Basic VAT

VAT

VAT (Value added tax) is effectively a tax on sales and is
borne by the final user of the product or service.

If a company is VAT registered they can reclaim the VAT on
purchases is they have a VAT invoice for the item or service purchased. But they pay VAT on all sales made (if the goods or service) are subject to VAT.

This is a brief overview of VAT so you know the basics to be
able to do clients bookkeeping when they are VAT registered, if you wish to
study VAT further so you can give clients VAT advice and possibly increase your
fee levels we do have an additional module available.

Input VAT is VAT charged to your clients when they pay for
goods or services that are VATABLE

Output VAT is VAT charged by your client when he/she sells
goods or services that are VATABLE

Only VAT Registered businesses can charge VAT if an
individual or company is NOT VAT registered they CANNOT BY LAW
charge VAT.

The simple equation on VAT to decide how much VAT should be
paid or reclaimed is

When we do bookkeeping for a VAT registered business we need
to show the accounts NET of VAT.

So if we remember back when we looked at debits and credits
we remember that if we have a credit we need an equal value debit (or
combination of debits) this is an example of how the combination would work.
For a sale which would include Output VAT

Let’s assume we sold some goods for £240 including VAT (£200
+ VAT AT 20%) our scales need balancing like this

This is because the sale was worth £200 to the business but
the business collected £40 for HMRC in VAT so our sales account needs to show
the £200 credit to the business, the £40 VAT is a liability to the business
because it’s owed out and the £240 is an asset (either a petty cash receipt,
bank receipt or debtor).

Our T Accounts will be shown like this

And for a purchase including Input VAT

So now let’s assume we bought some goods for £240 including
VAT (£200 + VAT AT 20%) our scales need balancing like this.

This is because the purchase was worth £200 to the business
but the business paid £40 for HMRC in VAT so our purchases account needs to
show the £200 debit to the business, the £40 VAT is an asset to the business
because it’s owed to us and the £240 is an liability (either a petty cash
payment, bank payment or creditor).

Our T Accounts will be shown like this

More detailed VAT training is available in OUR VAT SECTION

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