Cash Accounting: What is it?

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Cash accounting is recording accounting based on cash flows. In concrete terms, this simply amounts to noting all the inflows and outflows from your bank account at the time the operation is carried out. It is of course necessary to record them in the correct accounting categories, indicate the method of payment and keep all the supporting documents, but in principle it is as simple as that.

Sounds too good to be true? Maybe you are right. Not everyone is entitled to it and like everything else, this means of monitoring your operations is not perfect. Let’s start by seeing who can use this method.

Who can do cash accounting?

In normal times, most professionals subject to income tax in the category of non-trading profits (BNC) use cash accounting. It is also almost the only independent professionals who are authorized to use such a simple method, with the exception of micro-entrepreneurs who have very few accounting obligations.

Be aware, however, that if you are BNC and you wish, you can opt for commitment accounting. We will see later in this article that this can have advantages in certain cases.

Note: Some “small” companies in the BIC category (Industrial and Commercial Profits) and some companies subject to corporation tax are also entitled to use cash accounting under two conditions:

Benefit from the simplified real tax regime;

Not to exceed €818,000 in turnover excluding tax per year for commercial activities and €247,000 for services.

Commitment accounting in a nutshell

So what is the alternative for those who, for example, have a company, and for whom cash accounting is not allowed? This is commitment accounting. In this method, revenue and expenditure should be recognized on their date of commitment (date of issue of the invoice) and not on receipt of payment in the bank account. It is therefore a heavier accounting, which requires a more substantial investment, which we will only deal with briefly in this article so as not to mix things up for you.

Benefits of cash accounting

The advantages of this type of accounting are numerous and not insignificant:

Time saving

As you have seen in the previous paragraph, cash accounting is quicker to set up than its counterpart, accrual accounting. As long as you track your accounts regularly or use a solution like Indy that automatically retrieves your bank account information, that’s a big plus.

earning money

Whether you have an accountant or not , this time advantage will inevitably translate into financial savings for your business. This type of accounting will either allow your accountant to spend less time on your accounts, or if you do it yourself, to devote yourself to the heart of your activity and therefore to work for your customers/patients. Unless this saving is compensated by other elements, but we will come back to this in the part on the disadvantages.

Clearer accounts

As you will have understood, commitment accounting integrates invoices that have not yet been credited or debited from your bank account into your accounting. This therefore gives an image of your accounts which is sometimes not representative of your finances at the moment T. Cash accounting, based on the actual inflows and outflows of your bank account, gives you a snapshot of your financial health at desired time.

More informed decisions

As a direct consequence of the previous advantage, you can take strategic decisions by looking at your accounts with full knowledge of your financial health, provided you have a table of unpaid invoices. This will make it easier for you to make decisions for your business, such as buying expensive equipment or investing in advertising, for example.

Simplified classification of accounting documents

A godsend for your AGM and administrative phobics: just attach to your monthly bank statement the receipts for the entry and exit of money from your account (invoices issued by you or your suppliers) in chronological order.

Cash accounting: disadvantages

Unfortunately, cash accounting is not a perfect method and like everything, it has drawbacks. Here are a few :

The case of year-end debt

Perhaps the most annoying but also the most logical inconvenience: all your expenses undertaken at the end of the financial year and not settled cannot be recorded in your balance sheet , and will therefore not be deducted from your result.

For BIC entrepreneurs, don’t panic, everything is settled at the end of the financial year. But this brings an additional workload during the closing, which is not necessarily the time when we are most available.

More complicated tax management

As VAT declarations are calculated according to the dates of invoicing, it is often necessary to carry out extra-accounting calculations to declare it in good and due form.

Example: You invoiced a service of €1,000 to your client on April 28 and he pays it to you on May 20. Despite the fact that you had not yet collected the sum, you will have to pay the €200 of VAT collected to the administration for the month of April, the date of invoicing being taken as proof.

Indy’s advice: if you haven’t already done so, opt for the real simplified VAT regime, which allows you to make only one annual declaration with half-yearly installments. This will allow you to better control your cash flow and avoid unpleasant surprises, the installments being based on the VAT collected last year.

A follow-up of unpaid invoices to be done in parallel

No one wishes you this, but bills not paid on time can happen to anyone. And in the opposite direction, you may forget to pay a bill. In all cases, you need to keep a tracking table of invoices not paid by you or your customers/patients to clarify the discrepancies between your invoices issued or received and your bank account. An invoicing solution or cash accounting software, such as Indy, will help you see things more clearly, for example.

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