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    I'm trying to do a T-account for some data with VAT. Here's the data given:

    Revenue (net, all standard rated) £500,000
    Purchases (net, all standard rated) (£120,000)
    Gross Profit £380,000

    Expenses (see Note) (£280,000)

    Net Profit £100,000

    Note: Expenses:
    Wages and Salaries (exempt from VAT) £162,000
    Entertainment Expenditure (£40,000 + irrecoverable VAT £8,000) £48,000
    Other (net, all standard rated) £70,000

    In respect of VAT, payments of £5k, £15k, £20k have been made throughout the year to HMRC and a repayment of £12k was received.

    The balance owed by HMRC from the previous period is £15k

    The original question is workout the balance for VAT on the statement of financial position on 30th May 20X9 with a hint given: use a T-account.

    As for what goes on the DR and CR sides of the T-account, I understand that input tax goes on the DR side as VAT is a liability, and so input tax is a decrease in liabilities as it can be claimed back from HMRC.

    Therefore output tax goes on the CR side of the T-account

    Balance b.d £15k
    Input tax from purchases (£120k * 20%) = £24k
    Input tax on other expenses (£70k ^ 20%) = £14k
    Amount paid to HMRC throughout year (£5k + £15k + £20k) £40k
    Amount paid back by HMRC £12k

    Output Tax on revenue (£500k * 20%) £100k
    Irrecoverable VAT from entertainment expenditure: £8k

    The bold underlined entries are, according to the solution, incorrect. The £12k received from HMRC should be on the CR side and the irrecoverable VAT from entertainment expenditure does not appear on the T-account at all.

    Could someone please explain why this is?


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    Re the £12k, consider the complete double entry - ie cash received (dr bank), other entry = equal & opposite entry, cr VAT AC. Re vat on Ents, this is disallowable & thus not entered. Not all VAT paid to a supplier is claimable, such as VAT on (non pool) cars
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