Chapter 10 - VAT

Question 1

1. What is input tax?
2. What is output tax?

Answer 1

1. Tax paid on purchase which can be reclaimed
2. Tax charged on sales

Question 2

What money is paid or reclaimed from HMRC?

Answer 2

• Output tax > input tax → a business pays excess to HMRC
• Input > output → The business reclaims excess from HMRC (non taxable items e.g kids clothing)

Question 3

Define..

1. Net selling price?
2. Gross selling price?

Answer 3

Assume VAT = 20%

1. Price excluding VAT → (100%)
2. Price inclusing VAT → (120%)

Question 4

VAT registered businesses have a VAT ledger accout. Give the double entries for…

1. VAT on sales
2. VAT on purchases

Answer 4

1. VAT on sales

• Dr recivables control account → _{VAT inclusive price}
• Cr sales → _{VAT exclusive price}
• Cr VAT account → _{<em>VAT </em>}(liability as VAT earnt owned to HMRC)

2. VAT on purchase

• Dr purchases → _{<em>VAT exclise price</em>}
• Dr VAT account → _VAT (recievable as HMRC owe it back)
• Cr payables control account → _{VAT inclusive price}

Question 5

Give the layout of a VAT control account

Answer 5

Question 6

What is blocked input VAT?

Answer 6

• VAT that can not be reclaimes.
• e.g Purchase of cars / Client entertaining expenses
• VAT isdebeted to NCA / expense

Question 7

What happend to VAT when discounts are applied?

Answer 7

• VAT is calculated on amount paid so for ealy payment discount we calculate VAT on full price.
• If customer pays within discount period the VAT needs adjusting

Question 8

• Orla sells goods to keely, charging a VAT exclusive price of £240.
• She offers a discont of 5% if payment is recieved within 7 days.
• How should this be reflected in accounts?

Answer 8

Question 9

How is VAT recorded in books of original entry?

Answer 9

• A coloumn for VAT is written on the right within sales, purchases and cash day books.
• No VAT impacts credit payments or reciepts as it has alreasy been recorded at the point of sale/purchase.