## **Learning Outcomes**

After reading this article, you will be able to calculate VAT from net or gross prices, and record net, VAT and total amounts in the sales, purchases and returns day books. You will be able to post day book totals and individual entries to the sales, purchases, returns, trade receivables, trade payables and VAT control accounts using double entry. You will also be able to explain how credit notes reduce VAT on returns and spot common exam errors.

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

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

- how to record sales and purchases allowing for VAT (sales tax) in the accounting system
- how to enter sales invoices and credit notes issued to customers, including VAT
- how to enter supplier invoices and credit notes received from suppliers, including VAT
- how to record sales returns and purchase returns and the related VAT adjustment
- how VAT affects the VAT (sales tax) ledger account when transactions are recorded

## **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 credit sale invoice totals £1,200 including VAT at 20%. What is recorded in the sales day book?
   - A. Net £1,200, VAT £0, Total £1,200
   - B. Net £1,000, VAT £200, Total £1,200
   - C. Net £960, VAT £240, Total £1,200
   - D. Net £1,200, VAT £200, Total £1,400

2. True or false? A sales credit note reduces output VAT.

3. Write the double entry (three lines) for a credit purchase invoice of £600 plus VAT at 20%.

4. A supplier sends a credit note for goods returned: net £500, VAT £100. How is the VAT control account affected?
   - A. Debit £100 (increase input VAT)
   - B. Credit £100 (reduce input VAT)
   - C. Debit £500
   - D. Credit £500

5. True or false? If a supplier is not VAT-registered, you still record VAT in the purchases day book.

## **Introduction**

VAT is often examined in FA1 through straightforward recording tasks: sales invoices, purchase invoices, and the credit notes used for returns. The marks are gained by putting the net amount, VAT amount and total amount in the correct places and then posting them correctly.

Day books (books of prime entry) are where credit transactions are listed before posting totals to the general ledger and posting individual amounts to customer and supplier accounts. If you mix up net and gross, or treat returns incorrectly, your double entry will not balance.

## VAT basics you must apply in day books

> **Key Term: VAT**
> A sales tax charged on taxable supplies by VAT-registered businesses and shown separately on VAT invoices.
>
> **Key Term: Output VAT**
> VAT charged on sales to customers.
>
> **Key Term: Input VAT**
> VAT charged by suppliers on purchases and expenses that a VAT-registered business may reclaim (subject to local rules).
>
> **Key Term: VAT control account**
> A general ledger account that collects output VAT and input VAT so the net amount payable to (or recoverable from) the tax authority can be calculated.

### Net, VAT and gross

Most VAT invoices show:

- **Net** (excluding VAT)
- **VAT** (net × rate)
- **Gross/Total** (net + VAT)

At a VAT rate of 20%:

- $VAT = Net \times 20\%$
- $Gross = Net + VAT$

If you are given a VAT-inclusive (gross) amount and must find the net:
$$Net = Gross \times \frac{100}{120}$$
and:
$$VAT = Gross - Net$$

### VAT and discounts (FA1 focus)

In exam questions, VAT is normally calculated on the invoice value **after trade discount** (because the invoice shows the reduced selling price). Settlement discounts are recorded when payment is made; unless the question tells you otherwise, do not adjust VAT at the invoice stage for a possible future settlement discount.

## Day books used for VAT transactions

> **Key Term: Sales day book**
> A list of credit sales invoices issued to customers, analysed into net sales, VAT and total columns.
>
> **Key Term: Purchases day book**
> A list of credit purchase invoices received from suppliers, analysed into net purchases/expenses, VAT and total columns.
>
> **Key Term: Sales returns day book**
> A list of sales credit notes issued to customers (returns inwards), analysed into net returns, VAT and total columns.
>
> **Key Term: Purchases returns day book**
> A list of supplier credit notes received (returns outwards), analysed into net returns, VAT and total columns.
>
> **Key Term: Credit note**
> A document that reduces the amount a customer owes (sales return) or reduces the amount owed to a supplier (purchase return).

### What goes into the VAT column?

- **Sales day book:** VAT recorded is **output VAT** (VAT you charged).
- **Purchases day book:** VAT recorded is **input VAT** (VAT your supplier charged).
- **Returns day books:** VAT is recorded again, but it is a **reversal** of the original VAT effect.

A simple way to stay correct: record the VAT shown on the document in the VAT column, then post it to the VAT control account with the correct debit/credit (explained below).

## Posting VAT from day books to the ledger accounts

### Credit sales invoice: posting logic

For a credit sale, the customer owes the **gross** amount, but sales income is only the **net** amount. The VAT is a separate liability.

Double entry for a credit sales invoice:

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

### Credit purchase invoice: posting logic

For a credit purchase, the supplier is owed the **gross** amount. The purchase/expense is recorded at **net**, and VAT is recorded separately as input VAT.

Double entry for a credit purchase invoice:

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

### Sales returns (customer credit note): posting logic

A sales credit note reduces what the customer owes and reduces sales income. It also reduces output VAT previously charged.

Double entry for a sales credit note:

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

### Purchase returns (supplier credit note): posting logic

A supplier credit note reduces what you owe the supplier and reduces purchases. It also reduces input VAT previously recorded.

Double entry for a supplier credit note:

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

### **Worked Example 1.1**

On 10 June, you issue invoice S102 to a credit customer for goods priced at £2,000 net plus VAT at 20%.

> **Answer:**
>
> VAT = £2,000 × 20% = £400, so gross = £2,400.  
> **Sales day book entry:** Net £2,000, VAT £400, Total £2,400.  
> **Posting (double entry):** Dr Trade receivables £2,400; Cr Sales £2,000; Cr VAT control account £400.  
> Post £2,400 to the individual customer’s account as a debit.

### **Worked Example 1.2**

You return goods to a supplier. The supplier issues a credit note for £500 net plus VAT at 20%.

> **Answer:**
>
> VAT = £500 × 20% = £100, so gross = £600.  
> **Purchases returns day book entry:** Net £500, VAT £100, Total £600.  
> **Posting (double entry):** Dr Trade payables £600; Cr Purchase returns £500; Cr VAT control account £100.  
> Post £600 to the individual supplier’s account as a debit (to reduce the amount owed).

### **Exam Warning**

A common error is posting the **gross** figure to Sales or Purchases. Sales and Purchases (and returns) are recorded at **net**; only receivables/payables carry the **gross** balance.

Another common error is getting the VAT control entry the wrong way round on returns:

- Sales credit note: VAT control is **debited**
- Supplier credit note: VAT control is **credited**

### **Revision Tip**

For every invoice/credit note, write three figures first: **net, VAT, gross**. Then decide which account holds the gross balance (customer/supplier) and which accounts hold the net and VAT parts.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- VAT invoices and credit notes contain net, VAT and gross totals that must be recorded separately.
- In the sales day book, record net sales and output VAT; post net to Sales and VAT to the VAT control account.
- In the purchases day book, record net purchases/expenses and input VAT; post VAT to the VAT control account.
- Sales returns are recorded from sales credit notes and reduce both sales income and output VAT.
- Purchase returns are recorded from supplier credit notes and reduce both purchases and input VAT.
- Trade receivables and trade payables are posted with **gross** amounts; sales/purchases/returns are posted with **net** amounts.
- VAT is normally recorded when invoices/credit notes are entered, not when they are paid.

## **Key Terms and Concepts**

- VAT
- Output VAT
- Input VAT
- VAT control account
- Sales day book
- Purchases day book
- Sales returns day book
- Purchases returns day book
- Credit note


Recording VAT in day books - VAT on sales, purchases, and returns