{m}.{s}.1Accounting for VAT

To account for VAT we must open a new account in our nominal ledger - the VAT account.

When goods are sold the net amount will be credited to Sales. The extra charge to the customer (the VAT) will be credited to the VAT account. We have therefore created a liability - the VAT is due to be paid over to HM Revenue & Customs.

When invoices are received from suppliers the net amount will be debited to the appropriate expense account. The extra charge by the supplier (the VAT) will be debited to the VAT account. We have therefore reduced the liability of the amount owing to HM Revenue & Customs.

At the end of the quarter the balance in the VAT account will be the amount due to/from HM Revenue & Customs.

 

VAT
    
VAT on expenses VAT on sales
(INPUT VAT) (OUTPUT VAT)
    

[{m}.{s}a]

Credit balance in the account: we have a liability (creditor).
Output VAT exceeds input VAT: balance due to be paid over.

Debit balance in the account: we have an asset (debtor).
Input VAT exceeds output VAT: balance due to be recovered.

It is possible to keep two VAT accounts - Input VAT and Output VAT. The operation of the accounts is just the same as above but with the VAT account split into two parts. In this tutorial we will normally use the one account.

 

{m}.{s}.2VAT account: Example

We will now look at the recording of a series of transactions. In particular we will show the entries being made in the VAT account [{m}.{s}b].

The balance due to HM Revenue & Customs at 1 March is £1,025.

We will now look at the transactions for March and the journal entries to record them.

 

VAT
  Mar 1 Bal b/d1,025
    
    
    
    

[{m}.{s}b]

{m}.{s}.3VAT account example 1: Invoice received for goods

Transaction 1: An invoice is received for goods for resale:

———
INVOICE
 
 

————
————

Date:  10 Mar

Order No:——
 
    
 Invoice Number:
£
 
 Goods1,080 
 Net1,080 
  +VAT@ 10% 108 
 Gross1,188 
VAT No xxx xxxx xx
    
[{m}.{s}c]

 

 

 

[{m}.{s}d]

{m}.{s}.4VAT account example 2: Telephone bill received

Transaction 2: A telephone bill is received:

———
INVOICE
 
 

————
————

Date:  25 Mar

Order No:——
 
    
 Invoice Number:
£
 
 Rental & Calls120 
 Net120 
  + VAT @ 10% 12 
 Gross132 
VAT No xxx xxxx xx
    
[{m}.{s}e]

 

 

 

[{m}.{s}f]

{m}.{s}.5VAT account example 3: Payment to HM Revenue and Customs

A cheque for £1,025 for the VAT quarter December - February, is sent to HM Revenue & Customs on 28 March.

[{m}.{s}g]

 

 

 

[{m}.{s}h]

{m}.{s}.6VAT account example 4: Credit sales

Transaction 4: Credit sales for the month total:

Date Mar 31 Monthly credit sales
  Net VAT Gross
——— ——— ——— ———
——— ——— ——— ———
TOTAL 2,460 246 2,706
[{m}.{s}i]

 

 

 

[{m}.{s}j]

{m}.{s}.7VAT account example 5: Cash sales

Transaction 5: Cash sales for the month total:

Date Mar 31 Monthly cash sales
  Net VAT Gross
——— ——— ——— ———
——— ——— ——— ———
TOTAL 800 80 880
[{m}.{s}k]

 

 

 

[{m}.{s}l]

{m}.{s}.8VAT account example 6: Petrol paid

Transaction 6: On 31 March, a cheque for £22 is paid for petrol for the business van.


[{m}.{s}m]

 

 

 

[{m}.{s}n]

{m}.{s}.9VAT account: Balance

At 31 March we can calculate the balance in the account.

This balance is the net of:

Output VAT (246 + 80) = 326
less Input VAT (108 + 12 + 2) = 122
  204
   
[{m}.{s}o]

Once the entries have been made for April and May, the balance in the account will be the output VAT for the quarter less the input VAT i.e. the figure to be paid over to HM Revenue & Customs in June.

 

 

VAT
Mar 10 Creditors108Mar 1 Bal b/d1,025
Mar 25 Creditors12Mar 31 Debtors246
Mar 28 Bank1,025Mar 31 Bank80
Mar 31 Bank2  
Mar 31 Bal c/d204  
 1,351 1,351
  Apr 1 Bal b/d204

[{m}.{s}p]