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Difference between Invoice and Cash Basis Accounting

Understanding the difference between invoice and cash basis of accounting is an important accounting principle that you must understand.

Value added tax is something that most businesses are accustomed to. In fact, it’s so important that we wrote a guide on the subject here. VAT, if you didn’t already know, is a tax on consumer spending.

Businesses collect VAT on behalf of Revenue on the goods or services that they sell. At some time, depending on the setup of the business, they become liable to pay this VAT collected to Revenue.

The amount of VAT that you are liable to pay can differ depending on what basis of accounting your business adheres to. There are two types basis of accounting, the invoicing basis and the cash basis. Deciding upon which basis to run your accounts using should be something that you discuss with your accountant when the business is being set up.

If your business is using the invoice basis of accounting, it becomes liable for VAT once an invoice is sent for sales that the business makes. So, even if the company hasn’t received payment for a sale that has been made, it will still be liable to pay for the VAT charged on that sale if an invoice has been raised and sent to a customer/client.

Your business may also use the cash basis of accounting which is more formally known as the money received basis of accounting. Under this basis, a business only becomes liable for VAT on sales it makes when it receives payment for that sale and not before.

There are certain criteria that you must meet in order to be eligible for the cash basis of accounting. Either, your annual turnover must be less than €2,000,000 or the vast majority of your customers must not be registered for VAT. However, if a customer is registered for VAT, you must issue a VAT invoice to them.

There are potential cash flow implications depending on what basis of accounting you choose. So making the best decision for your business is important and as outlined above, your accountant should definitely have input into this issue.