VAT Accounting Based on Invoicing or on Cash Basis

Value added tax holds great significance in business and in the world. It has always been and will continue to be a highly sensitive topic with regard to laws and regulations, as people interpret them differently. Tax records enable more transparent business operations of a company. The analysis of the research work shows that there exists a dilemma regarding the difference in accounting, as based on the analysis of their service company X we cannot generalise the finding of the appropriateness of the VAT accounting method to other service companies. There is no need to speak of danger, as value added tax must be accounted for in any case, either when it is paid, that is in the case of VAT accounting on a cash basis, or when the obligation or receivable arises, i.e. in VAT accounting based on invoiced realisation.

Problem

Value added tax holds great significance in business and in the world. It has always been and will continue to be a highly sensitive topic with regard to laws and regulations, as people interpret them differently. The Value Added Tax Act has undergone a series of amendments, which is why the diploma thesis presented value added tax in Slovenia in accordance with the new Value Added Tax Act, which came into use on 1 January 2007.

VAT accounting based on invoicing and on cash basis are two possible different methods of maintaining VAT books. The basic method of maintaining VAT is VAT based on invoicing, whilst the second possible method is, in accordance with a special regulation, maintaining records on a cash basis. The author in the diploma thesis researched accounts in different accounting periods; she presented and recommended more favourable methods, particularly the two aforementioned VAT accounting methods.

The account comprises collected data from one service company – monthly and annual data, identification of advantages and disadvantages, dilemmas and dangers.

Solution and Method

Tax records enable more transparent business operations of a company. Quality accounts of monthly operations and comparison of two VAT accounting methods help us to decide in good time on a better accounting method. Value added tax accounting covers such a broad field that it is difficult to assess and present all the current issues, which additionally emerged after Slovenia's accession to the European Union and naturally after the introduction of the latest amendments to the Value Added Tax Act.

The latest amendment to the Value Added Tax Act came into use on 1 January 2007. The Act regulates the system and introduces the obligation to pay value added tax on the territory of the Republic of Slovenia. The Value Added Tax Act (ZDDV-1) permits two methods of maintaining books, that is according to the general regulation of value added tax based on invoicing and according to the special regulation, on a cash basis.

When writing the diploma thesis, she decided to examine closely the differences between value added tax accounting based on invoicing or on cash basis and, on the basis of a concrete example of a small service company, to determine which accounting method is more appropriate. The purpose of the diploma thesis is to show, on a concrete example of small service company X, whether the value added tax account according to the general regulation – invoicing and in comparison with the special regulation of value added tax on a cash basis represents a dilemma, an opportunity or a danger.

In the first, theoretical part of the diploma thesis, she presented the basic definitions of value added tax and what value added tax actually is, the legal regulations of value added tax and the legislative amendments to VAT following Slovenia's accession to the European Union. In the next chapter, she presented what the value added tax account consists of. According to the Value Added Tax Act – ZDDV, taxpayers had to attach the corresponding account books to the account on a monthly, quarterly, and at that time also six-monthly basis.

With the new act (ZDDV-1), which came into use on 1 January 2007, this is no longer necessary. Now, for the purposes of ensuring appropriate records, the value added tax account must be in electronic form. She presented the maintenance of records for each book of accounts separately, including the value added tax form (DDV-O), which contains all data from individual analytical business books.

In the sixth chapter, she presented the special regulation of value added tax on a cash basis and the account itself with all additional records that are required. She showed in what way we can proceed to maintain value added tax on a cash basis, how to prepare an account and in what way we cease using the special regulation, or how the state can also prohibit maintaining records according to the special regulation. The final part of the diploma thesis contains a comparison of the value added tax account according to the general regulation, i.e. based on invoiced realisation, and according to the special regulation, i.e. on a cash basis.

This is shown through a practical example of small service company X. The data, which were collected on the basis of one year, are presented with the help of graphs and tables. The graph shows a comparison of the financial effects of both VAT accounting methods.

The curve showing the value added tax account based on invoicing is fairly constant throughout the year, whilst the other curve, which is a presentation of the VAT account on a cash basis, is highly fluctuating.

Results

The analysis of the research work shows that there exists a dilemma regarding the difference in accounting, as based on the analysis of their service company X we cannot generalise the finding of the appropriateness of the VAT accounting method to other service companies. There is no need to speak of danger, as value added tax must be accounted for in any case, either when it is paid, that is in the case of VAT accounting on a cash basis, or when the obligation or receivable arises, i.e. in VAT accounting based on invoiced realisation.

In any case, the opportunity for companies can be very great, as by maintaining records on a cash basis we can remit value added tax when we also receive it paid. Because of this, the company does not fall into liquidity difficulties due to tax payments. In conclusion, based on the analysis, I can assert that due to additionally incurred costs, VAT accounting on a cash basis does not bring the company significantly greater liquidity.

Of course, we must not neglect the facts that in the cash basis accounting system, VAT is paid in the current month for payments from the previous month. Based on the analysis of different VAT accounting methods, it means for a company that accounts for VAT on a cash basis a short-term better liquidity, which means that this accounting is only an apparently more favourable position. Through the analysis of VAT accounting, she proved on the example of a concrete small service company that VAT accounting on a cash basis does not bring additional benefits.

I suggest that VAT accounting on a cash basis be first examined and it be determined whether such accounting, given the current operations, is more favourable for the company and how the company should operate in the future. With well-defined goals, examinations and indicators, the company can also gain better momentum with the help of VAT accounting on a cash basis. I should emphasise that based on my analysis of a small service company, I cannot claim that my findings also apply to other companies.

Our constitution works: it seems that everything promises that it will last; in this world, however, only death and taxes are certain. (In a letter to Leroy, 1798, Franklin, Benjamin, 1706-1790)