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Purchases / Sales Ledgers on Cash Accounting

Purchases / Sales Ledgers on Cash Accounting

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I'm having a bit of a moment this morning.  We have taken on a new client that produces p/l and s/l but operates as cash accounting for VAT.  Am I right in thinking the p/l and s/l are paper exercises to verify the year end creditors and debtors, but the actual base of the accounts will be the money in / out reports that have been provided?

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11th Oct 2013 09:57

Cash accounting for VAT and the new option for cash accounting for income tax are entirely different things.  When you ask about "the actual base of the accounts" do you mean accounts to be prepared under the new cash basis option or on the normal accruals basis? 

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By Ozzi
11th Oct 2013 10:15

The new cash basis option.

 

Our client keeps p/l and s/l but runs VAT cash accounting system.  He has given me printouts of various reports, but from what I can see, I should be using the cash basis to allocate transactions for Income Tax and then adjust for creditors / debtors by balancing the p/l and s/l to ensure the year end balances are correct.

 

Am I making sense or am I now on a mission to confuse everyone else!

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11th Oct 2013 10:38

Yes if you are preparing accounts under the new cash basis option you ignore debtors and creditors.  Your mention of cash accounting for VAT in the same breath is what is potentially causing confusion (although I am sure not to you).  That's a completely separate matter from the basis of preparation of the accounts.

HOWEVER the upper turnover threshold for being able to opt for the cash basis for income tax is the VAT registration limit.  So being able to prepare cash basis accounts for a VAT registered business is at first sight anomalous.  Are you sure that your client is not too big for the cash basis option (for income tax) to be available?

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By Ozzi
11th Oct 2013 10:52

My mistake, it was indeed me who was confusing you. 

I don't mean the cash basis for Income Tax, apologies for that.  I intend to produce the accounts using his workings for p/l and s/l, but the fact he accounts for VAT using cash accounting is confusing me.

 

When producing his p/l, he's split out the VAT when entering invoices onto the PDB, same for sales.  So how do I go about entering those figures on for purchases in terms of VAT, when he's used what has physically been paid?  The VAT won't tie up because of the two different methods.

 

I know I'm being blind here, but it's one of those weeks.

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11th Oct 2013 11:04

So you just prepare accounts in the normal way including S/L and P/L balances.  Your only difficulty will be that the VAT balance in the accounts is not the same as the VAT balance on the latest return.  So you just reconcile the VAT balance in the accounts with the VAT balance on the return (handy if there is a VAT return made up to the balance sheet date but more complicated if not).  The reconciling items should just be the VAT included in the S/L and P/L balances.

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By Ozzi
11th Oct 2013 11:13

And that's the answer I was looking for.  Thank you very much!

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