September 25, 2020

SB-Accounting

Accounting + Finance Blog

Meaning and double entry for VAT accounting

Meaning and double entry for VAT accounting
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VAT is a compulsory charge for the consumption of goods and services in most countries. In Nigeria, VAT was introduced in 1993. In this article, we will consider the meaning of VAT and the double-entry.

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What is VAT?

Value Added Tax (VAT) is an indirect tax charged on vatable goods and services based on the value-added to the products and services.

In addition, VAT is a consumption tax in which the percentage charged is based on value-added to the goods or services.

Key explanations

Vatable goods and services are consumer goods and services that are not exempted by law from VAT charges.

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VAT charges are on the purchase of goods (input VAT) and sales of goods (output VAT).

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The percentage charge for VAT in Nigeria is 7.5 percent as of January 2020. The previous VAT rate was 5 percent.

The double entry for VAT

In an entity’s accounting book, the following double entry is applied to record VAT transaction

When sales are made

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Debit: Cash a/c or A/c receivable
Credit: Sales a/c
Credit: VAT a/c

When purchases are made

Debit: Purchases a/c
Debit: VAT a/c
Credit: Cash a/c or A/c Payable

Examples

When sales are made

Ali made cash sales of 20,000 Naira. The VAT charge of 5 percent. However, the VAT is not included in cash sales. Show the double entry for the transaction.

Debit: Cash a/c N21,000
Credit: Sales a/c N20,000
Credit: VAT a/c N1,000

When purchased is made

Micheal purchased goods on credit for 16,000 Naira (VAT exclusive). Show the double entry for the transaction.

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Debit: A/c Payables N16,800
Credit: Purchases a/c N16,000
Credit VAT a/c N800

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From this article, you have learned the meaning of VAT and how to record VAT in an entity’s accounting record. In the next article, we will explain, trade discount and its treatment in accounting.

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