Supplier invoice arrives after year-end for goods received before year-end: you may need to record an expense in the earlier year (and a liability such as accrued expenses or accounts payable) because the cost relates to that period.

2) You pay a bill in advance: you may record a prepaid expense (an asset) and then recognise the cost over time as you receive the benefit.

3) Estimated expenses: sometimes you know you have incurred costs but do not yet have the final invoice amount. Depending on your rules, you may accrue a reasonable estimate and adjust later.

Accruals and prepayments: the year-end “cut-off” toolkit

Two of the most important concepts for year-end accuracy under accrual accounting are accruals and prepayments. They are the tools that help you place expenses (and sometimes income) into the period they actually belong to.

What is an accrual?

An accrual is a recognition of income or expense that has been earned or incurred but not yet billed or paid. For expenses, an accrual might represent electricity used in March where the bill will arrive in April. For income, it might represent services delivered in March where the invoice will be issued in April.

What is a prepayment?

A prepayment is a payment made in advance for benefits you will receive in the future. If you pay a 12-month insurance premium upfront, you have paid cash today, but you haven’t “used up” the insurance coverage all at once. Under accrual accounting, you recognise the expense over the period of coverage, not entirely on the payment date.

Why cut-off matters

Cut-off is the process of ensuring transactions are recorded in the correct accounting period. A poor cut-off can inflate or understate profits, making your tax return inconsistent with reality. Many year-end mistakes come down to cut-off: missing accruals, failing to defer prepayments, or recording revenue in the wrong period when invoices straddle the year end.

Special situations that confuse timing

Even after you understand cash vs accrual, a few recurring real-world situations trip people up. Here are some of the most common ones and how to think about them.

Advance payments, deposits, and retainers

Advance payments can feel like income because cash is received. Under the cash basis, they commonly are treated as income when received. Under accrual accounting, they may be deferred and recognised when the underlying work is performed or goods delivered, especially if you have an obligation to provide something in return.

Deposits can be particularly tricky. A refundable deposit might be treated as a liability rather than income because you may have to return it. A non-refundable deposit might be income sooner. The correct treatment often depends on the legal substance: is it an advance payment for a service, a security deposit, or a cancellation fee?

Partly completed jobs at year-end

If you run a service business, you may have work in progress at year-end: time spent but not yet invoiced, or milestones partially complete. Under accrual accounting, you may need to recognise revenue for work performed (and the related costs) depending on the applicable rules. Under a cash basis, you may ignore it until payment arrives, though again some systems have exceptions for certain businesses or industries.

If you sell products, inventory complicates things. Many tax regimes require inventory to be accounted for in determining taxable profit, which is inherently an accrual concept. In those cases, even a “cash” method may still need adjustments for inventory.

Returns, refunds, and credit notes

Returns and refunds can cause timing issues if the original sale occurred in one year and the refund occurs in another. Under accrual accounting, the key question is when the obligation to refund becomes evident. If a customer returns goods after year-end, you may recognise the refund in the later period unless the conditions existed before year-end (for example, goods were defective and the issue was known). Under cash basis, the cash refund date often drives the deduction or reduction in income, but local rules may vary.

Bonuses, commissions, and payroll timing

Wages are typically deductible when paid under a cash basis. Under accrual accounting, wages are usually expensed when employees earn them, which often means you accrue unpaid wages and payroll taxes at year-end for work performed but not yet paid. Bonuses and commissions can be more complex: you may need to consider whether there is a legal or constructive obligation at year-end and whether the amount is determinable.

Subscription services and recurring billing

Software subscriptions, maintenance contracts, memberships, and service plans frequently cross tax years. Under accrual accounting, you usually treat them as prepaid expenses if paid in advance, recognising the cost over the subscription period. If you are receiving subscription income, you may recognise revenue over the service period, not necessarily when billed or paid, depending on the rules that govern you.

Capital vs revenue: timing is different when it’s an asset

Not all spending is immediately deductible. A major reason people get timing wrong is that they treat a capital purchase like a normal expense. If you buy a laptop, a vehicle, machinery, or you substantially improve property, that spending typically creates an asset that provides benefit over multiple years. Tax rules often deny an immediate full deduction, instead allowing deductions over time through capital allowance regimes or depreciation-like deductions.

This means the “tax year” question becomes a two-part question: which year did you acquire the asset (or place it into service), and what deduction is allowed in each subsequent year? For many assets, the first-year deduction depends on when the asset was acquired or first used, and sometimes on whether special incentives or thresholds apply.

Repairs and maintenance can also straddle the line. Routine repairs might be deductible when incurred, while improvements that extend useful life or significantly enhance value might be capitalised. The timing and tax impact differ greatly, so correct classification matters as much as period allocation.

