Chapter 3: VAT and Discounts Flashcards
Where would a registered business charge output tax?
On its sales
Who would a registered business pay out put tax over to?
the tax authority once any recoverable in put tax is deduced.
What will a register business recover on its purchases?
Input Tax
Name the three main types of discounts?
Trade discount
Bulk discounts
Prompt payment discounts
What is a trade discount given?
At point of sale to reduce list price
When are bulk discounts offered?
On orders over a certain quality/ or amount
Why do businesses use prompt payment discounts?
Encourages customers to pay quickly
When is VAT charged?
On purchases and sales after trade and bulk discounts.
What happens when a prompt payment discount taken?
A credit note is issued to take account of the lower VAT to be paid.
When must a business register for VAT?
If the sales of a business exceed a certain amount for a year
When must a registered business charge VAT?
On sales (output tax) Suffer VAT on purchase (input tax)
What is a Trade Discount?
A trade discount is a percentage reduction from the price of goods or services
What is the list price?
The seller’s standard price before any discounts have been deducted
Why may a trade discount be offered?
because the customer is regular and valued
As an incentive to a new customer or buyer
The customer is in the same trade as the supplier and the supplier wants to develop good relations.
What is a bulk discount?
A percentage reduction from the list price of goods or services offered because the customer’s order is large.
Why may a business offer a bulk discount?
To encourage customers to place large orders, so costs of administration and delivery are reduced.
What is a prompt payment discount?
A percentage discount of the gross total that is offered to a customer to encourage them to pay the invoice earlier.
How does a prompt payment discount differ from a trade or bulk discount?
It is up to the customer to decide whether or not to,accept the offer of the discount
The discount is not shown as a deduction from the invoice total.
It is noted in the terms section on the invoice.
What are three steps for preparing a credit not for a prompt payment discount?
Step 1 Identify or calculate the PPD taken by the customer
Step 2 Calculate the VAT on the PPD taken
Step 3 Calculate the net amount of the discount
What is the discounts allowed day book?
A book of prime entry used to record prompt payment discounts taken by credit customers.
What is meant by discount allowed?
The business has allowed the customer to take the discount
What is meant by discount received?
The business has received the discount from the supplier
Where are Trade and bulk discounts shown?
On the invoice as deductions before arriving at the net total.
