VALUE ADDED TAX (VAT)

What is VAT?
VAT stands for Value Added Tax. Value Added Tax (VAT) is levied on the
supply of goods and services by vendors or it is a tax businesses charge
when they supply their goods and services. We have to pay VAT on most of
the things that we buy.
VAT CONCEPTS
Zerorated ite!s Zero-rated items are goods or services which are taxed
at a rate of 0! e.g. mil"! brown bread! mai#e! fruit! etc.
VATexe!"ted
ite!s
These items involve services that are not sub$ect to VAT
at either the standard rate or #ero rate! e.g. childcare
services! educational services! etc.
Sta#dard rate %n &outh Africa &tandard-rated supplies are taxed at the
rate of '(.
VATa$le ite!s These items are goods or services that are sub$ect to
VAT.
VAT Out"ut VAT paid on items purchased and can be claimed bac"
from &A)&. %t is VAT! which your company would charge
on items! which it! sells. Thus a company could wish to
sell an item and added to the amount a standard rate tax
would be charged.
VAT %#"ut VAT on &ales and income and must be paid over to
&A)&. %t is VAT that you pay on all your business
expenses and for which you have a tax invoice. %t also
relate to VAT that is paid on other goods and services
bought or rented for the business.
VAT Co#trol %s a summary of the VAT %nput and *utput and shows
whether the business owes &A)& money or whether
&A)& owes the business money.
VAT CALCULAT%ONS
&o' to add VAT (Value Added Tax) to a "ri(e ()*+)
This is the calculation you need to use when you "now a P,%CE BEFORE
TAX (T&E NET P,%CE) but want to find out the P,%CE AFTER TAX (T&E
-,OSS P,%CE).

VAT rate o. )*+/
Net "ri(e 0ulti"lied $1 )/)* 2 -ross "ri(e
Pri(e $e.ore tax 0ulti"lied $1 )/)* 2 Pri(e a.ter tax
Cal(ulatio#s3
The VAT sta#dard rate is rate of )*+
+irst! get the !ulti"lier3
)* )44+ 2 4/)*
4/)* 5 ) 2 )/)*
The !ulti"lier is )/)*
&o...
Net "ri(e 0ulti"lied $1 )/)* 2 -ross "ri(e
Pri(e $e.ore tax
(Net "ri(e)
0ulti"lied $1 )/)* 2 Pri(e a.ter tax
(-ross "ri(e)
,.g.-
,)44 0ulti"lied $1 )/)* 2 ,))*
,)44 5 Tax 2 ,))* i#( Tax
How to deduct VAT from a price - (14%)
.eople can often add VAT to a figure! but when it comes to ta"ing it off it is a
problem.
&o here it is...
Ta6i#7o.. VAT (Tax) .ro! a "ri(e
This is the calculation you need to use when you "now a P,%CE AFTER TAX
(T&E -,OSS P,%CE) but want to find out the P,%CE BEFORE TAX (T&E
NET P,%CE)/
VAT rate o. )*+/
-ross "ri(e ("ri(e a.ter
tax)
Di8ided $1 )/)* 2 Net "ri(e
Pri(e a.ter tax Di8ided $1 )/)* 2 Pri(e $e.ore tax (Net
"ri(e)
Cal(ulatio#s3
The VAT sta#dard rate is rate of )*+
+irst! get the di8isor3
)* )44+ 2 4/)*
4/)* 5 ) 2 )/)*
The di8isor is )/)*
&o the bac" calculation for '( VAT is ...
-ross "ri(e Di8ided $1 )/)* 2 Net "ri(e
Pri(e a.ter tax Di8ided $1 )/)* 2 Pri(e $e.ore
tax
E/7/3
,))*/44 Di8ided $1 )/)* 2 ,)44
,))*/44 i#( Tax 2 ,)44 5 Tax
T&,EE 9OO::EEP%N- ACCOUNTS
+or the purposes of Value Added Tax /VAT0 records! three boo""eeping
accounts must be "ept.
'. The VAT on inputs account.
1. The VAT on output /transactions0 account.
2. VAT 3ontrol /4ebit and 3redit0 account.
The VAT o# %#"uts A((ou#t 5This account will usually show a debit /the
VAT &A)& 6owe6 you money for the VAT you have paid and you are
entitled to receive from them0.
The VAT o# Out"ut (Tra#sa(tio#s) A((ou#t 5This account will usually
show a credit /the VAT &A)& are 6entitled6 to receive the VAT from you
that you have collected on their behalf. The money is not yours and it is
only temporarily in your possession until the due date for the payment of
VAT.
The VAT Co#trol (De$it a#d Credit) A((ou#t/ This is the account to
which the 1 first accounts are posted. The account balance may show a
credit! when the periodic report to the VAT is for a payment to be made! or
it may show a debit when the periodic report shows that that money is to
be returned.

