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There are two methods established by the Federal Tax Administration for collecting Value Added Tax (VAT):
- In the invoice-based method, VAT is recorded when the invoice is issued or received, regardless of when payment is made or received.
- In the cash-based method, VAT is recorded only when the payment is received (for customers) or made (for suppliers).
The cash-based method is often chosen by small businesses and professionals because it avoids paying VAT in advance on amounts that have not yet been actually collected.
This page provides a general overview of the VAT cash-based method and refers to detailed pages for operational entries.
VAT on a cash basis: the basic principle
In the VAT cash-based method, the focus is not on the invoice date, but on the moment the financial transaction occurs. This approach is designed to simplify daily management and to avoid paying VAT in advance when the money has not yet actually been collected or paid. With the cash-based method:
- VAT becomes due only at the time of collection (for customers)
- VAT becomes deductible only at the time of payment (for suppliers)
Therefore, during the year, issued or received invoices do not affect VAT until the payment or receipt actually occurs.
Setting up customer and supplier accounts with VAT on a cash basis
With VAT under the cash-based method, during the year it is not necessary to manage customers and suppliers. However, if you still wish to manage invoices and due dates, customer and supplier accounts can be set up using cost and profit centers.
For more information, see:
Why accruals are needed at year-end
Even if operations are based on the cash principle during the year, at year-end it is necessary to apply the accrual principle. This allows costs and revenues to be properly attributed to the year they belong to, providing an accurate financial picture of the activity. At the end of the fiscal year, it is essential to determine the correct economic result for the year.
This means that:
- the revenues of the year must also include invoices issued but not yet collected
- the costs of the year must also include invoices received but not yet paid
For this reason, outstanding invoices are recorded as accrual invoices, without anticipating VAT.
Recording outstanding customer invoices
At year-end, with the VAT cash-based method, it is necessary to record customer invoices that have been issued but not yet collected, in order to correctly allocate revenues to the fiscal year. On the dedicated page, you will find the entries to be made on 31.12 and the reversal to be recorded at the beginning of the new year.
Recording outstanding supplier invoices
At year-end, with the VAT cash-based method, it is necessary to record supplier invoices that have been received but not yet paid, in order to correctly allocate costs to the fiscal year. On the dedicated page, you will find the entries to be made on 31.12 and the reversal to be recorded at the beginning of the new year.