Examples that show how the tax year changes

Examples make the difference between theory and practice. Imagine a tax year that runs from 1 April to 31 March (a common pattern in some contexts), and compare what happens under cash and accrual approaches.

Example 1: Service delivered in March, paid in April

You complete a consulting job on 20 March and invoice the client the same day. The client pays on 10 April.

Cash basis: record the income in the tax year that includes 10 April.

Accrual basis: record the income in the tax year that includes 20 March, because you earned it then.

Example 2: Expense incurred in March, paid in April

You receive goods from a supplier on 25 March and get the invoice on 28 March. You pay on 15 April.

Cash basis: record the expense in the year that includes 15 April.

Accrual basis: record the expense in the year that includes 25 March (or 28 March), because that’s when the cost was incurred/recognized.

Example 3: Annual insurance paid upfront

You pay an annual insurance premium on 1 February that covers 1 February to 31 January.

Cash basis: you might deduct it when paid, but some tax rules require apportionment if the benefit extends beyond a certain period.

Accrual basis: you treat it as a prepaid expense and recognise the insurance cost over the 12 months of coverage, splitting the expense across two tax years.

Example 4: Customer deposit for work next year

You receive a deposit on 10 March for a job you will perform in May.

Cash basis: typically income in the year containing 10 March.

Accrual basis: often deferred until May when the service is performed, if the rules require or allow deferral for unearned income.

How to decide the correct year step-by-step

If you want a practical method for deciding what year something belongs to, you can use a simple sequence of questions. This approach reduces errors and helps you document your decision if you ever need to explain it later.

Step 1: Identify your tax reporting basis

Start by confirming whether you are required to use a cash basis, allowed to choose, or required to use accrual accounting. This is usually determined by your entity type, turnover size, and the tax rules in your jurisdiction. Once chosen, apply it consistently.

Step 2: Determine whether it is income, an expense, or a capital item

Classify the transaction. Is it ordinary business income? Is it a day-to-day operating cost? Or is it a capital purchase or improvement? Capital items have their own timing rules and often involve deductions over multiple years.

Step 3: Identify the key date for recognition

For cash basis, identify the receipt date (for income) or payment date (for expenses). For accrual basis, identify the date the income was earned or the expense incurred. That could be the delivery date, service completion date, usage period, or the point you became obligated to pay.

Step 4: Consider cut-off adjustments

If you are on accrual accounting, check whether an accrual or prepayment is needed. Did you receive a service but not yet get billed? Did you pay for something that extends into the next period? Adjust accordingly.

Step 5: Check for special tax rules

Some items have special timing rules. Examples can include bad debts, provisions, capital allowances, financing costs, foreign exchange, and certain employee-related expenses. If you know an item is likely to be “special,” treat it with extra care and make sure it is handled in line with the rules that apply to you.

Step 6: Document your reasoning

Good record-keeping isn’t just about storing receipts. It’s also about preserving context: what the payment related to, when goods or services were delivered, what period a subscription covers, and what contractual terms say. Even a short note can save time later.

Common year-end mistakes and how to avoid them

Even diligent business owners make the same few mistakes at year-end. Avoiding them usually requires a checklist and a little discipline around dates.

Mistake 1: Using invoice date as the only rule

Invoices are important, but under accrual accounting they are not always the determining factor. A March invoice could relate to April work, and an April invoice could relate to March work. Use delivery/performance dates to support correct recognition.

Mistake 2: Forgetting unpaid bills and unbilled income

If you are on accrual accounting, you must consider what you owe and what you’ve earned even if no invoice has arrived or been issued. Year-end accruals for utilities, contractor work, and wages are common. Likewise, accrued income for work completed but not invoiced can be significant.

Mistake 3: Deducting capital purchases as expenses

Large purchases often need to be capitalised. If you expense them immediately, you may overstate deductions in one year and understate them in later years, potentially triggering adjustments.

Mistake 4: Not apportioning prepayments

Insurance, rent, subscriptions, and annual service contracts often span tax years. Under accrual accounting, they should usually be spread over the relevant coverage period, not recognised entirely on the payment date.

Mistake 5: Mixing methods inconsistently

A subtle but common error is using the cash basis for some items and accrual for others without a clear permitted reason. For example, recognising income when paid but expenses when incurred can distort results. If your regime allows a hybrid approach, it will define what’s permitted. Otherwise, consistency matters.

What about individuals with employment income?

