VAT and Discounts

Question 1

What does VAT stand for?

Answer 1

Value added tax

Question 2

What is the standard rate of VAT?

Answer 2

20%

Question 3

What is output tax?

Answer 3

When a business charges VAT on sales

Question 4

What is input tax?

Answer 4

When a business purchases something they will suffer VAT tax

Question 5

How do you calculate VAT on the net total?

Answer 5

VAT = Net/5
or
VAT = Net x 0.2

Question 6

How do you calculate the VAT from the gross amount?

Answer 6

VAT = gross/6
or
VAT = gross x 20/120

Question 7

How do you work out the Gross and net if only given the VAT

Answer 7

VAT divided by 20
x 120 = gross
x 100 = net

Question 8

What is a trade discount?

Answer 8

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

Question 9

What is a bulk discount?

Answer 9

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.

Question 10

If a customer is given a trade and a bulk discount what happens?

Answer 10

1. Calculate the trade discount
2. Then calculate the bulk discount.

Question 11

What is a prompt payment discount? (PPD)

Answer 11

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.

Question 12

Why is a credit note issued if the prompt payment discount is taken?

Answer 12

HMRC requires the business to raise a credit note to the customer showing the discount has been taken.

Question 13

How to calculate the Net, VAT and Total on the credit note? Use £240 gross as an example and a ppd of 2%

Answer 13

240 x 0.02 = 4.80
4.80 = gross amount
4.80/6 = 0.8
4.80 - 0.8 = 4

Question 14

When the customer takes upon a ppd what is recorded and where?

Answer 14

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.

Question 15

In cases where the business itself chooses to take a ppd what would be recorded and where?

Answer 15

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.

Question 16

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

Answer 16

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