## **Learning Outcomes**

After reading this article, you will be able to explain common VAT terms used in bookkeeping, identify the main VAT rates used in exam questions, and calculate VAT on VAT-exclusive and VAT-inclusive amounts. You will also be able to state what information must appear on a VAT invoice (including VAT registration number, tax point and VAT rate) and explain why correct VAT invoice details matter when recording sales, purchases and credit notes.

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

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

- How sales tax (VAT) affects the recording of sales and purchases
- How discounts (especially trade discounts) affect VAT calculations
- How to prepare and check sales invoices and credit notes, including VAT information
- How to identify the key content of business documents used as accounting evidence
- How VAT information links to ledger postings (sales, purchases and the VAT ledger/control account)

## **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. Which item is specifically required on a VAT invoice for VAT purposes?
   - A. Supplier VAT registration number
   - B. Customer telephone number
   - C. Delivery driver signature
   - D. Customer credit limit

2. True or false? When a trade discount is given, VAT is calculated on the price before the trade discount.

3. A receipt shows a total of \$240 including VAT at 20%. Calculate (i) the VAT and (ii) the VAT-exclusive amount.

4. A business sells goods for \$800 VAT-exclusive, VAT rate 5%. What is the total amount payable?
   - A. \$760
   - B. \$800
   - C. \$840
   - D. \$960

5. True or false? The tax point helps decide which VAT reporting period a sale belongs to.

## **Introduction**

VAT (value added tax) is a common sales tax charged on many supplies of goods and services. For FA1, you are often tested on how VAT changes the amounts shown on invoices and how those amounts are recorded in the accounting system.

You need two skills: (1) calculate VAT correctly at the rate given, and (2) know what information must be shown on VAT invoices and VAT credit notes. If an invoice is missing required VAT details, it may not be valid evidence for VAT reporting, and it can also cause errors in the bookkeeping.

## VAT basics for FA1

> **Key Term: VAT**
> A sales tax charged as a percentage of the value of taxable goods or services. A VAT-registered business charges VAT on sales and may recover VAT on purchases (subject to local rules).
>
> **Key Term: VAT-registered business**
> A business that is registered with the tax authority to charge VAT on taxable sales and to report VAT through periodic returns.

### Output VAT and input VAT

> **Key Term: Output VAT**
> VAT charged on a business’s sales (on VAT invoices issued to customers).
>
> **Key Term: Input VAT**
> VAT charged by suppliers on a business’s purchases (on VAT invoices received from suppliers).

In bookkeeping, output VAT increases the amount your customer owes, and input VAT increases the amount you owe your supplier. VAT itself is not income or an expense for a VAT-registered business; it is tax collected or tax paid.

> **Key Term: VAT control account**
> A ledger account used to collect total input VAT and output VAT so the business can calculate the net VAT payable to (or receivable from) the tax authority.

### Taxable, zero-rated and exempt supplies

> **Key Term: Taxable supply**
> A sale of goods or services that is within the scope of VAT and is charged at a VAT rate (including 0%).
>
> **Key Term: Zero rate**
> A VAT rate of 0%. The sale is still taxable, but the VAT amount charged is zero.
>
> **Key Term: Exempt supply**
> A sale that is outside the VAT system for charging VAT on the invoice. No output VAT is charged.

For exam questions, use the VAT treatment stated. Do not assume a supply is exempt or zero-rated unless the question tells you.

## VAT rates (how exam questions use them)

> **Key Term: Standard rate**
> The main VAT rate applied to most taxable supplies (the question will state the percentage, such as 20%).
>
> **Key Term: Reduced rate**
> A lower VAT rate applied to specific taxable supplies (the question will state the percentage, such as 5%).

FA1 questions will normally give you the VAT rate to use. Your job is to apply that rate to the correct base amount (usually the VAT-exclusive value after any trade discount).

## Calculating VAT on invoices

> **Key Term: VAT-exclusive (net amount)**
> The amount before VAT is added. This is the base used to calculate VAT.
>
> **Key Term: VAT-inclusive (gross amount)**
> The total amount after VAT is added (what the customer pays in total).