Many individuals earn income as employees rather than through a business. For employment income, the timing rules are typically determined by payroll reporting: wages are generally taxed in the period they are paid (or made available) rather than when “earned” in an abstract sense. This can matter around year-end bonuses, late payroll runs, or back pay. If you receive a bonus after the year closes, it often belongs to the following tax year even if it relates to performance in the prior year, but the exact rule can depend on the system used where you live.

Deductible expenses for employees (where allowed) often follow their own rules and may require that the expense be incurred wholly and necessarily for the job. Timing can depend on when the cost is incurred or paid, and whether reimbursement is received. Keeping evidence of dates and purpose is important.

What about self-employed people and small businesses?

For self-employed people and small businesses, the question of which tax year to record things in is a daily practical issue: platform payments arrive after jobs are done, suppliers bill monthly, and business owners pay for things on cards that settle later. The simplest way to stay accurate is to choose a consistent basis that you’re allowed to use, then set up your bookkeeping to reflect it.

If you are on a cash basis, focus on bank and payment processor feeds, and make sure you capture all receipts and payments. If you are on an accrual basis, focus on invoice registers, delivery dates, and year-end cut-off adjustments. Either way, reconcile regularly so you don’t end up with a year-end scramble.

Credit cards and timing: payment date vs purchase date

Credit cards introduce a common timing trap. If you are on a cash basis, you might think an expense occurs when the credit card bill is paid. But many bookkeeping systems treat credit card purchases as expenses when the transaction is made, with the credit card balance as a liability that is later cleared when paid. Whether that is acceptable under a “cash basis” tax regime depends on how the regime defines payment and what it allows for practical record-keeping.

Under accrual accounting, recording the expense when the purchase occurs is generally consistent with the idea that you incurred the cost when you received the goods or services, even if you pay the credit card company later.

The safe approach is to align your bookkeeping treatment with the rules applicable to you and keep it consistent across periods. If you treat the purchase date as the expense date, do so consistently and reconcile the credit card liability. If you treat the date you pay the card as the expense date, be aware that this may bunch expenses into the month of payment and may not reflect the period of benefit.

Bank transfers, processing delays, and “received” funds

Payment timing can also be muddied by processing delays. Bank transfers, card settlements, and online marketplaces may show multiple dates: the customer’s payment date, the processor’s settlement date, and the date the funds reach your bank. For cash-basis taxpayers, the question becomes: when did you have control of the funds? Often that is when the money is credited to an account you can access, even if not yet transferred to your main bank.

For accrual taxpayers, the cash date is less important for recognition, but it still matters for tracking receivables, cash flow, and bad debt considerations.

How to handle mistakes after the year is closed

Sometimes you only discover an error after you have finalised your accounts or filed your return. The right fix depends on the size of the error, whether it is an accounting mistake or a tax treatment issue, and the correction mechanism available in your system. In many places, small errors can be corrected in the next return within certain limits, while larger or more systematic errors require amending the original return or making a formal disclosure.

The practical takeaway is that accuracy at the time of recording is cheaper than correction later. A clear process for capturing invoices, receipts, and delivery dates reduces the chance of filing with incorrect period allocation.

Year-end checklist for getting the tax year right

A short checklist can prevent most timing errors. Whether you do this monthly or just at year end, it helps you ensure that income and expenses land in the correct tax year.

1) Confirm your basis (cash or accrual) and apply it consistently.

2) Reconcile bank accounts and payment processors to ensure all receipts are captured.

3) Review unpaid bills and identify expenses incurred before year-end but not yet invoiced or paid.

4) Review unbilled work and identify income earned before year-end but not yet invoiced (accrual basis).

5) Review invoices issued close to year-end and confirm they relate to the correct period (avoid premature revenue recognition).

6) Identify prepayments and subscriptions that extend beyond year-end and apportion if required.

7) Separate capital purchases from operating expenses and apply the correct tax treatment.

8) Check payroll and contractor cut-off for wages earned but unpaid at year-end (accrual basis).

9) Ensure inventory (if applicable) is counted and valued consistently at year-end.

10) Keep supporting documentation for timing decisions, including contracts, delivery notes, and service periods.

Putting it all together

The tax year in which income and expenses should be recorded depends primarily on your accounting basis and the nature of the transaction. Under a cash basis, receipts and payments usually dictate the year. Under an accrual basis, the decisive factor is when income is earned and when expenses are incurred, supported by cut-off adjustments like accruals and prepayments. Capital items follow separate rules and often spread deductions over multiple years.

If you take one practical principle from all of this, let it be consistency backed by evidence. Choose the method you are permitted (or required) to use, apply it the same way every period, and keep the documents that show when goods and services were delivered and what period costs relate to. That combination makes it much easier to answer the question “What tax year should this go in?” with confidence, and it makes your tax return more defensible if anyone ever asks how you arrived at the figures.