Chapter 10: Accounting Systems and VAT

Question 1

Typically, how do you process adjustments to a trial balance?

Answer 1

Using a columnar approach, working across from left to right:

Step 1 - Extract the trial balance from the ledger accounts
Step 2 - Enter the journals in the adjustments column
Step 3 - Add across the debits and credits for each row and enter the net debit or credit in the final trial balance

Question 2

Output tax is charged on what?

Answer 2

Sales

Question 3

Input tax is paid where?

Answer 3

Input tax is paid on purchases and may be reclaimed

Question 4

What happens if output tax exceeds input tax?

Answer 4

The business periodically pays the excess to HMRC

Question 5

What happens if input tax exceeds output tax?

Answer 5

The business periodically reclaims the excess from HMRC

Question 6

How do you calculate VAT inclusive price?

Answer 6

To calculate the VAT when given the gross VAT inclusive price:

VAT = VAT inclusive price × 20/120

Or alternatively

VAT = VAT inclusive price × 1/6

Question 7

What is the net selling price?

Answer 7

The amount that the business wishes to achieve (VAT exclusive price)

Question 8

What is the gross selling price?

Answer 8

The gross selling price is the price charge to customers (VAT inclusive price) - 120% of the cost

Question 9

How do you calculate VAT exclusive price?

Answer 9

To calculate the VAT when given the gross VAT exclusive price:

VAT = VAT exclusive price × 20%

Or alternatively

VAT = VAT exclusive price × 1/5

Question 10

A VAT registered business will need a what? What is the variation?

Answer 10

A VAT registered business will need to maintain a VAT ledger account. This may be a receivable or a payable account depending on the circumstances

Question 11

What is the correct double entry for a VAT on sales?

Answer 11

Dr Receivables Account VAT inclusive price
Cr Sales VAT exclusive price
Cr VAT Account VAT

Question 12

What is the correct double entry for a VAT on purchases?

Answer 12

Dr Purchases/Expenses VAT exclusive price
Dr VAT Account VAT
Cr Payables Account VAT inclusive price

Question 13

What do you do when input VAT cannot be recovered? What are some examples for when this is the case?

Answer 13

The most common instances are:

• Purchase of motor cars
• Client entertaining expenses

In these cases, the VAT inclusive cost to the business is debited to non-current assets/expenses