Value added tax practical accounting treatment 2020

We need to create 3 accounts in our chart of account:
1- VAT Input A/C
2- VAT output A/C
3- Net Vat Payable/Receivable A/C (Control Account)
The 1st 2 accounts we will not link directly to our Trial balance, but we need to link these 2 accounts with the Net Vat Payable/Receivables Control account and Net Vat Payable/Receivables Control account has to link with Trial Balance.

Let’s See how we can do this:

VAT Input Accounting Entry:
Stationary A/C 30,000.00 Dr
Vat Input A/C 1,500.00 Dr
Cash/Bank/Customer A/C 31,500.00 Cr
Narration: Purchased stationary item as expense.

VAT Output Accounting Entry:
Cash/Bank/Customer A/C 126,000.00 Dr
Vat Output A/C 6,000.00 Cr
Sales A/C 120,000.00 Cr
Narration: Sales of Product.

Auto Closing of VAT input & VAT output Account:
Create a CONTROL Ledger account of Net Vat Payable/Receivable A/C. And link this VAT Input & Vat Output Ledgers with this CONTROL Account as per following:

We will only link one account with our trial balance which will be “Net Vat Payable/Receivable A/C” on our current liability side.
VAT payment Accounting Entry:
Net Vat Payable/Receivable A/C 4,500.00 Dr
Cash/Bank A/C 4,500.00 Cr
Narration: Payment made to Govt.

You have seen our all transactions of this method done correctly. There is no need to close the VAT Input & Vat output account monthly. The control account automatically tells us if we are liable for VAT or not.

What if the VAT Input Value higher than VAT Output?
In this case if the VAT input value higher than the VAT output value, we will not make any payment transaction and the Net Vat Payable/Receivable a/c will be shown under Current assets as receivables from Govt. or if the account is created under the current liability side then the balance will be in Minus -.

When we receive this payment from Govt. then we will pass the following Entry:
Cash/Bank A/C Dr.
Net Vat Payable/Receivable A/C Cr.
Narration: Vat input received from Govt..


Note:
This is a direct method of calculating VAT in accounting books. We didn’t need to do additional work of closing every month VAT accounts. It will automatically tell us the true picture, either the VAT is going to be our current liability or current asset.

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