## **Learning Outcomes**

After reading this article, you will be able to calculate VAT from net and VAT-inclusive figures, record VAT correctly in the sales and purchases day books, and post day book totals to the general ledger. You will also be able to record VAT in the cash book (receipts and payments), avoid charging VAT twice when customers or suppliers settle invoices, and deal with VAT on credit notes (returns) using correct double-entry.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must understand...

- how sales tax (VAT) affects double-entry for sales and purchases
- how to enter invoices and credit notes into books of prime entry (day books)
- how to post day book totals to general ledger accounts, including the sales tax/VAT account
- how to record cash receipts and cash payments including any VAT effect
- how to post cash book totals to the general ledger (bank, sales, purchases/expenses, receivables, payables, VAT)

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. A business issues a credit sale invoice for £1,200 plus VAT at 20%. What is the posting from the sales day book total to the general ledger?
   - A. Dr Sales £1,200; Cr Trade receivables £1,440; Cr VAT control £240
   - B. Dr Trade receivables £1,440; Cr Sales £1,200; Cr VAT control £240
   - C. Dr Trade receivables £1,200; Cr Sales £1,200; Cr VAT control £240
   - D. Dr Bank £1,440; Cr Sales £1,200; Cr VAT control £240

2. True or false? When a credit customer pays an invoice, you record output VAT again in the cash book.

3. A cash expense is £72 inclusive of VAT at 20%. Calculate (i) the net amount and (ii) the VAT amount.

4. A supplier sends a credit note for goods returned (net £500 plus VAT 20%). Which entry posts the VAT correctly?
   - A. Debit VAT control £100
   - B. Credit VAT control £100
   - C. Debit Sales £100
   - D. Credit Purchases £100

## **Introduction**

VAT questions in FA1 often look simple, but marks are lost when candidates mix up net and gross, or post VAT to the wrong side of the VAT account. The exam also tests whether you understand which book records a transaction first (day books or cash book), and how totals are posted to the general ledger.

In practice, day books summarise credit invoices and credit notes, while the cash book summarises bank receipts and bank payments. Your job is to separate each transaction into net amount and VAT amount, then post them to the correct ledger accounts.

## **VAT and the ledger accounts used**

VAT creates a separate element in many sales and purchase transactions: part is income/expense, and part is tax collected or recoverable.

> **Key Term: VAT**
> A sales tax charged on taxable sales and purchases, usually shown separately on invoices as a percentage of the net amount.
>
> **Key Term: Output VAT**
> VAT charged to customers on taxable sales. It increases the amount owed to the tax authority.
>
> **Key Term: Input VAT**
> VAT charged by suppliers on taxable purchases. It is normally recoverable from the tax authority (subject to local rules).

### VAT control account logic

In bookkeeping questions, VAT is usually recorded in one general ledger account (often called _VAT control_ or _Sales tax_). Output VAT increases the liability; input VAT reduces it.

> **Key Term: VAT control account**
> The general ledger account that collects output VAT (credit entries) and input VAT (debit entries) to show the net VAT payable or recoverable.

A simple way to check direction:

- **Sales invoice**: you are charging VAT → **credit** VAT control (output VAT).
- **Purchase invoice**: you are being charged VAT → **debit** VAT control (input VAT).
- **Credit note**: reverse the VAT entry you would have made on the original invoice.

## **Calculating VAT: net, VAT and gross**

Most FA1 questions use a single VAT rate (for example 20%). You should be able to move between net and gross quickly.

If VAT rate is $r$:

- VAT on a net amount: $VAT = Net \times r$
- Gross total: $Gross = Net + VAT$
- If given a VAT-inclusive (gross) amount:  
  $$Net = \frac{Gross}{1+r} \qquad VAT = Gross - Net$$

### **Exam Warning**

Do not post the **gross** to Sales or Purchases. Sales and Purchases/Expenses are recorded **net**; VAT is posted to the VAT control account.

