I talked about VAT a few weeks ago when I was describing how to account for your trade debtors (accounts receivables) and trade creditors (accounts payables) in your budget balance sheet. Now we need to account for the VAT we calculated in respect of the trade debtors and trade creditors and it is advisable to have a separate line in your balance sheet to collate the VAT.
To calculate the trade debtors we took the sales figures from the profit and loss account and added VAT. This calculated VAT figure needs to be entered onto the VAT line as a credit to complete the double entry for trade debtors.
Calculating the trade creditors figure is a little more complicated as trade creditors includes a number of elements which include:
* The purchases figure from the stock (inventory) on the balance sheet (see previous blog);
* Expenditure from the profit and loss account excluding salaries; and
* Fixed asset purchases from the balance sheet (fixed assets are accounted for net of VAT with the exception of company cars).
VAT is added to all of these to calculate the trade creditors figure and the VAT is entered onto the VAT line as a debit to complete the double entry for trade creditors.
In January 2011 the VAT rate was increased to 20%. As budgets are forward looking then the rate used will need to be 20%. VAT returns are completed quarterly and the budget must reflect this. VAT is paid in the month following the end of the quarter, so the VAT payment will need to be added to the cash flow forecast in the month following the end of the quarter and the VAT balance on the balance sheet cleared down to zero. If however your business completes monthly returns and is in a repayment situation then the VAT receipt will be added to the cash flow forecast in the following month and the VAT balance on the balance sheet cleared down to zero.
A couple of things to remember are:
* VAT is not added to any of the numbers included in the profit and loss account; and
* When you add VAT to your sales, purchases, expenditure and fixed assets the calculated VAT figure must be inserted in the VAT line of the balance sheet to ensure that the double entry is completed.