Business owners who keep the KPiR (tax revenue and expense ledger) face an important choice about how to record costs in their business. There are two methods of recognising costs: the simplified method, colloquially called the cash method, and the accrual method. Although they may look similar at first glance, in practice they differ significantly in their booking rules and can have a real impact on the amount of income tax. In full accounting, the accrual principle is applied through, among other things, deferred income in the accounting books.
Choosing the right method of recording costs is a strategic decision that affects the whole year's tax settlements. Each method has its advantages and disadvantages, and knowing them allows business owners to make an informed decision that best suits the nature of their business.
The chosen method of recording costs must be applied consistently throughout the tax year. The method can only be changed from the start of a new tax year. The business owner does not have to inform the tax office (urząd skarbowy) of the chosen method or of a change
Basic rules for recording costs in the KPiR
Whichever method is chosen, there are certain universal rules for recording costs in the KPiR. The fundamental rule is determining when a cost is incurred, which as a rule is the day the invoice, bill or other document on which the booking is based was issued (Article 22(6b) of the PIT Act (personal income tax)).
This rule applies to taxpayers using both the simplified and the accrual method. The differences between the methods only appear in how costs are treated in relation to the periods they concern, and in the division into direct and indirect costs.
It is also essential to distinguish between the income tax rules and the VAT rules. The colloquially named "cash" simplified method in the KPiR is a completely different solution from the cash accounting method used for VAT. Nor should it be confused with the cash method under Article 14c of the PIT Act (since 2025), under which, where revenue in the previous year did not exceed PLN 2,000,000 (from 2026), costs from transactions with businesses are deducted only in the year of payment (Article 22(4a)). At year end, assigning revenue to the right period matters too, as we explain in our piece on year-end revenue in the KPiR.
The rules provide for separate principles for recognising revenue and costs in the revenue and expense ledger. When a cost is incurred is determined on the basis of the date the document was issued, whichever method of recording costs is chosen
Business owners must remember to apply the chosen method consistently throughout the tax year. Any changes can only be made from the start of the following year, which requires proper planning and preparation.
The accrual method – detailed rules and use
The accrual method is much more complex than the simplified method. Its main feature is the need to divide costs into two categories: costs directly related to revenue and indirect costs. This division is fundamental to determining when an expense should be treated as a tax-deductible cost.
Costs directly related to revenue are subject to special booking rules. If they were incurred in the given tax year (or in earlier years) or in the following year but before the tax return is filed – no later than the deadline for filing it – they must be recognised in the year in which the corresponding revenue was earned (Article 22(5)–(5a) in conjunction with (6) of the PIT Act). Those incurred later are deducted in the following year ((5b)). This rule requires the business owner to track closely the links between costs and the revenue they generate.
Costs directly related to revenue must be recognised in the year in which the corresponding revenue was earned. This applies to costs incurred in the given year or in the following year up to the day the tax return is filed, no later than the deadline for filing it
Indirect costs are subject to different rules. As a rule, they are treated as tax-deductible costs on the day the invoice or other document is issued. However, there is an important exception for costs spanning the turn of the year – such expenses must be allocated to the years they concern, and where it is not possible to determine what part relates to a given year, divided proportionally to the length of the period (Article 22(5c) of the PIT Act).
A practical example is a telephone invoice issued in January covering calls from December and the January subscription. This cost must be divided between the two tax years: the part for the December calls to the previous year, the January subscription to the current year. It is important, however, that the proportional division rule applies only to the turn of the year, not to periods within the year.
The rule of proportional division of indirect costs applies only to the turn of the tax year. If an invoice was issued in April for services provided in March of the same year, it is booked under the date the document was issued
The simplified method – simplicity in practice
The simplified method, as the name suggests, was created to make tax settlements simpler for business owners. Its main principle is recording costs in the tax year in which they were incurred, regardless of the periods they actually concern.
An important advantage of this method is that there is no need to divide costs into those directly and indirectly related to revenue. All costs are treated in the same way, which greatly simplifies booking and removes the need for complex analysis of the links between costs and revenue.
A good example illustrating the differences between the methods is an insurance policy covering two tax years. Using the accrual method, the business owner would have to divide the cost proportionally between the years and book the parts in the correct periods. Under the simplified method, the whole expense is recorded at once on the date the policy is issued.
Under the simplified method, costs are recorded in the tax year in which they were incurred, regardless of the periods they concern. There is no need to divide costs into direct and indirect
The simplified method does, however, have its limits. Not all categories of costs follow this rule. Exceptions include, among others, employees' wages and the employer-funded part of social insurance contributions: they are a cost in the month for which they are due if they were paid on time – otherwise only on the date of payment (Article 22(6ba)–(6bb) of the PIT Act). Income tax advances are not a cost at all (Article 23(1)(12)).