),TA%7,)
.urchases 8
VAT %nput 8
.urchases price 8
&ales 8
VAT *utput 8
&elling price 8
&A)&
3*9&:;,)
.urchases 8
VAT 8
.urchase price 8
W<*7,&A7,)
&ales 8
VAT *utput
&elling price 8
Pa1 to
SA,S ,)*
Clai!
,)* 9a(6
Pa1 to SA,S
,;<
'. The wholesaler sell the product to the retailer at )'00 = '( VAT 8
)''(.00
1. The wholesaler collect VAT of )'(.00 from the retailer and pays it over
to &A)&! thus ta"ing the VAT out of the business /VAT *utput0
2. The retailer claims bac" the VAT /)'(0 from &A)&! thus put it bac" into
the business /VAT %nput0
(. The retailer adds a mar"-up of '00 to the product and sell it to the
consumer for )100 = VAT of )1>.00.
?. The retailer collects the VAT /)1>0 from the consumer and pays it over
to &A)&! thus ta"ing the VAT out of the business /VAT *utput0.
@. The consumer cannot register for VAT and cannot claim bac" the VAT.
A. &A)& collected VAT to the amount of )1> instead of only )'( due to
value being added to the product in the form of a mar"-up percentage.
Exa!"le )3
)) Pur(hase 7oods o# (redit .ro! ,/ Ada!s= ,;; <44 (%SP)/
5 %NVENTO,> (A)
3reditors 10 000
C,ED%TO,S (L) 5
%nventory 10 000
%nput VAT 1 >00
5 %NPUT VAT (A)
3reditors 1 >00
11 >00 x '(B''( 8 1 >00
;) Paid ,/ Ada!s ,;; 444 i# .ull settle!e#t o. our a((ou#t/
5 9AN: (A)
3reditors 11 000
C,ED%TO,S (L) 5
Can" 11 000
4iscount received D >00
*utput VAT
D%SCOUNT ,ECE%VED (%) 5
3reditors A0'-A?
OUTPUT VAT (L) 5
3reditors E>-1?
>00 x '(B''( 8 E>-1?
?) Sold !er(ha#dise o# (redit to T/ Tax= ,;; @)* (%SP)/ The
!ar6 u" is ;4+ o# (ost "ri(e/
5 DE9TO,S (A)
&ales 10 '00
*utput VAT 1 >'(
SALES (%) 5
4ebtors 10 '00
OUTPUT VAT (L) 5
4ebtors 1 >'(
5 %NVENTO,> (A)
3ost of &ales '@ A?0
5 COST OA SALES (E)
%nventory '@ A?0
11 E'( x '(B''( 8 1 >'(
11 E'( 5 1 >'( 8 10 '00
10 '00 x '00B'10 8 '@ A?0
*) T/ Tax "aid us ,;; 4)* i# .ull settle!e#t o. his a((ou#t/
5 DE9TO,S (A)
Can" 11 0'(
4iscount allowed D
%nput VAT E00
5 9AN: (A)
4ebtors 11 0'(
5 D%SCOUNT ALLOWED (E)
4ebtors A>E-(A
5 %NPUT VAT (A)
4ebtors ''0-?2
E00 x '(B''( 8 ''0-?2
E00 5 ''0-?2 8 A>E-(A
B) A de$tor S/ Su##1Cs de$t o. ,)) *44 !ust $e 'ritte# o..
as irre(o8era$le/
5 DE9TO,S (A)
Cad debts D %nput VAT '' (00
5 9AD DE9TS (E)
4ebtors '0 000
5 %NPUT VAT (A)
4ebtors ' (00
'' (00 F '(B''( 8 ' (00
D) The o'#er ta6es sto(6 .or his o'# use= ,) )*4/
D,AW%N-S (OE) 5
%nventory D %nput VAT ' '(0
5 %NVENTO,> (A)
4rawings ' 000
5 %NPUT VAT (A)
4rawings '(0
' '(0 x '(B''( 8 '(0
E) %ssue a (redit #ote to a de$tor .or da!a7ed 7oods= ,EB/
5 DE9TO,S (A)
4ebtors allowance D
*utput VAT A?
5 DE9TO,S ALLOWANCE (E)
4ebtors @?-AE
OUTPUT VAT (L) 5
4ebtors E-1'
A( x '(B''( 8 E-1'
<) ,e(ei8e a (redit #ote .ro! a (reditor .or da!a7ed 7oods
retur#ed= ,))*/
C,ED%TO,S (L) 5
%nventory D %nput VAT ''(
5 %NVENTO,> (A)
3reditors '00
5 %NPUT VAT (A)
3reditors '(
''( x '(B''( 8 '(
NOTE
%ssue a credit note- debtor returned goods.
)eceived a credit note- business returned goods
N9/
Althou7h lear#ers are #ot reFuired to dra' u" Gour#als= i# this exa!"le
Gour#al e#tries are "ro8ided .or $etter u#dersta#di#7 o. the led7er
a((ou#t/
Exa!"le ;3
20.'.0E - The total purchases that you made amount to ) '!000 by cheGue
plus ) '?0 VAT on inputs.
20.'.0E - The total cash sales you made amount to ) (!000 plus )@00 VAT on
outputs.
'?.1.0E - Hou paid the balance that was owing to &A)&.
