In order to fully implement accounting practices, businesses need to continue with choose the accounting method they ‘re going to follow. Companies are free to select among two specific accounting methods: the cash basis for accounting, or the accrual basis for accounting.
In general VAT is calculated on the basis that the VAT you pay to your suppliers is deducted from the VAT you collect from your clients (Output VAT). This then becomes your VAT liability, or in the case where you’re paying out more VAT than you’re collecting this is the sum you would reclaim from HMRC.
What is Cash Basis?
What is Accrual Basis?
Use Case for understanding:
Consider a situation where you purchased 250 units of a product and will pay for it coming month. In cash basis, there will be no transactions recorded where as in Accrual basis, transactions recorded through an accounts payable(liability) account.
What are the differences between Cash and Accruals?
So while it is clear that accrual accounting needs more effort, technology will perform much of the heavy lifting for you. You should set up accounting apps to manage your bills and bring the numbers straight to the accounts on an accrual basis. Your invoices will also be recorded as profits when you collect them. So if you run a hybrid accounting system, smart software would help you to switch between cash basis or accrual basis anytime and anywhere you need to.
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