Cash accounting at your Hungarian company

What is cash accounting in Hungary?

Cash accounting (“pénzforgalmi elszámolás”) is a special method for reporting and paying VAT at small businesses in Hungary. While VAT subject companies usually report and pay VAT based on the delivery date of invoices, cash accounting allows them to do so based on the actual payment date. The main benefit of cash accounting is that this way companies do not have to pay VAT after invoices that have not yet been paid, and liquidity will not be unduly affected. At the same time, choosing cash accounting comes with several disadvantages that the benefits might not outweigh. As a result, business owners must carefully consider if it is worth introducing this accounting method at their Hungarian company.

Is your company eligible for cash accounting?

Cash accounting is available only to small businesses under the following conditions:

• The business is subject to VAT.
• The business is considered an SME by Hungarian law, meaning that it must have fewer than 250 employees, a yearly balance sheet total below EUR 43 million, and yearly revenues below EUR 50 million.
• The yearly net revenue of the business was below HUF 125 million (ca. EUR 330,000) last year and this year, or it is expected to remain below it in the first year for new companies.
• The company is not undergoing bankruptcy or windup procedures.

Cash accounting may be chosen upon company setup, or if introduced later, until December 31 of each year, so it will be applicable to the following year. From then on, each invoice must have the phrase “pénzforgalmi elszámolás” indicated on it.

A business may continue to apply cash accounting as long as it wants, or until one of the following things happens:

• The company exceeds the above limits in two consecutive years.
• Bankruptcy, windup, or forced liquidation procedure is initiated against it.

Benefits of cash accounting in Hungary

The main benefit of cash accounting is that it removes needless strain from the cash-flow of companies. Under regular VAT accounting, VAT becomes due when an invoice is issued. This means that if you issue an invoice to a customer, you must pay its VAT content to the Treasury by the next VAT due date (day 20 of the following month). You have this obligation even if the invoice is not settled by then. Then the missing VAT content needs to be covered by funds from other sources.

In sectors where customers are prone to late payment or where long payment deadlines are typical (up to 40-90 days), paying VAT before receiving compensation might pose risks to the liquidity of companies, especially small or new businesses. The option for choosing cash accounting can alleviate this strain by allowing companies to pay VAT only after their invoices have been settled.

Disadvantages of cash accounting

The most important disadvantage of cash accounting is that it affects not only VAT payable, but also VAT deductible. Under regular accounting, the VAT content of incoming and outgoing invoices can be set against each other. Purchases can be planned to match sales, reducing the VAT payable. However, if VAT is payable only upon the settlement of an invoice, the VAT content of a purchase might not be set against it in time. As a result, while cash accounting reduces predictability in general, it can also have an impact on the timing of purchases.

Cash accounting might also affect customers negatively. Business customers will not be able to deduct VAT from invoices they receive from you before they settle those, which will affect their own cash-flow planning. In such cases, sometimes the impact is so big that some customers choose not order from sellers who use cash accounting.

Cash accounting also requires additional documentation, since the date of settlement needs to be reported as well as the date of delivery. This, of course, can largely be automated thanks to modern invoicing tools, but not completely, incurring additional costs. Additional expertise is also required for watching revenue limits, especially since sales may or may not count towards them, depending on the type of product and the location of the customer.

Advantages and disadvantages

	Regular accounting	Cash accounting
VAT due	For the month of invoice delivery date	For the month of payment date
VAT deductible	For the month of invoice delivery date	For the month of payment date
Effect on purchases	VAT content of purchases is deductible immediately	May affect the timing of purchases
Effect on customers	Customers can deduct VAT immediately	Customers can deduct VAT only upon payment
Documentation	Regular reporting	Additional reporting (for payment date and revenue limits)

Should you choose cash accounting for your Hungarian company?

While cash accounting is available to all small businesses that meet the above criteria, the practice is not all that common among businesses. The main reason for this is that cash accounting affects not only the business itself, but also its customers. VAT and its deductibility play a major role in cash-flow planning, and while cash accounting increases liquidity, it also reduces predictability, which has several consequences. These consequences are often considered to outweigh the benefits, so most companies will continue to apply regular accounting.

Helpers Finance offers accounting and bookkeeping services to small and medium sized companies, with special expertise in working with foreign owners. If you want to make the most of your Hungarian company, let our experts assist your financial decision making with precise accounting and extensive experience.

Frequently Asked Questions

What are the main advantages of cash accounting?

By allowing your business to pay VAT only when invoices are settled, cash accounting relieves the strain on cash-flow caused by late payments and distant due dates.

What are the main disadvantages of cash accounting?

• VAT deduction is possible only for paid invoices.
• This reduces predictability both at your company and at your business customer.
• This, in turn, runs the risk of losing customers.
• Cash accounting also increases administration.

Why don’t customers like buying from sellers using cash accounting?

Customers cannot deduct the VAT content of invoices issued by sellers using cash accounting upon receipt of the invoice, only upon payment. This can negatively affect their cash-flow.

Why cannot customers deduct VAT from invoices issued by sellers using cash accounting?

This is because VAT accounts for one fifth of government income in Hungary, so it is essential that government income is not hurt by late VAT payments. If one party is allowed late payment, it is essential that connected parties cannot make claims against that payment until it is fulfilled.

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