The $oo66ee"i#7 re(ords 'ill loo6 as .ollo's3
'. De$it Credit
.urchases B %nventory '!000
VAT on %nput '?0
Can" '!?00
(?4/)/4@) .urchases recorded for Ianuary
1.
Can" (!@00
&ales (!000
VAT on *utput @00
(?4/)/4@) &ales recorded for Ianuary
2.
VAT on *utput @00
VAT on inputs '?0
VAT 3ontrol Account (?0
(?4/)/4@) Transfer of surplus to 3ontrol Account
(.
VAT 3ontrol Account (?0
Can" (?0
()B/;/4@) .ayment of VAT reported for Ianuary
Dr VAT %#"ut A((ou#t Cr
Aug. 2' Can" '?0 Aug. 2' VAT 3ontrol '?0
Dr VAT Out"ut A((ou#t Cr
Aug. 2' VAT 3ontrol @00 Aug. 2' Can" @00
Dr VAT Co#trol A((ou#t Cr
Aug. 2' VAT input '?0 Aug. 2' VAT *utput @00
Can" (?0
VALUE ADDED TAX3 CALCULAT%ONS
Notes= Assess!e#t Tas6s a#d solutio#s
Lear#i#7 Out(o!e )3 Ai#a#(ial A((ou#ti#7
Perform elementary VAT calculations- 3alculation.
Value Added Tax is a tax on the supply of goods and services which is
eventually borne by the final consumer! but which is collected at each stage of
the production and distribution chain. 3urrently the &tandard rate of VAT in
&outh Africa is '( and this is the rate to $e used 'he# a#s'eri#7 all
Fuestio#s.
HUEST%ON )
*n 'A ;arch! Tilly sells goods to the four customers shown in the table. The
value of the goods is also shown. VAT has not yet been included in the invoice
price of the goods.
3alculate the value of VAT in each case and the total value of the invoice to
be sent to each customer.
CUSTO0E, VALUE OA
-OODS SOLD
VAT %NVO%CE TOTAL
9ina ) ?(.@A
Jhentsane ) '21.E'
.huti ) 'A.?(
Congi )1 2>'.E1
HUEST%ON ;
*n ( &eptember! <arry receives invoices for goods that he purchased. The
invoices show the total price of the goods including VAT.
3alculate the value of goods that <arry received and the amount of VAT
added to this to produce the invoice total.
SELLE, %NVO%CE TOTAL VALUE OA
-OODS
PU,C&ASED
VAT
3indi ) 21?.A@
Folani ) ?(.11
Tenye"o )( ?A'.0E
A#windini ) A1.AA
9C. The most difficult calculation involving VAT is encountered when cash
discount is involved.
HUEST%ON ?
Aill i# the 7a"s/
Two types of discount are used in the business world-
a. KKKKKKKKKK is a reduction in price when goods are supplied to other
businesses /usually in the same line of business0. This reduced price is not
available to the general public.
This type of discount is generally shown on the invoice /source document0!
but is not included in the double-entry records.
b. KKKKKKKKKK is an allowance that can be deducted from the total amount
charged for goods if the debt is settled within a time specified by the supplier.
This type of discount is only recorded when advantage is ta"en of the
reduction.
HUEST%ON *
Cernard sells goods valued at )1 A@0 to Aileen. Aileen is allowed a 1? trade
discount.
3alculate-
a0 The amount that Cernard will show on his sales invoice for the goods sold
and the amount that he will enter in his sales $ournal
b0 The amount that Aileen will enter in her purchases $ournal
Notes3
CAS& D%SCOUNT
*ne of the tric"iest calculations that you will come across during your
accounting studies involves the calculation of VAT on goods that are sub$ect
to both trade and cash discount. 7earn it and practice it several times.
VAT is always calculated after deducting cash discount. %f the customer does
not pay before the date stipulated on the purchase invoice! they lose the