## **Recording VAT in day books (credit transactions)**

Day books are books of prime entry used to list similar transactions before posting totals to the general ledger.

> **Key Term: Day books (books of prime entry)**
> Lists (often within accounting software) used to record batches of similar transactions such as credit sales invoices and credit purchase invoices before posting to ledger accounts.

### Typical day book columns

For VAT-registered transactions you usually need three amount columns:

- **Net**
- **VAT**
- **Total (gross)**

Trade discounts, if given, are normally applied to the list price **before** calculating VAT.

### Sales day book (credit sales invoices)

> **Key Term: Sales day book**
> The book of prime entry used to record credit sales invoices issued to customers, analysed into net, VAT and gross totals.

What gets entered:

- each sales invoice line shows the customer, invoice reference, net, VAT, and gross.

How postings work:

- **Individual customer posting (receivables ledger / customer account):** debit the customer with the **gross** amount.
- **General ledger posting (from day book total):** split the day book total into net sales and output VAT.

General ledger double-entry for the **sales day book total**:

- Dr Trade receivables (gross)
- Cr Sales (net)
- Cr VAT control (output VAT)

### Purchases day book (credit purchase invoices)

> **Key Term: Purchases day book**
> The book of prime entry used to record credit purchase invoices received from suppliers, analysed into net, VAT and gross totals.

How postings work:

- **Individual supplier posting (payables ledger / supplier account):** credit the supplier with the **gross** amount.
- **General ledger posting (from day book total):** split the day book total into net purchases/expenses and input VAT.

General ledger double-entry for the **purchases day book total**:

- Dr Purchases/Expense (net)
- Dr VAT control (input VAT)
- Cr Trade payables (gross)

## **VAT on credit notes (returns) in day books**

A credit note reverses part (or all) of a previous invoice, so it reverses VAT too.

### Sales returns (credit note issued to a customer)

If you issue a credit note to a customer, you are reducing:

- the customer balance (gross)
- sales (net) via a _sales returns_ account
- output VAT (so VAT control is **debited**)

Typical entry from **sales returns day book total**:

- Dr Sales returns (net)
- Dr VAT control (reduce output VAT)
- Cr Trade receivables (gross)

### Purchase returns (credit note received from a supplier)

If a supplier issues you a credit note, you are reducing:

- the supplier balance (gross)
- purchases via a _purchase returns_ account
- input VAT (so VAT control is **credited**)

Typical entry from **purchase returns day book total**:

- Dr Trade payables (gross)
- Cr Purchase returns (net)
- Cr VAT control (reduce input VAT)

## **Recording VAT in the cash book (bank receipts and payments)**

The cash book summarises money in and money out through the bank (and sometimes cash). It often uses analysis columns so you can post totals efficiently.

> **Key Term: Cash book**
> A record of bank receipts and bank payments, usually with analysis columns (such as sales, VAT, receivables, payables, expenses) that are posted as totals to the general ledger.

### Receipts side: when VAT appears (and when it does not)

VAT appears on the receipts side when the receipt itself is a **cash sale** (you are making a sale now). It does **not** appear when you are collecting money from a credit customer, because output VAT was recorded when the invoice was issued.

Posting idea from a cash receipts total:

- Dr Bank (total receipts)
- Cr VAT control (output VAT on cash sales)
- Cr Sales (net cash sales)
- Cr Trade receivables (receipts from credit customers)
- Cr Other income (if applicable)

### Payments side: when VAT appears (and when it does not)

VAT appears on the payments side when the payment is for a **cash purchase/expense** that includes VAT (you are buying now). It does **not** appear when you are paying a supplier for a credit purchase, because input VAT was recorded when the supplier invoice was received.

Posting idea from a cash payments total:

- Cr Bank (total payments)
- Dr VAT control (input VAT on cash purchases/expenses)
- Dr Purchases/Expenses (net)
- Dr Trade payables (payments to suppliers)

### **Exam Warning**

Do not split a receipt from a customer (or payment to a supplier) into net and VAT. Settlement of an invoice does not create new VAT.

