VAT.

You need to know the following:

General theory relating to VAT
Basic VAT calculations
Ledger accounts: VAT input account; VAT output account; VAT Control account
Ethical aspects relating to VAT

RECORDING VAT IN JOURNALS AND THE GENERAL LEDGER

GENERAL THEORY RELATING TO VAT

VAT is levied in terms of the Value-Added Tax Act (No 89 of 1989). VAT is an indirect tax or a
transactions tax. VAT is a liability, VAT collected is due to the SARS (this liability is reduced by
input claims).
The VAT system comprises of 3 types of supplies:
Standard Rated Supplies Goods and services at a VAT rate of 14% (current rate).
Exempt Supplies goods and services not subject to VAT, for example, bank charges.
There are no input credits against these.
Zero-rated supplies goods and services subject to VAT but at ZERO PERCENT, for
example, fresh vegetables, fresh fruit, maize meal, maize rice, samp, milk, eggs, petrol, taxi
fares, bus fares, etc.

OUTPUT VAT: goods sold or services rendered attract VAT. The VAT collected is an output
VAT and is due to the SARS. As mentioned above, some goods and services are zero-rated
and as such, zero VAT is collected.

INPUT VAT: Input VAT is the VAT that the business pays on its expenses for which it has tax
invoice. The business is allowed to deduct input VAT from output VAT provided the input VAT
paid by the vendor is supported by a valid tax invoice.

VAT CALCULATIONS
Vat IS LEVIED AT 14%.

Price does not include VAT: If you are required to calculate VAT on an item where the price that
does not include VAT, then the formula is as follows: 14% of the value of the item.
Calculate VAT on an item costing R1 000 excluding VAT.
ANSWER: 14/100 x R1 000 = R140.

Price includes VAT: If you are required to calculate VAT on an item where the price includes VAT,
the formula is: 14/114 X amount.
Calculate VAT if the selling price inclusive of VAT is R22 800.
ANSWER: 14/114 x 22 800 = R2 800.

Calculating the amount due to the SARS:

Let us examine the following example:
On 1 September 2008, a VAT vendor, Rico Traders, purchases supplies from Logie Wholesalers
for R6 840(VAT inclusive). Rico Traders sells these goods on 20 September to his customer
Shavinas Ship for R15 960(inclusive of VAT).
calculate the amount of INPUT VAT that Rico Traders can claim from SARS.
calculate the amount of OUTPUT VAT that Rico Traders is liable to pay SARS.
Calculate the net amount due to SARS by Rico Trader.
ANSWER:
INPUT VAT CLAIM: 14/114 X 6 840 = R840
OUT PUT VAT LIABILITY: 14/114 X 15 960 = R1 960
VAT PAYABLE TO SARS: R1 960 R840 = R1 120.

VAT LEDGER ACCOUNTS

You need to know the following ledger accounts: Input VAT account; Output VAT account and the
VAT Control account.

Example:
The monthly journals of Frere Stores were added up and verified by the internal auditor. The
temporary bookkeeper is unsure about the posting to the VAT accounts.

Required:
1. Post to the Input VAT account and Output VAT accounts in the General ledger.
2. Prepare the VAT Control account.

Information
Journal totals on 31 October 2008

Cash Receipts Journal

Bank Output VAT Sales Cost of Debtors control Sundries
sales Receipts Disc. all
21 484 2 184 15 600 3 733 2 500 0 1 200

Explanations:
Sales amount of R15 600 excludes VAT.
Output VAT is calculated as 14% of R15 600 = R2 184.
Output VAT is calculated on sales VAT collected on these sales is due to the SARS, therefore Output
VAT is a liability and has to be credited.
The R2184 (total of output VAT) is posted to the credit side of the Output VAT account.
DO NOT INCLUDE AMOUNTS COLLECTED FROM DEBTORS IN YOUR VAT CALCULATIONS.

