Accounting for VAT Flashcards
How is VAT recorded?
VAT is recorded in the VAT account (in place of the office cash account)
If you are charging VAT, you will CREDIT the VAT account.
If you are paying VAT, you will DEBIT it.
When is VAT charged (i) generally; and (ii) on a solicitor’s bill of costs?
VAT is generally chargeable at the point of supply, i.e. when the goods or services are supplied to the customer.
For solicitors and their clients, the point of supply is when an invoice is issued.
At what point can a solicitor make ledger entries relating to VAT on his bill of costs?
When the VAT invoice has been issued.
What are the relevant entries when issuing a bill of costs and the VAT chargeable thereon?
Bill of costs: (i) DR office ledger; (ii) CR profit costs
VAT: (i) DR office ledger with VAT figure; (ii) CR VAT account (VAT figure)
What are the relevant entries when there is an abatement of costs and a consequent reduction in VAT Payable?
Abatement of costs: (i) CR office ledger; (ii) DR profit costs)
VAT: (i) CR office ledger with VAT figure; (ii) DR VAT account
What is input VAT? What kinds of disbursements are typically VAT-exempt?
VAT incurred on purchases by a solicitor (i.e., charged by the supplier of a disbursement). Disbursements payable to court or government authorities.
What is the key difference between incurring disbursements on behalf of the client, and incurring disbursements as the client’s agent?
(i) Incurring on behalf = principal; i.e., you pay VAT to the supplier, then separately charge VAT to the client
(ii) Incurring as agent = client pays VAT directly; i.e., VAT comes out of client account as part of disbursements
What are the relevant entries when VAT is charged on a disbursement incurred as agent for the client?
No need to account for VAT since client is liable as principal for both the disbursement and VAT. So:
- DR client ledger;
- CR client cash
What are the relevant entries when VAT is charged on a disbursement incurred on behalf of the client?
Must account as principal.
- Paying lump sum of disbursement: (i) DR office ledger; (ii) CR office cash
- Record VAT on disbursement: (i) DR VAT account; (ii) CR office ledger
- Charging the client for disbursement and VAT:
(i) VAT = DR office ledger + CR VAT Account;
(ii) disbursement = DR office cash + CR office ledger
When can a solicitor recover VAT on a bad debt?
If a debt is more than 6 months old when it is written off
How do you record (i) writing off a bad debt; and (ii) the VAT on that debt?
(i) Amount of debt: CR office ledger; DR bad and doubtful debts account
(ii) VAT amount: CR office ledger; DR BAT account
PROPERTY TRANSACTION FINANCIAL STATEMENT
Where to put (i) VAT-exclusive and (ii) VAT-inclusive or exempt amounts?
(i) VAT-exclusive items in left column, with VAT as separate line item
(ii) VAT-inclusive or exempt items in middle column
PROPERTY TRANSACTION FINANCIAL STATEMENT
When do you need to display VAT as a separate line item?
Only when the solicitor (i) has charged VAT on his profit costs to the client; or (ii) has incurred VAT in disbursements as principal on behalf of the client (if incurred as agent, no need - just put lump sum of disbursement including VAT)
PROPERTY TRANSACTION FINANCIAL STATEMENT
Treatment of VAT on lender’s legal fees?
Fees for acting for the lender always appear as a VAT-inclusive amount on a financial statement, regardless of whether the firm has a separate client ledger for the lender or not
What are the relevant entries when charging VAT on costs for your lender-client where there is a separate ledger for the lender?
- Bill lender: DR office ledger/CR profit costs (for profit costs only)
- Charge VAT: CR VAT account/DR office ledger for lender client (for VAT only)
- Transfer liability to buyer: CR office ledger for lender-client/DR office ledger for buyer-client (lump sum)
