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Value added tax

12 important questions on Value added tax

What is input and input tax?

Input is the value of goods bought in and/or services supplied to a business. Input tax is the VAT on the input.

What are exempted businesses and which types of businesses are exempted?

Exempted businesses are businesses that do not add VAT to their products/services, nor do they get a refund of the VAT they themselves have paid on goods and services bought by them.
The types of business exempted are;
1. Nature of business
2. Smal businesses

What is a zero-rated business?

A special category of business that;
1. does not have to add VAT on the selling price of products; and
2. can obtain a refund of all VAT paid on the purchase of goods or services
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What is a unregistered business?

A business exempted for registering for VAT. This business does not need to keep any VAT records. The amount entered in its record would be the total amount paid including any VAT.

What is a registered business?

A registered business must account for VAT on all the taxable supplies they make and all the taxable goods and services they receive.

How are the VAT entries for sales invoices made for standard-rated and reduced-rated businesses?

The personal accounts are debited in the sales ledger with the total of the amounts which the customers will have to pay.
The double entry for VAT is made in the general ledger:
1. Credit the sales account with the sales content without VAT.
2. Credit the Value Added Tax account with the VAT content only.

How is the net amount of VAT to be paid to the Revenue and Customs calculated?

(a) Vat collected on sales invoices
(b) Less Vat paid on purchases
(c) Net amount to be paid to the Revenue and Customs

How are VAT entries made for zero-rated businesses?

As VAT on sales does not exist, there is no VAT entered in the sales day book. The purchases day book and purchases ledger will appear in exactly the same manner as for standard-rated businesses.

How is the VAT calculated with cash discounts?

Where a cash discount is offered for speedy payment, VAT is calculated on an amount represented by the value of the invoice less such a discount. Even if the cash discount is lost because late payment, the VAT will not change.

How are VAT entries made for an unregistered business?

As these businesses do not include VAT in the prices they charge, there is no entry for VAT in either the sales day book, sales ledger, purchases day book or purchases ledger. This means that there will not be a VAT account.

What is the formula for calculating VAT which has been added to the net amount?

(% rate of VAT / 100 + % rate of VAT) x Gross amount = VAT

How is the VAT on goods taken for private use treated? (Give the double entry)

If a traded takes some goods out of his own business stock for his own private use, then he should be charged with any VAT incurred when the business acquired the goods.
The double entry to be made is;
Dr drawings    (Amount + VAT)
Cr Purchases                                    (Amount)
Cr VAT                                               (VAT)

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The question on the page originate from the summary of the following study material:

Accskills 1

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