Accounting For Vat
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
The prime entries for VAT
The business needs a place to make the prime entries for VAT. This can simply be an extra column or so in the day books (see examples on page 158). In the extra column you separately record the VAT content of purchase invoices (inputs) and of sales invoices (outputs). The petty cash book, too, can be used to record VAT in the same way; in a special column you can enter the VAT charged on petrol and other small items.
We have already come across this extra column in the day books and the petty cash book earlier on (page 34). From there it is just a matter of posting the extra column to the ledger (i.e. a ‘VAT account’ in the ledger) along with others, i.e. the individual, analysed ‘Net amount’ columns:
- you post the VAT on purchases to the debit of the VAT account
- you post the VAT on sales to the credit of the VAT account.
You then total up and balance the VAT account, just like any other account in the ledger. The balance represents the tax payable or repayable, depending on whether the firm has collected in more than it has paid out.
Step by step
We have already seen how to record VAT step by step in the sections on books of prime entry and ledger posting (pages 9 to 49). All tax regardless of the rate, goes into the same column. The net amounts (i.e. net of VAT) in each transaction must be analysed in terms of the tax rate to which they relate. Even zero-rated and exempt goods or services must be treated like this.
You could in theory need any number of net columns in the books of prime entry, but in practice you will probably not need more than three or four.
At the end of every VAT collection period a VAT return must be filled in. The values of net VAT collected (VAT on sales less VAT on sales returns) and the net VAT paid on purchases and expenses must be entered in the appropriate boxes. The latter is deducted from the former and the difference entered as VAT payable or reclaimable this period. The net sales and net purchases also have to be entered in the appropriate boxes on the form.
Special arrangements for retailers
It would be a virtually impossible task for some shops to record every individual sale. Take a sweet shop, for example. It may well sell hundreds of packets of sweets or bars of chocolate a day. The proprietor simply wouldn’t be able to record each item individually, so special schemes have been devised for retailers, which excuse them from having to keep itemised VAT records on sales. There are several such schemes, each with their own special return forms, and the retailer chooses one most suited to his or her kind of business.