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Cash versus Accrual basis

Normally, vendors account for VAT on the accrual basis. That is, the VAT falls to account on the date of the relevant invoice. If the vendor has uncollected debtor balances at any time, then the debtors book contains VAT that has often already been paid over to SARS by the vendor, but not yet collected from the debtor. The converse is true in respect of the vendor’s unpaid creditors, but since debtors balances almost invariably exceed creditors balances, the VAT tied up can cause severe cash flow difficulties.

Sole traders, partnerships and other unincorporated businesses whose members are natural persons and whose annual turnover is less than R2,5m may elect to account for VAT on the cash basis. Under this arrangement VAT is only accounted for when the cash corresponding to a transaction flows into or out of the business. Thus no VAT is tied up in debtors or creditors.

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