### VAT when prices are VAT-exclusive

If the VAT-exclusive amount is $N$ and the VAT rate is $r\%$:

- VAT amount is $N \times \frac{r}{100}$
- VAT-inclusive total is $N + \left(N \times \frac{r}{100}\right)$

You may also see:
$$\text{VAT-inclusive total} = N \times \left(1 + \frac{r}{100}\right)$$

### Extracting VAT from a VAT-inclusive total

If the VAT-inclusive total is $G$ and VAT rate is $r\%$:

$$\text{VAT} = G \times \frac{r}{100 + r}$$

$$\text{VAT-exclusive amount} = G \times \frac{100}{100 + r}$$

### Trade discounts and settlement discounts (VAT effect)

A trade discount reduces the selling price, so VAT is calculated on the discounted amount. Settlement (prompt payment) discounts are handled as the question requires; many FA1 questions calculate VAT on the amount after any settlement discount that is expected to be taken.

### **Exam Warning**

A common error is to calculate VAT on the VAT-inclusive total. If $G$ already includes VAT, do not do $G \times r\%$. Use the extraction formula instead.

### **Worked Example 1.1**

A business issues an invoice showing:

- 4 widgets at \$100 each
- 1 grommit at \$43
  VAT rate is 20%.

> **Answer:**
>
> $$
> \text{Subtotal (VAT-exclusive)} = (4 \times 100) + (1 \times 43) = 443
> $$
>
> $$
> \text{VAT} = 443 \times 20\% = 88.60
> $$
>
> $$
> \text{Total payable (VAT-inclusive)} = 443 + 88.60 = 531.60
> $$

### **Worked Example 1.2**

A petty cash receipt shows “Total paid \$48.00 (including VAT at 20%)”. Calculate the VAT and the VAT-exclusive amount.

> **Answer:**
>
> $$
> \text{VAT} = 48.00 \times \frac{20}{120} = 8.00
> $$
>
> $$
> \text{VAT-exclusive amount} = 48.00 - 8.00 = 40.00
> $$
>
> $$
> \text{(Or VAT-exclusive amount)} = 48.00 \times \frac{100}{120} = 40.00
> $$

### **Revision Tip**

When you see a VAT question, first circle whether amounts are VAT-exclusive or VAT-inclusive. Then write the two totals you need: (1) VAT amount and (2) amount payable.

## VAT invoices and invoice requirements

> **Key Term: VAT invoice**
> A sales invoice that includes required VAT information so the sale can be reported correctly and, where allowed, the customer can claim input VAT.

A VAT invoice is also an external document that may be checked by the tax authority. For bookkeeping, the VAT invoice is the source document used to record the sale (and output VAT) or the purchase (and input VAT).

### Information you should expect to see on a VAT invoice

Exact rules vary by country, but FA1 commonly tests that a valid VAT invoice includes these VAT-specific items:

- Supplier VAT registration number
- Tax point (time of supply)
- VAT rate charged

It will also normally show:

- Supplier name and address
- Customer name and address
- Unique invoice number
- Invoice date
- Description of goods/services, quantities and unit prices
- VAT-exclusive amount(s)
- VAT amount(s)
- VAT-inclusive total payable
- Any relevant discount terms

> **Key Term: Tax point**
> The date used to decide when a supply is treated as taking place for VAT reporting (often linked to the invoice date or delivery date, depending on rules).

### Credit notes and VAT

If goods are returned or an overcharge is corrected, the supplier issues a credit note. A VAT credit note should show VAT details (including VAT rate and VAT amount being reversed), because it reduces output VAT for the supplier and reduces input VAT for the customer.

> **Key Term: Credit note**
> A document issued by a supplier that reduces the amount a customer owes. It acts like a negative invoice and may reverse VAT previously charged.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- VAT is a sales tax charged on taxable supplies by VAT-registered businesses
- Output VAT relates to sales; input VAT relates to purchases
- VAT rates in questions are applied to the VAT-exclusive amount (usually after trade discount)
- VAT can be added to net amounts or extracted from VAT-inclusive totals using formulas
- A VAT invoice must include VAT-specific details such as VAT registration number, tax point and VAT rate
- Correct VAT invoice details support accurate bookkeeping and VAT reporting
- Credit notes reduce both the amount owed and the VAT previously charged

## **Key Terms and Concepts**

- VAT
- VAT-registered business
- Output VAT
- Input VAT
- VAT control account
- Taxable supply
- Zero rate
- Exempt supply
- Standard rate
- Reduced rate
- VAT-exclusive (net amount)
- VAT-inclusive (gross amount)
- VAT invoice
- Tax point
- Credit note


VAT concepts and terminology - VAT rates and invoice requirements