Cash Payments Journal

Bank Input VAT Trading Consumables Creditors control Sundries
stock Payments Disc.
Rec.
16 873 1 684 8 900 570 3 455 0 2 300

Explanations:
The input VAT of R1 648 is calculated as follows:
Trading stock(R18 900) + Consumables (R570) + Sundries (R2 300) = R11 770
R11 770 X 14/100 = R1 647,80 or R1 648.
NOTE: DO NOT INCLUDE CREDITORS CONTROL IN YOUR VAT CALCULATIONS

Input VAT can be claimed back from the SARS and is therefore regarded as an asset and posting is
therefore done to the debit side of this account.(OPPOSITE TO OUTPUT VAT)

.
Petty Cash Journal

Petty Input VAT Trading Consumables Casual Sundry Sundries

cash stock wages expenses

1 167 109 500 130 280 58 90

Explanations:
Input VAT is calculated as follows:
Trading stock (R500) + Consumables (R130) + Sundry expenses(R58) + Sundry accounts(R90) = R778. X
R778 X 14/100= R108,92 or R109.
NOTE: DO NOT INCLUDE CASUAL WAGES IN YOUR VAT CALCULATIONS.

Input VAT can be claimed back from the SARS and is therefore regarded as an asset and posting is
therefore done to the debit side of this account (OPPOSITE TO OUTPUT VAT).

Debtors Journal
Debtors Output VAT Sales Cost of sales
control
5 472 672 4 800 3 200

Explanations:
The sales amount excludes VAT, therefore the output VAT of R672 is calculated (4 800 X 14/100).
This output VAT comes from sales of goods and is due to the SARS, therefore it is a liability and is posted
to the credit side of the Output VAT account.

Debtors Allowances Journal

Debtors Output VAT Debtors Cost of sales
control allowances
456 56 400 140

Explanations:
The Debtors allowances amount does not include VAT, therefore the VAT of R56 is calculated as 14% of
R400. When goods are returned by debtors, the sales amount is decreased, hence the output VAT on the
sales is also decreased. The OUTPUT VAT LIABILITY IS DECREASED. Posting is done to the debit side of
the Output VAT account.

Creditors Journal
Creditors Input VAT Trading Consumables Equipment Sundry
control stock accounts

4 936 606 2 450 1 430 450 --

Explanations:
The Creditors Journal accounts for items purchased on credit. VAT paid on these items can be claimed back
from SARS, therefore Input VAT is regarded as an asset and is debited. The Input VAT of R606 is
calculated as:
Trading stock (R2 450) + Consumables(R1 430) + Equipment(R450) = R4 330.
14% of R4 330 = R 606,20 or R606.
Creditors Allowances Journal
Creditors Input VAT Trading Consumables Equipment Sundry
control stock accounts

145 18 87 40 -- --

Explanations:
Entries in the CAJ arise through returns made to Creditors. Remember that we were entitled to claim VAT on
items were bought on credit and that these transactions had increased the input VAT. When we return items
to suppliers, the Input VAT, which we claimed for, will be reduced. The asset is reduced and posting is
therefore done to the credit side of the VAT input account.

General Journal
24 Drawings(inclusive of VAT) 114
Trading stock 100
Output VAT 14

26 Bad debts 200

Output VAT 28
Debtor/Debtors control 228

Explanations:
Drawings
Goods taken by the owner for his own use is likened to a sale made to the owner. Therefore drawings will
attract Output VAT. Output VAT is a liability and is therefore credited.

Bad debts
It was anticipated that the debtor will pay his account thereby settling the selling price plus the VAT amount
due to the business. Remember that sales (whether on a cash or credit basis) attracts Output VAT. If the
debtors account is written off, it will mean that the amount which we had hoped to collect from the debtor
(Output VAT) will never come in, hence we need to reduce the Output VAT liability and Output VAT is
accordingly debited.

Posting to the ledger

General ledger of Frere Stores

OUTPUT VAT ACCOUNT B10
Debtors control DAJ 56 Debtors control DJ 672
Debtors control(Bad debts) GJ 28 Bank CRJ 2 184
VAT Control1 GJ 2 786 Drawings GJ 14
2 870 2 870

INPUT VAT ACCOUNT B11

Creditors control CJ 606 Creditors control CAJ 18
Bank CPJ 1 684 VAT control a/c2 GJ 2 381
Petty cash PCJ 109
2 339 2 339

VAT CONTROL ACCOUNT B12

Input Vat account GJ 2 381 Output VAT account GJ 2 736
Bank3 CPJ 355
Explanations
1. This is the balancing amount which is transferred to the VAT control account. The total of the credit
side (2 870) minus (R56 +R28) = R2 786.
2. This is the balancing amount which is transferred to the VAT Control account. The total of the Debit
side (R2 3390 minus the total of the credit side (R18) = R2 381.
3. The Input VAT is lesser than the Output VAT, therefore we owe the difference to the SARS and this
amount was duly paid to the SARS.