Comparing the methods – a practical analysis
To better understand the differences between the methods, it is worth analysing specific accounting situations. The differences become particularly visible with costs spread over time and expenses relating to the turn of the year.
| Type of cost | Simplified method | Accrual method | Example |
|---|---|---|---|
| Insurance policy (2 years) | At once on the date of issue | Proportionally to the periods | PLN 2,400: full amount vs PLN 1,200 a year |
| Telephone invoice (turn of the year) | On the date of issue | Divided between the years it concerns | January: full amount vs split December/January |
| Wages | In the month for which they are due (if paid on time) | In the month for which they are due (if paid on time) | Same under both methods |
| Direct costs | On the document date | In the year the revenue is earned | Different recording rules |
The choice of method should be well thought out and tailored to the nature of the business. Companies with a regular cost and revenue structure can benefit from the simplicity of the simplified method. Businesses with a more complex cost structure, especially those with expenses spread over time, can use the accrual method to match costs better to the years they concern.
Practical aspects of choosing a method
The decision on which method of recording costs to use should be preceded by a thorough analysis of the business's cost structure. Each method may produce different tax results depending on the nature of the business.
Business owners whose cost structure is regular, without significant expenses spread over time, can successfully use the simplified method. It removes the need for complex analysis and division of costs, which saves time and reduces the risk of accounting errors.
The choice of method for recording costs is entirely the business owner's decision. Before deciding, it is worth analysing the cost structure of the business and the expected benefits of each method
On the other hand, companies with significant costs spread over time, such as insurance, leases or subscription services, may consider the accrual method. It allows costs to be matched better to the periods they concern, which affects how tax burdens are spread over time (the total amount of costs does not change).
Key factors influencing the choice of method:
- The cost structure of the business
- How often costs are spread over time
- The complexity of accounting processes
- The resources available for bookkeeping
- The business's tax strategy
Legal and regulatory aspects
The legal rules on how costs are recorded in the KPiR are precisely set out in tax law. Business owners must comply not only with the rules of the chosen method, but also with the general requirements for keeping accounting documentation. Keeping the KPiR under either method is covered by our accounting services.
It is important to distinguish between the income tax rules and the VAT rules. The colloquially named "cash" simplified method in the KPiR has a completely different meaning from the cash accounting method used for VAT and from the cash method under Article 14c of the PIT Act. Business owners must remember this distinction to avoid errors in their settlements.
The rules provide for separate regulations for recognising revenue and costs in the revenue and expense ledger. The colloquially named "cash" simplified method in the KPiR differs from the cash accounting method used for VAT
The documentation requirements remain the same whichever method is chosen. All accounting documents must be properly described, dated and stored in line with the rules in force. The differences concern only how costs are recorded over time, not the formal requirements.
Tax consequences of the different methods
The choice of method for recording costs can have a significant impact on the amount of income tax in individual years. The differences result from the different timing of cost recognition, which can affect the tax result.
The simplified method may lead to costs being concentrated in the year they are incurred, which in the case of large one-off expenses can significantly reduce taxable income in that year. The accrual method, by contrast, allows costs to be spread more evenly over time, which may suit companies planning their tax burdens over a longer period.
A trading company bought an insurance policy for PLN 12,000 covering two full calendar years. Under the simplified method, the whole amount will be recorded as a cost in the year of purchase, reducing taxable income by the whole amount. Under the accrual method, the cost will be spread proportionally - PLN 6,000 a year.
Tax planning when choosing a method should take into account not only the current benefits but also the long-term effects. Business owners whose business is cyclical can use the right choice of method to influence how tax burdens are spread over time.
Mistakes and pitfalls in applying the methods
Applying the different methods of recording costs involves certain risks and typical mistakes that should be avoided. The most common problems result from misunderstanding the rules of each method and applying them inconsistently.
A common mistake with the accrual method is classifying costs incorrectly as direct or indirect. Incorrect classification can lead to costs being recorded at the wrong time, which results in errors in tax settlements.
With the simplified method, business owners often forget the exceptions for certain categories of costs, such as wages or ZUS (Social Insurance Institution) contributions funded by the employer. These categories are a cost in the month for which they are due, provided they are paid on time – otherwise on the date of actual payment, regardless of the date the document was issued.
Typical mistakes include incorrect classification of costs, inconsistent use of the chosen method and ignoring the exceptions for certain categories of costs. Applying the chosen method consistently throughout the tax year is key
Another significant problem is inconsistent use of the chosen method during the tax year. The rules require the chosen method to be applied consistently throughout the year, and any changes are only possible from the start of a new tax year.
The most common mistakes in applying the methods:
- Mixing the rules of different methods during the year
- Incorrect classification of direct and indirect costs
- Ignoring the exceptions for certain categories of costs
- Incorrect division of costs between periods under the accrual method
- No documentation justifying the choice of method
Organising accounting processes
Applying the chosen method of recording costs effectively requires accounting processes to be properly organised. Whichever method is chosen, the key is to set up a system that ensures all costs are recorded correctly and on time.
With the simplified method, the main challenge is to book documents systematically under their issue dates and to remember the exceptions for certain categories of costs. The simplicity of the method does not mean that details can be neglected.
The accrual method requires a more advanced system of control and analysis. Business owners must introduce procedures for classifying costs correctly and dividing them proportionally where they concern the turn of the year.
Applying the chosen method effectively requires appropriate accounting procedures. Systematic documentation of all transactions and regular checks that bookings are correct are key
Whichever method is chosen, regular reviews of bookings are recommended to check that the chosen rules are being applied correctly. Such checks make it possible to detect errors early and correct them before the tax year is closed.
