Cash Accounting: Explaining Its Necessity and Understanding When and How to Go for It - Essay Example

To use cash accounting, you need to apply for it; rather you should make all necessary VAT returns. You also have to satisfy the HP Revenue and Customs by clearing any VAT payment arrears to use the cash accounting scheme. When you start using the cash accounting scheme, it is a must to use it for the whole business and it is desirable to continue it for 2 years.

However, you can quit the scheme at any moment, provided it does not contribute to your business as well as your accounting system does not support the requirements for the scheme. While starting with cash accounting, you need to be very much careful that you do not re-account for any VAT on receipts and payments that are already dealt with. In cash accounting the main accounting record is kept in a cash book summarizing all the payments made and received. It has a separate column where you can specify the relevant VAT.

In the cash book, you also need to record the corresponding tax invoices and provide an efficient system for cross-referencing. Understanding the Advantages and Disadvantages of Cash AccountingThe benefit of the cash accounting scheme primarily depends on the period between the issuing of the sales invoice to receiving payments from the customers. Cash accounting is likely to be more beneficial when this period extends. There is also no due on output tax for your business until the business receives the payment against the sales invoices, which in turn, helps in automatic bad debt relief.

Cash accounting also simplifies the bookkeeping requirements where you can control many businesses with the help of an appropriate cash book. However, there are disadvantages as well of this scheme. The primary disadvantage of cash accounting is that when you receive a tax invoice, you cannot take the credit for VAT. You need to wait for it until the payment is made. Distinguishing Between Zero-Rated and Exempt SuppliesThe zero-rated and exempt supplies are two types of supplies used in the cash accounting scheme where the rate at which VAT is charged is zero.

However, the primary difference between them is that zero-rated supplies are taxable whereas exempt supplies are non-taxable. You can claim the input tax in respect of the goods or services that are used to make zero-rated supplies as a deduction, which you cannot do in the case of exempt supplies. However, the difference between these two supplies is significant regarding registering for VAT. It is because, unlike exempt supplies, a person making zero-rated supplies can go for VAT registration.