Revision:A level accounts module 1 - vat and the double entry system - The Student Room

VAT and the double entry system

So far, all our double entry transactions have assumed that there is no VAT to be accounted for. However, we now need to adjust our adjustments to take VAT into account. When we buy or sell goods we know part of the selling price will include VAT (assuming that the firm is registered for VAT). This amount will need to be separated out from the actual net invoice total on both purchases and sales totals.

Example 1

On May 8 2000, we sell goods on credit to A Westwood for £200, with VAT on this sale at £35. The total invoice for the sale will be £235. The entry in the sales daybook would appear as follows:


Notice how the net and gross totals for the invoice (with and without VAT) are listed separately. This is important, as we will need both totals to make entries in the ledger accounts.

Example 2

Following on with the same example, on May 15 2000 we purchase £100 of goods from C Stringer. The VAT on this purchase would be £17.50. The entry in the purchases daybook would appear as follows:


The general rules for entries for VAT on sales and purchases can be formulated form the above two examples. These will be as follows:


VAT and returns

When dealing with returns, both inwards and outwards, then we cannot subject these to our VAT calculations. It would be unfair to have to VAT on goods sold that we actually returned to us by customers. Similarly, we cannot reclaim VAT on goods purchased that we end up returning to the original supplier.

If these examples were the only relevant transactions that had taken place during the month then we could balance off the VAT account at the end of the month to see how much VAT was due. This is done below:


The credit balance indicates that the firm is liable for VAT of the amount £12.25. This is normally settled by a bank or cash payment. If the balance had been a debit balance then the firm could claim for a refund.

However, because this is not normal, it is more likely that the firm would simply wait until the balance had 'slipped back' into credit.

VAT is not an expense. It is simply a tax payable. The double entry needed to clear the amount owing would be from either cash account or bank account. In our example this would look as follows:


This gives us a simple way of memorising whether or not we owe VAT or are owed VAT. A credit entry in the cashbook implies a payment had been made. Therefore the debit entry in the VAT account from the cashbook must be there to clear the amount owing.

Until the amount has been paid, the VAT due should also appear as a current liability on the balance sheet (or as a current asset if it is a debit balance).

VAT and fixed assets

VAT is payable on expenditure relating to fixed assets purchases as well as other expenses related to the running of the business. Some firms will be able to reclaim the VAT paid on fixed asset purchases by offsetting it against the VAT payable on sales, in the same way that VAT paid on purchases is used.

For example, if a firm buys a machine for £5,000 and the VAT included amounted to £800, then the firm would only enter the net value of the machine in the assets account (i.e. Debit machinery £4,200) and the VAT would be entered in the account (Debit VAT £800).

If a firm cannot reclaim VAT on these items that the full value of the purchase will be entered into the asset account.


Construct VAT account from the following information:

  1. Sales for the month were £1,976 which included VAT of £350.
  2. Purchases for the month were £1,666 that included VAT of £250.
  3. Returns inwards for the month were £800 including VAT of £140.
  4. Returns outwards for the month were £588 including VAT of £200.


Construct extracts from the sales, purchases and both returns journals for the month of May 2001 and transfer the totals for the month to the VAT Account.

In each case VAT will need adding to the appropriate transaction and is set at 17.5%.