How Cash and Accrual accounting affect VAT

Learn how cash and accrual accounting methods affect VAT.

The accounting method you use — cash basis vs accrual basis — can affect the amount of VAT you owe.

In this article, we'll explain how.

Understanding cash vs accrual

When you use the cash basis method, you report your income when you receive it.

When you use the accrual basis method, you report your income when you bill it.

For example:

In August, you send out a $1000 invoice, with a sales tax rate of 6%, for a grand total of $1060. You receive a $424 payment in August, and the remaining $636 in September.

• With cash basis, you owe two sales tax payments, $24 for August and $36 for September, because you received payments in both August and September.
• With accrual basis, you owe one sales tax payment of $60 in August, because you invoiced your customer in August.

View the difference

The Sales Tax Centre can show you the difference in sales tax owed for cash and accrual methods.

1. Go to VAT.
2. In the Sales Tax Owed table, select your method from the Accounting Basis ▼ drop-down menu to see the difference.

Depending on your location, there may be additional rules that govern when to use a cash or accrual basis. Talk to your accountant about which method is most appropriate for your company.