{m}.{s}.1Three VAT accounts

In our examples we have used one VAT account to record all our VAT figures. In practice, it is often clearer to keep three VAT accounts:

  • Input VAT is debited to the Input VAT account
  • Output VAT is credited to the Output VAT account
  • The VAT liability account will then be used to record the amount owing to (or from) the tax authorities

This means that we will be accumulating as separate balances the input VAT and output VAT figures required for the VAT return.

Input VAT
       
Input VAT    
       
       
Output VAT
       
    Output VAT
       
       
VAT Liability
       
       
       
       
[{m}.{s}a]

 

{m}.{s}.2Quarterly procedures

Step 1

Input VAT
Mth1 Input VAT x    
Mth1 Input VAT x    
       
       
Output VAT
    Mth1 Output VAT x
    Mth1 Output VAT x
       
       
VAT Liability
       
       
       
       

[{m}.{s}b]

The balances in the Input VAT and Output VAT accounts will be transferred periodically to the VAT Liability account. This could be done either monthly or quarterly.

If the transfers are carried out quarterly, the figures for input VAT and output VAT will accumulate in these accounts for the three months of the quarter.

 

Step 2

Input VAT
Mth1 Input VAT x    
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
       
Output VAT
    Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
       
VAT Liability
       
       
       
       
       
       
       

[{m}.{s}c]

At the end of the quarter, the balance in the Input VAT account will be the figure to be entered on the VAT return as input VAT. This balance is transferred to the VAT Liability account by journal entry at the end of the month.

 

Step 3

Input VAT
Mth1 Input VAT x Mth3 Transfer 2,000
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
  2,000   2,000
Output VAT
    Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
       
VAT Liability
Mth3 Input VAT 2,000    
       
       
       
       
       
       

[{m}.{s}d]

The Input VAT account has now been cleared. The input VAT for the next quarter will now start accumulating in the account.

Similarly, the balance in the Output VAT account will be the figure to be shown on the VAT return and will be transferred by journal entry to the VAT Liability account.

 

Step 4

Input VAT
Mth1 Input VAT x Mth3 Transfer 2,000
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
  2,000   2,000
Output VAT
Mth3 Transfer 3,250 Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
  3,250   3,250
VAT Liability
Mth3 Input VAT 2,000 Mth3 Output VAT 3,250
       
       
       
       
       
       

[{m}.{s}e]

We now have available, in the VAT Liability account, the VAT figures to enter on the VAT return.

VAT due on Sales 1 3,250
VAT claimed on Purchases 4 2,000
VAT to be paid 5  

Step 5

Input VAT
Mth1 Input VAT x Mth3 Transfer 2,000
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
  2,000   2,000
Output VAT
Mth3 Transfer 3,250 Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
  3,250   3,250
VAT Liability
Mth3 Input VAT 2,000 Mth3 Output VAT 3,250
Bal c/d 1,250    
  3,250   3,250
    Mth4 Bal b/d 1,250
       
       
       

[{m}.{s}f]

The balance now showing in the VAT Liability account is the amount to be paid to HM Revenue & Customs, as shown on the VAT return.

VAT due on Sales 1 3,250
VAT claimed on Purchases 4 2,000
VAT to be paid 5 1,250

Step 6

Input VAT
Mth1 Input VAT x Mth3 Transfer 2,000
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
  2,000   2,000
Output VAT
Mth3 Transfer 3,250 Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
  3,250   3,250
VAT Liability
Mth3 Input VAT 2,000 Mth3 Output VAT 3,250
Bal c/d 1,250    
  3,250   3,250
Mth4 Paid 1,250 Bal b/d 1,250
  1,250   1,250
       

[{m}.{s}g]

When the payment is made, during the following month, the balance in the VAT Liability account will be cleared.

