Cash Accounting Vs Accrual Accounting

For the purpose of VAT, it is very important to know that the difference between these 2 accounting policies and their impact on your business particularly VAT.

Remember there are no provision for cash Accounting in the UAE VAT Legislation. Although in Kingdom of Saudi Arabia it is allowed (provided turnover is not more than SAR 5 million), a taxable person may account for and pay VAT on the basis of cash or other consideration paid or received.

Cash Accounting has greater impact on VAT payments and cash outflow. It is not simple to implement and make changes to your relations with customers, provide training to employees to make sure they understand the impact on the business and cash flow, particularly when you do not want to disclose so much information to your employees.

So how a business will get impact due to no provision for cash accounting

  • You will pay VAT to FTA even if your customer has not paid your VAT invoice.
  • 6 months rule for bad debt, which means if your customer has default/insolvent, you will then be able to recover the output tax back and net off against current VAT payment.
  • Certain conditions must be met in order for supplier to write off debt.
  • Businesses with higher debtors books to suffer cash flow deficits if not managed properly
  • The advantage of cash accounting is that no bad-debt write-off is required by the taxable person. The business would pay VAT only after the cash is received from the customer.

    Using cloud account software such as Xero, Kashflow or Intuit will help you better control your cash flow and forecast VAT payments.