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When using software to prepare general ledgers, a VAT code is attached to each transaction to tell the software how much VAT to record and to what general ledger code it should be sent.  VAT is recorded in a VAT control account.  All the debits and credits accumulate in the VAT control account and the balance is the amount owing to or receivable from HMRC.

For example, a sales invoice of £100 is charged to a customer.  VAT of 17.5% is raised.  The total invoiced amount is £117.50.  To record this transaction, post a credit of £100 to sales in the Income Statement, post a credit of £17.50 to the VAT control account in the balance sheet, and post a debit of £117.50 to the customer control account. 

A supplier invoice is processed similarly.  The net amount of £70 attracts VAT of £12.25 at 17.5% and you are invoiced £82.25.  To record this transaction, post a debit of £70 to expenses in the Income Statement, post a debit of £12.25 to the VAT control account and a credit of £82.25 to the supplier control account.

The VAT control account now contains a credit of £17.50, a debit of £12.25 and a final credit balance of £5.25.  This is the amount due to HMRC that must agree to the VAT return and payment. Once the payment is made, a debit is posted to the VAT control account and a credit is posted to the bank control account.  No VAT is recorded when posting payments and receipts of VAT and the Income Statement is not affected. The only amounts in the income statement are the net sale of £100 and the net expense of £70, giving you a profit of £30.

Some companies use two VAT control accounts for convenience. As soon as month end is finalised, the VAT control account balance is transferred to the second control account. It waits there to be netted off against the HMRC payment or receipt. As soon as the payment or receipt is posted to the second control account, the balance should automatically become zero.

The first VAT control account therefore contains the entries relating to the new VAT period to be finalised.

Tax box reports

Software like Pastel Accounting produces a tax box report containing all the VAT entries for which a tax code was generated on initial capturing of transactions. Output VAT is VAT on sales and other income, and Input VAT is VAT on expenses and other payments.

Any direct entries to the VAT control account are usually not included in the tax box report.  Examples are bank payments, bank receipts and general journal entries for which no tax codes are entered. If the VAT control account balance does not agree to the net payable or receivable VAT on the tax box report, this is usually because these entries have been excluded from the report but included in the general ledger balance.

The tax box report groups types of transactions together to simplify completion of the VAT return.  They are also used by HMRC auditors to audit VAT returns.  Each entry on the VAT return should reconcile back to the tax box report. For example, gross sales and output VAT from which credit notes and input VAT thereon have been deducted should agree to sales and output VAT on the VAT return.

To reconcile differences between the tax box report and the general ledger, it can be useful to export the general ledger to a spreadsheet and separate the types of entries into separate columns. The column totals can be compared to the entry type totals on the tax box report to identify where differences arise. Compare the detail on the report and spreadsheet for those entry types (for example standard rated VAT on sales invoices) and list them to agree the two reports.  If errors have occurred on the general ledger, entries may need to be reversed.

Spreadsheets

List sales and purchases showing VAT in a separate column. Calculate the balance of payments due on sales and claims due on expenses. Agree the closing balance of the VAT control account to the VAT return (Dr net repayment due or Cr net payment due)


Expenses: Record the net amount of the invoice (before VAT) in the profit and loss expense account (debit), the VAT in the balance sheet VAT control account(debit), and the total in trade creditors(credit).


Sales: Record the net amount of the invoice (before VAT) in the profit and loss income account (credit), the VAT in the balance sheet VAT control account (credit), and the total in trade debtors (debit).


VAT: Record the payment of VAT as a debit in the VAT control account (balance sheet); Record a VAT receipt as a credit in the VAT control account. Calculate the balance as the difference between total debits and credits.

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Gayle  - Owner   |196.25.255.xxx |2011-01-18 03:07:17
Thank you for your explaination, I have been doing my own bookkeeping for 5
years and have on numerous occasions asked my Auditors how come I have an amount
always at the end of the returns remittance, there reply was not to worry they
will sort it out at the end of the year. I have taught myself bookkeeping, and
do not fully understand all of it, but I feel so far I have done a good job. I
have fired those Auditors and have a new one, who was impressed with my work and
has offered me help. Makes a difference. Thanks again. I need to learn about
journals, not to good on that, I have the Pastel partner programe.

Regards
Gayle

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