General entry to show how the Input VAT and Output VAT is closed off

General Journal
VAT Control 2 381
Input VAT account 2 381
Input VAT transferred to VAT control

Output VAT 2 736

VAT Control account 2 736
Output VAT transferred to VAT control

Try this question taken from the Exemplar 2008 paper.

VALUE-ADDED TAX (30 marks; 20 minutes)

Manzini Stores, owned by Ivy Manzini, is registered for VAT under Category B (the invoice basis)
on a one-month period. The business also only deals with other VAT vendors. You have been
provided with the information from the journals for August 2008.

1. What is meant by value-added tax and at what rate is VAT calculated? (2)

2. Calculate:
2.1 The VAT output amount from the CRJ (2)
2.2 The VAT input amount from the CPJ (3)
2.3 The VAT output amount from the DJ (3)

3. Ivy is unsure how her bookkeeper should enter the VAT amounts in the Ledger. Indicate to
her how the VAT totals of the following journals will be Complete the table in the ANSWER
BOOK. (12)

4 Calculate the amount of VAT to be paid over to the SARS in respect of August 2008. (4)

3 Ivy does not have enough money in her bank account to pay the SARS for the VAT. The
bank balance is currently in overdraft at approximately R50 000. What advice would you
offer her in order to:
Solve the problem now
Solve the problem in the future (4)

INFORMATION FROM THE JOURNALS:

1. Cash Receipts Journal

Total of Sales column R942 000
Total of Debtors' Control column R420 000
Total of Sundry Accounts column Nil
Total of VAT output column R?
2. Cash Payments Journal
Total of Trading Stock column R248 000
Total of Creditors' Control column R494 000
Total of Sundry Accounts column (all equipment) R580 000
NOTE: Equipment is subject to VAT.

3. Debtors' Journal
Goods were sold on credit for R397 860 (including VAT).

4. Debtors' Allowance Journal

Total of VAT output column R6 930

5. Creditors Journal
Total of VAT input column R58 170

6 Creditors' Allowance Journal

Total of VAT input column R7 210

7. General Journal
7.1 The owner took stock at cost price, R9 000, for personal use. The VAT on this item is
R1 260.
7.2 A debtor, D Dodge, has disappeared. His debt of R4 560 is to be written off as
irrecoverable. All items sold to D Dodge were subject to VAT of R560.

Answer grid
1.
2.1.
2.2
2.3

3.
Journal Debit Credit Amount
CRJ Bank
CPJ
DJ
DAJ Vat output/Vat control Debtors control
CJ VAT input/VAT control Creditors control
CAJ Creditors control VAT input/VAT control
GJ
GJ

4.
5.

MARKING MEMO

1. Tax on sales of goods (levied on the purchaser by the seller).

14%
2.1. VAT output from CRJ
14% of R942 000 = R131 880
2.2 VAT input from CPJ
14% of (R248 000 + R580 000) = R115 920
2.3 VAT output from DJ
14/114 X R397 860 = R48 860

3.
Journal Debit Credit Amount
CRJ Bank VAT output/control R131 880
CPJ VAT input/control Bank R115 920
DJ Debtors control VAT output/control R48 860
DAJ Vat output/Vat control Debtors control R6 930
CJ VAT input/VAT control Creditors control R58 170
CAJ Creditors control VAT input/VAT control R7 210
GJ Drawings VAT output/control R1 260
GJ VAT output/control Bad debts or Debtors R560
control

4.VAT control a/c

115 920 131 880
6 930 48 860
58 170 7 210
560 1 260
181 580 189 210
TO PAY R189 210 R181 580
= R7 630

5.
Solving the problem immediately.
Borrow from bank at reduced rates; introduce more capital

Solving the problem in the future

Better budgeting VAT charged to customers must be earmarked for repayment, not spent on
assets such as equipment.