VAT and Discounts Flashcards
What does VAT stand for?
Value added tax
What is the standard rate of VAT?
20%
What is output tax?
When a business charges VAT on sales
What is input tax?
When a business purchases something they will suffer VAT tax
How do you calculate VAT on the net total?
VAT = Net/5
or
VAT = Net x 0.2
How do you calculate the VAT from the gross amount?
VAT = gross/6
or
VAT = gross x 20/120
How do you work out the Gross and net if only given the VAT
VAT divided by 20
x 120 = gross
x 100 = net
What is a trade discount?
Trade discount is a percentage reduction from the list price given to loyal or new customers. The discount will be shown on the invoice as a deduction.
Deducted off the net total
What is a bulk discount?
A bulk discount is a percentage reduction from the list price of goods or services however offered only to orders exceeding a large amount. Shown on the inovice.
If a customer is given a trade and a bulk discount what happens?
- Calculate the trade discount
- Then calculate the bulk discount.
What is a prompt payment discount? (PPD)
A percentage discount of the GROSS total offered to a customer that pays the invoice earlier. Customer can decided whether they want to take up this offer.
Why is a credit note issued if the prompt payment discount is taken?
HMRC requires the business to raise a credit note to the customer showing the discount has been taken.
How to calculate the Net, VAT and Total on the credit note? Use £240 gross as an example and a ppd of 2%
240 x 0.02 = 4.80
4.80 = gross amount
4.80/6 = 0.8
4.80 - 0.8 = 4
When the customer takes upon a ppd what is recorded and where?
If a customer takes a ppd then the business must issue the customer with a credit note to show the discount taken and the related VAT.
these credit notes are recorded in the discounts allowed day book.
In cases where the business itself chooses to take a ppd what would be recorded and where?
The supplier must issue the business a credit note showing the discount taken and the related VAT. These credit notes are recorded in the discounts received day book.
If the customer takes a PPD how would you calculate the net gross and VAT to go onto the credit note?
Use goods with a net total of £368.00 with a 3% ppd as an example
1) You would take the NET amount - £368.00
2) Work out the VAT - 368 x 20% = 73.60
3) Add this value onto the NET - 368 + 73.60 = 441.60
4) Take the gross amount and work out the ppd - 441.60 x 3% = 13.25
5) This value is now the GROSS value of the ppd.
6) work out the VAT and NET from the gross value of 13.25 - 13.25/6 = 2.21