## **Worked Example 1.1**

A business is VAT-registered (VAT 20%).

- 3 June: Credit sale to Kent Co. List price £2,000 less trade discount 5%, plus VAT.
- 4 June: Credit purchase from Alpha Supplies £1,200 plus VAT.
- 10 June: Credit note issued to Kent Co for goods returned, net £300 plus VAT.

### **Worked Example 1.1**

Record the day book amounts and show the general ledger postings (using Trade receivables, Trade payables, Sales, Purchases, Sales returns, VAT control).

> **Answer:**
>
> **1) Calculate gross amounts**  
> Sale net = £2,000 × 95% = £1,900; VAT = £1,900 × 20% = £380; gross = £2,280.  
> Purchase net = £1,200; VAT = £240; gross = £1,440.  
> Sales return net = £300; VAT = £60; gross = £360.
>
> **2) Post sales day book total (credit sale)**  
> Dr Trade receivables £2,280  
> Cr Sales £1,900  
> Cr VAT control £380
>
> **3) Post purchases day book total (credit purchase)**  
> Dr Purchases £1,200  
> Dr VAT control £240  
> Cr Trade payables £1,440
>
> **4) Post sales returns day book total (credit note issued)**  
> Dr Sales returns £300  
> Dr VAT control £60  
> Cr Trade receivables £360

## **Worked Example 1.2**

A business is VAT-registered (VAT 20%). In one day it has:

- Cash sale (VAT-inclusive takings) £600
- Receipt from a credit customer £1,080
- Payment to a supplier for a credit invoice £720
- Cash purchase of fuel £120 inclusive of VAT

### **Worked Example 1.2**

Show the cash book analysis (net/VAT where needed) and the general ledger posting totals.

> **Answer:**
>
> **1) Split VAT-inclusive amounts**  
> Cash sale:
>
> $$
> Net = \frac{£600}{1.2} = £500
> $$
>
> VAT = £100.  
> Fuel:
>
> $$
> Net = \frac{£120}{1.2} = £100
> $$
>
> VAT = £20.
>
> **2) Cash book analysis (summary)**  
> Receipts: Bank total £1,680 (600 + 1,080)
>
> - Sales (net) £500
> - VAT (output) £100
> - Receivables £1,080  
>   Payments: Bank total £840 (720 + 120)
> - Payables £720
> - Fuel expense (net) £100
> - VAT (input) £20
>
> **3) Post receipts totals to general ledger**  
> Dr Bank £1,680  
> Cr Sales £500  
> Cr VAT control £100  
> Cr Trade receivables £1,080
>
> **4) Post payments totals to general ledger**  
> Dr Trade payables £720  
> Dr Fuel expense £100  
> Dr VAT control £20  
> Cr Bank £840

### **Revision Tip**

After posting, do a quick reasonableness check:

- Sales and expenses should be **net**.
- VAT control should contain **only VAT** (input as debits, output as credits).
- Receivables/payables changes on settlements should be **gross** (no VAT split).

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- VAT invoices are analysed into net amount, VAT amount and gross total.
- Output VAT on sales is credited to the VAT control account; input VAT on purchases is debited.
- Sales day book totals post: Dr Trade receivables (gross), Cr Sales (net), Cr VAT control (VAT).
- Purchases day book totals post: Dr Purchases/Expense (net), Dr VAT control (VAT), Cr Trade payables (gross).
- Credit notes reverse VAT: sales returns debit VAT control; purchase returns credit VAT control.
- In the cash book, VAT is split only for true cash sales or cash purchases/expenses, not for settling credit invoices.
- Analysis columns in day books and cash book are designed to make ledger posting by totals accurate.

## **Key Terms and Concepts**

- VAT
- Output VAT
- Input VAT
- VAT control account
- Day books (books of prime entry)
- Sales day book
- Purchases day book
- Cash book


Recording VAT in day books - Posting VAT to ledgers and cash book