CHAPTER 3B - VAT

Question 1

What is Output tax and how is it recorded?

Answer 1

The VAT charged to a customer

Credit the sales account with the net value

Credit the VAT account with VAT value

Debit debtor account with gross value

Question 2

What is Input tax and how is it recorded?

Answer 2

The VAT charged to us by a supplier

Debit the Purchases, Expense or Asset account with the net value

Debit the VAT account with the VAT value

Credit the creditor with the full value

Question 3

Explain the implications of a total credit and total debit balance in the VAT account

Answer 3

Debit balance

• We’ve paid (through purchasing) more VAT than we’ve charged (through sales)
• HMRC owes us the balance
• Treated as a current asset in balance sheet

Credit Balance

• We’ve charged (through sales) more VAT than we’ve paid (through purchases)
• We owe HMRC
• Treated as a current liability - must be paid within 3 months

Question 4

How do we record VAT transactions for Sales and Purchases returns?

Answer 4

Sales Returns (returns inwards)

Debit Sales Returns account with net value

Debit VAT account with VAT value

Credit Debtor account with gross value

Purchases Returns (returns outwards)

Credit Purchases Returns, asset or expense account with net

Credit VAT account with VAT

Debit creditor account with total value

Question 5

List some useful equations for calculating net, VAT and gross

Answer 5

gross / 6 = VAT

VAT x 6 = gross

net x 1.2 = gross

gross / 1.2 = net