benefit of the cash discount.
Exa!"le
3orinne sells goods on 2 ;arch valued at )'! 1A@.>( to 4olly. The terms are
a trade discount of 1? and a cash discount of ? if 4olly settles her account
within 20 days.
3alculate the total value of the sales invoice sent to 4olly.
Answer
.rice of goods )'! 1A@.>(
7ess trade discount 2'E.1'
&elling price to 4olly E?A.@2 ) E?A.@2
Less cash discount (A.>>
E0E.A?
VAT '?E.1' '?E.1'
Total value of invoice , )=))D/<*
The total value shown on the copy sales invoice /sour(e do(u!e#t0 is
entered in the sellerLs /3orinneLs0 sales Gour#al.
The invoice will be received by the purchaser /4olly0 as a purchases invoice
/sour(e do(u!e#t0 and will be entered in his "ur(hases Gour#al.
All the subsidiary boo"s must record any VAT included in the source
documents.
HUEST%ON B
*n 2 *ctober ;ale"a sells goods to .ierre with a catalogue value of )A! ?00.
The goods are sub$ect to a trade discount of 22M and if .ierre settles the
outstanding amount before the end of the month he may deduct a 1N cash
discount /invoice no. '12(0. *n ( *ctober ;ale"a sells goods to ;apule with
a catalogue price of )2A@. <e allows ;apule 1? trade discount and 2
cash discount for settlement within 20 days /invoice no. '!12?0. Also! on (
*ctober ;ale"a sells goods to Congani with a catalogue price of )?'>.
ConganiLs order is sub$ect to ?0 trade discount and a cash discount of ' if
the debt is settled by the end of the month /invoice no. '!12@0.
3alculate-
a the total of the sales invoice sent to .ierre
$ the total of the sales invoice sent to ;apule
( the total of the sales invoice sent to Congani
d .repare the entries in ;ale"a sales $ournal.
0ale6a3 sales Iour#al
Date Parti(ulars %#8oi(e #o/ Sales Vat %#8oi(e total
2 *ctober .ierre ' 12( ) ) )
( *ctober ;apule ' 12?
(*ctober Congani ' 12@
SOLUT%ONS
HUEST%ON )
3alculate the value of VAT in each case and the total value of the invoice to
be sent to each customer.
CUSTO0E, VALUE OA
-OODS SOLD
VAT %NVO%CE TOTAL
9ina ) ?(.@A ) A.@? ) @1.21
Jhentsane ) '21.E' ) '>.@' ) '?'.?1
.huti ) 'A.?( ) 1.(@ ) 10.00
Congi )1 2>'.E1 )222.(A )1 A'?.2E
HUEST%ON ;
3alculate the value of goods that <arry received and the amount of VAT
added to this to produce the invoice total.
SELLE, %NVO%CE TOTAL VALUE OA
-OODS
PU,C&ASED
VAT
3indi ) 21?.A@ ) 1>0.'? ) (?.@'
Folani ) ?(.11 ) (@.@2 ) A.?E
Tenye"o )( ?A'.0E )2E2'.'( )@2E.E?
A#windini ) A1.AA ) @1.?> ) '0.'E
HUEST%ON ?
Aill i# the 7a"s/
A. Trade discount
C. 3ash discount
HUEST%ON *
Cernard sells goods valued at )1 A@0 to Aileen. Aileen is allowed a 1? trade
discount.
a0 )1 0@0
b0 ) )10@0
HUEST%ON B
(a) ($) (()
A/ Pierre 9/ 0a"ule C/ 9o#7a#i

)A ?00.00

)2A@.00
)
?>'.00
7ess Trade discount
1 (EA.?0
7ess Trade discount
E(.00
7ess Trade discount
1?E.?0

? 001.?0

1>1.00

1?E.?0
7ess discount
'1?.0@
7ess 3ash discount
>.(@
7ess 3ash discount
1.?E

(>AA.((

1A2.?(

1?@.('
Add VAT
>>1.>(
Add VAT
2>.20
Add VAT
2?.E0
Total value of invoice
??@0.1>
Total value of invoice
2''.@(
Total value of invoice
1E1.2'
d .repare the entries in ;ale"a sales $ournal for 2 and ( *ctober.
0ale6a3 sales Iour#al
Date Parti(ulars %#8oi(e #o/ Sales VAT %#8/ Total
2 *ctober .ierre ' 12( ) (@AA.(( ) @>1.>( ) ??@0.1>
( *ctober ;apule ' 12? 1A2.?( 2>.20 2''.@(
(*ctober Congani ' 12@ 1?@.(' 2?.E0 1E1.2'