For small a businesses, cash accounting is a useful way of easing VAT issues Generally accepted accountancy practice is that accounts are prepared to the accruals concept, which requires that expenditure be charged to the financial period it was paid for. So for example , If on the last day of your current financial year, ended say 31st July 2013, you paid £500 to cover Business rates for the next month, August 2013, that is the first month of the next financial year, that £500 would be charged in the year ended 31st July 2014.
However, under cash accounting, the output VAT on sales is reported on a VAT return only when you have been paid. Input VAT is similarly reported on your VAT return after you have paid for the item. Cash account is great for your cash flow where you give generous credit terms, suffer regular bad debts.
The financial accounts of the entity using cash accounting have to be prepared on the accrual basis. As a result, your accountant will need to make an adjustment to reconcile between the cash basis VAT and the accruals based financial statements.
Feel free to call us and have a chat about cash accounting for your business.