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:
This means that we will be accumulating as separate balances the input VAT and output VAT figures required for the VAT return.
Input VAT | |||
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Input VAT | |||
Output VAT | |||
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Output VAT | |||
VAT Liability | |||
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[{m}.{s}b] |
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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. |
[{m}.{s}c] |
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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. |
[{m}.{s}d] |
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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. |
[{m}.{s}e] |
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We now have available, in the VAT Liability account, the VAT figures to enter on the VAT return. |
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[{m}.{s}f] |
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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. |
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[{m}.{s}g] |
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When the payment is made, during the following month, the balance in the VAT Liability account will be cleared. |
[{m}.{s}h] |
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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. |
[{m}.{s}i] |
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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. |
[{m}.{s}j] |
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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. |
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[{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.