Accounting for VAT

VAT, Value Added Tax, is the consumption tax that will be calculated every time the goods or services are sold within the supply chain. The seller needs to charge VAT from their customer and paid the amount to the tax authority. At the month-end, the seller needs to calculate the amount which requires to pay to the tax authority. It is the total VAT charged to the customer during the month less VAT which the seller has paid to the previous supplier.

The aim of VAT is to charge tax on the consumption of people on any goods or service except the cost related to commercial which is allowed to claim at before settlement. It is the indirect tax which not collect directly from the person who pays tax but impost on the company who provide service or product. The tax will transfer to the final consumer by the increasing of product’s price.

VAT needs to charge every time the goods or service is sold from one seller to another seller. However, they only paid the different amount which VAT Output over VAT Input. If the VAT Input is higher, the company must carry it forward until all goods are sold. The final consumer is the person who bears all the VAT within the supply chain.

As we can see, the enterprise will be able to claim back the VAT to the supplier and net off with VAT charge to customers. The company usually buy the product at a lower price and resell at a higher price, so the VAT charged to customers will be higher than the VAT payment to the supplier.

Accounting For VAT

As mention above, we need to charge our customers and we also pay VAT to our supplier as well. VAT that we charged or paid is not the revenue or expense but just the asset and liability account which will be settled in the future.

VAT Input: is the amount of VAT which the company pays when buying goods or services from suppliers. It is the amount which we need to claim back from the government, however, due to the amount is less than VAT Out, we simply deduct it from the VAT Output. It is not cost of product or service.

VAT Output: is the amount of VAT which the company charge to the customer on behalf of the government. It is the liability amount that must be paid to the government on a monthly basis. It is not our revenue.

When we purchase the goods, the VAT that we paid will be recorded as the asset (VAT receivable or VAT Input). On the other hand, the VAT that we charge to customer will be recorded as a liability (VAT Payable or VAT Output).

VAT Settlement

The company will require to calculate the VAT pay

• If the VAT Output > VAT Input: we must pay the difference and deduct the balance to zero. We can’t carry forward the VAT Output balance in the balance sheet.
• If the VAT Output < VAT Input: we must carry forward in the balance sheet to calculate in next month when we make more sale.

Example,

Company ABC purchases goods from the whole sellers on 01 June 202X amount $ 11,000, it includes VAT $1,000. During the month, the company sold some of the goods for 22,000, it includes VAT $ 2,000. We assume the VAT rate is 10%. Please prepare journal entries for VAT during purchase and sale.

Purchase:

Account	Debit	Credit
Inventory	10,000
VAT Receivable	1,000
Cash		11,000

Sale:

Account	Debit	Credit
Cash/AR	22,000
VAT Payable		2,000
Sale Income		20,000

At month-end, company needs to pay VAT to tax authority. During the month, we have charge $ 2,000 from customers however, we allow to rebate the VAT we paid during purchasing so we only 1,000 ($ 2,000 – $ 1,000).

Account	Debit	Credit
VAT Payable	2,000
VAT Receivable		1,000
Cash		1,000

If the VAT receivable is greater than VAT payable, the company needs to carry the amount to next month and it will keep deducting until all goods are sold.

VAT Vs Sale Tax

	Sale Tax	Value Add Tax
Collected	Sale tax only collects on the final sale of the supply chain.	VAT is collected on every sale made during the supply chain.
Who pay the tax	The final consumer pays the sale tax.	All the purchasers pay the VAT however, they are allowed to rebate later. Final consumer is responsible for all VAT.
Invoice	Seller requires to separate the sale tax from selling price.	Seller requires to separate VAT amount including the VAT number.
Purchase to resell	The buyer will issue a certificate to the seller to prove that the goods are purchased for resell.	The buyer needs to pay VAT and claim back at the end of the month.