 

{m}.{s}.3Variations

Step 1

Input VAT
Mth1 Input VAT x    
Mth1 Input VAT x    
Mth2 Input VAT x    
Mth2 Input VAT x    
Mth3 Input VAT x    
Mth3 Input VAT x    
       
Output VAT
    Mth1 Output VAT x
    Mth1 Output VAT x
    Mth2 Output VAT x
    Mth2 Output VAT x
    Mth3 Output VAT x
    Mth3 Output VAT x
       
VAT Liability
       
       
       
       
       
       
       

[{m}.{s}h]

Keeping three VAT accounts has the advantage of keeping separate figures that need to be accumulated for the VAT return. It is a much clearer system to use in practice.

 

Step 2

Input VAT
Mth1 Input VAT x Mth1 Transfer 700
Mth1 Input VAT x    
Mth2 Input VAT x Mth2 Transfer 600
Mth2 Input VAT x    
Mth3 Input VAT x Mth3 Transfer 700
Mth3 Input VAT x    
       
Output VAT
Mth1 Transfer 1,200 Mth1 Output VAT x
    Mth1 Output VAT x
Mth2 Transfer 900 Mth2 Output VAT x
    Mth2 Output VAT x
Mth3 Transfer 1,150 Mth3 Output VAT x
    Mth3 Output VAT x
       
VAT Liability
Mth1 Input VAT 700 Mth1 Output VAT 1,200
       
Mth2 Input VAT 600 Mth2 Output VAT 900
       
Mth3 Input VAT 700 Mth3 Output VAT 1,150
       
       

[{m}.{s}i]

Above we showed the transfer of input and output VAT being done at the end of the VAT quarter. These transfers could alternatively be done on a monthly basis.

 

Step 3

Input VAT
Mth1 Input VAT x Mth1 Transfer 700
Mth1 Input VAT x    
Mth2 Input VAT x Mth2 Transfer 600
Mth2 Input VAT x    
Mth3 Input VAT x Mth3 Transfer 700
Mth3 Input VAT x    
       
       
Output VAT
Mth1 Transfer 1,200 Mth1 Output VAT x
    Mth1 Output VAT x
Mth2 Transfer 900 Mth2 Output VAT x
    Mth2 Output VAT x
Mth3 Transfer 1,150 Mth3 Output VAT x
    Mth3 Output VAT x
       
       
VAT Liability
Mth1 Input VAT 700 Mth1 Output VAT 1,200
       
Mth2 Input VAT 600 Mth2 Output VAT 900
       
Mth3 Input VAT 700 Mth3 Output VAT 1,150
Bal c/d 1,250    
  3,250   3,250
    Mth4 Bal b/d 1,250

[{m}.{s}j]

In this case, the input and output Vat accounts are cleared each month. The amounts to be entered on the VAT return will be the sum of the three months' figures. The amount due to be paid will be the balance in the VAT Liability account at the end of the third month.

For quarterly VAT returns, either monthly or quarterly transfers may be appropriate, depending on the rest of the accounting system in operation. In some cases returns are completed monthly, in which case monthly transfers will be carried out.

 

{m}.{s}.4VAT accounts: Example

Open/Close{m}.{s}.Q1
Input VAT
Jun 10 Creditors108 Jun 30 Creditors 20
Jun 25 Creditors 12   
Jun 30 Bank 2    
      
Output VAT
Jun 30 C/N 10 Jun 30 Credit Sales 246
    Jun 30 Cash Sales 80
       
      
VAT Liability
Jun 28 Paid 1,520 Jun 1 Bal b/f 1,520
       
       
      

[{m}.{s}k]

 

The VAT Liability account was cleared by the payment during the month. We can now transfer the input and output figures for the month (Jun 28 Paid 1520).

Amounts of input VAT arise on credit invoices received and on making cash payments.

Note that while most of the entries in the Input VAT account are on the debit side, there will be occasional entries on the credit side - as we have seen above with the credit note, which went to reduce the input VAT previously recorded (Jun 30 Credtrs 20).

Amounts of output VAT arise when sales are made - these will be both credit sales and cash sales.

Again there will be occasional entries on the opposite side to the normal one (June 30 C/N 10).

You will now be asked to key in the journal entries required to make the transfers to the VAT Liability account.

Open/Close{m}.{s}.Q2
Open/Close{m}.{s}.Q3