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Hi Karen
Hope the below notes help.
Kind regards
Brian
The VAT due from customers as a result of the firm’s sales of goods/services is called the trader’s output tax i.e. the tax due on their outputs. This tax is due to HM Revenue & Customs.
The trader must calculate all of the output tax on goods and services made by them during the last VAT accounting period (usually quarterly). The accounts must be kept in such a way as to show the output tax separately. It is essential that all of the output tax charged during the period be reflected in the accounts, for example: -
Jan 1 – sales of £200 + VAT to B Brown
Jan 4 – sales of £400 + VAT to I Smith
B BROWN ACCOUNT
Debit
Jan 1 Sales 240
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Credit
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I SMITH ACCOUNT
Debit
Jan 4 Sales 480
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Credit
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SALES ACCOUNT
Debit
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Credit
Jan 1 J Brown 200
Jan 4 I Smith 400
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VAT ACCOUNT
Debit
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Credit
Jan 1 J Brown 40
Jan 4 I Smith 80
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It can be seen that: -
a) the balances on the customers’ (debtors) accounts record the amount due from them ie including VAT
b) the sales are kept exclusive of VAT
c) The VAT account shows the amount due to HM Revenue & Customs.
TB (extract) at this point is:
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Account
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Debit
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Credit
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£
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£
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B Brown
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240
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I Smith
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480
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Sales
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600
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VAT
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120
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If, in any VAT period, the Input tax (VAT on the purchases of goods/services incurred by the business), exceeds the Output tax the VAT account will be in the TB as a debit balance. In this instance,the business will subsequently receive a repayment from HM Revenue & Customs. Double entry then will be debit bank and credit VAT a/c to bring its balance to zero.
On the other hand, if the Output tax exceeds the Input tax for the VAT period the VAT account will be in the TB as a credit balance. In this instance, the trader will subsequently submit a payment to HMRC for the excess of the Output tax over Input tax. Double entry then will be credit bank and debit VAT account to bring the valance on it to zero.
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