VAT Cash Accounting Vs Accrual Accounting

 In the process of becoming registered for VAT, there are a number of alternative approaches you can take to calculating your VAT, each of which has a set of perks and drawbacks associated with it. The cash accounting technique and the accrual accounting method are two of the most frequent types of VAT accounting procedures.

In most cases, value-added tax (VAT) is computed by deducting the amount of VAT that a company owes to its vendors from the amount of VAT that the company has collected from its customers (Output VAT). After then, this amount is considered to be your VAT liability; alternatively, in the event that you are paying out more VAT than you are collecting, this is the amount that you can reclaim from HMRC.

Now, let's take a look at the two approaches of accounting for VAT that are the most common.

Cash Accounting

When you use the cash accounting technique, rather than basing your VAT calculation on when the invoices themselves were created, you base it on when the money was actually exchanged for them. This offers the advantage, from a sales viewpoint, of guaranteeing that you only pay VAT to HMRC once your customer has paid and settled their invoice. This is a significant advantage. On the other hand, you can only refund VAT on purchases after the invoice from the supplier has been paid.

Key Points:

• When your invoices are paid, use that date as the foundation for your VAT calculation.
• Easier on the flow of your cash.
• Simple to compute.
• Perfect for companies of a tiny or medium size who have trouble maintaining a steady cash flow.
• You are only eligible for this if your annual taxable revenue is less than £1.35 million.

Accrual Basis Accounting

Accrual accounting differs from cash accounting in that it requires you to compute your VAT based on the date that the invoice was issued (in the case of customers) or received (in the case of clients) (in the case of suppliers). Therefore, accrual accounting does not take into consideration the dates on which payments were received or made.

Accrual accounting is generally favoured, and in some cases even mandated, for organisations that have a greater turnover rate.

Key points

• Determine the amount of VAT owed based on the dates on which invoices were issued and received.
• It is necessary to maintain an adequate cash reserve in order to satisfy the VAT payments owed to HMRC on outstanding invoices.
• If your company's taxable turnover is greater than 1.35 million pounds, registration is required.
• Larger companies typically take use of this strategy.

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