Simple Accounting Spreadsheets - The pro’s and con’s of using the Cash Accounting VAT Scheme
Using the Cash Accounting VAT Scheme with easy to use cash accounting spreadsheets can provide many small businesses with significant administrative and cost advantages.
Many practicing accountants recommend the Cash Accounting VAT Scheme. The simple bookkeeping structure and positive cash flow benefits make this an ideal accounting system for many smaller businesses.
Using conventional VAT accounting you will pay VAT on any invoices you have issued, even if you have not received the payment, and you reclaim VAT on any invoices you have received, even if you have not yet paid your supplier.
The Cash Accounting Scheme differs from this. You pay VAT on your sales ONLY when your customers pay you and you reclaim VAT on your purchases ONLY when you have paid your suppliers.
Advantages and disadvantages
The HMRC website has the following to say:
The Advantages - Using this scheme may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the scheme.
Disadvantages - Depending on your own circumstances, there may be some disadvantages to using the schemem as you cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
If you leave the scheme you will have to account for all outstanding VAT due including any bad debts.
There are some minor additional accounting and compliance requirements as you will still need to keep a record of year end debtors and creditors.
Why choose Cash Accounting
For many small businesses the great advantage of a cash accounting spreadsheet based system is that it is easy to understand. This simplicity encourages attention to detail in the recording of business transactions and this serves to enhance the quality of the accounting records.
In an earlier article 'Accounting Software - are bookkeeping spreadsheets the answer for small businesses.' I outlined the importance of maintaining accurate and fully reconciled Cash Book records as one of the essential ingredients in maintaining a good spreadsheet based bookkeeping system.
The bookkeeping records needed are exactly the same as those for the Cash Book and can easily be catered for!
Cash accounting can be viewed as an opportunity for some small businesses to take advantage of a simplified bookkeeping system and at the same time improving their cash flow.
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ABOUT THE AUTHOR
Shane Udall is a business school graduate and Price Waterhouse trained accountant.
For the past 26 years Shane has run his UK based software and accountancy consulting business Heron Accounting Services specialising in the design and installation of accounting software.
During this time Shane has developed numerous spreadsheet based applications for businesses of all sizes. Calling on his knowledge of Microsoft Excel and recognising the need for low cost accounting software, Shane developed the popular 'Small Business Accounting Spreadsheet' range of Excel based bookkeeping software for small businesses and using the Mr.SpreadSheet brand these products are now available via www.MrSpreadSheet.co.uk