Before knowing the journal entries, I am explaining VAT. VAT is value added tax.

India is
adopting VAT formula from western countries. Before this, sale tax was collected. Value
added tax is charged on purchase and sale. On purchase, it will be VAT input. On sale, it will
be VAT Output. Excess of VAT output over VAT input will deposit in state Govt. account. If
you are buying or selling the Good which are under VAT, you have to keep its record.

For recording, you have to pass following journal entries of VAT.

1. When Goods are bought and you have to pay both purchase value and VAT
input or paid both, at that time, following journal entry will be passed.

Purchase Account Dr. (Value of Purchase)

VAT Input Account Dr. ( VAT on Purchase)

Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)

Reason of this Journal Entry :

We have bought the goods, it increases our current asset. Increase of asset will always debit.
VAT input is also our current Asset or Negative Current Liability because We paid this to
our creditor or supplier (for paying govt.) but still our net liability has not been fixed. If we
received VAT output same to VAT input, then VAT Input account will automatically written
off. If VAT input will be more than VAT Output, we have to Get money from Govt. So, VAT
input account will be Debit. If we are final consumer, we need not show the VAT Input
account, its cost will be included in purchase account. So, purchase expense will increase
and debit in our journal entry.

2. When Goods are Sold and you have to receive both Sale Value and VAT
Output or received both, at that time, following journal entry will be passed

Cash or Bank or Name of Customer Account Dr. (Value of Purchase + VAT output)

Sale Account Cr. (Value of Sale)

VAT Output Account Cr. (VAT on Sale)

Reason of this Journal Entry :

When we sell any goods we receive cash or bank. If we sell the goods on credit, we have to
get money from our customer. So, Receivable money from our customer is just like given
loan. So, it is also increase of our current asset. So, in case of cash sale, we will debit cash or
bank account. In case of credit sale, we will debit to debtor or customer account. We will
credit to sale account because in sale, we transfer the ownership of goods to other party. So,
it is decrease of our current asset. So, sale account will be credit. All the amount of VAT
which we will receive on sale will not go to our pocket. It is the money of Govt. Because
Govt. can not get the money of tax from each part, so, we have obtained the tax on the behalf
of Govt. So, it is increase in our current liability. So, this account will credit.
3. When We pay the Net VAT (Payable) to Government. At that time, following
journal entry will be passed.

Net VAT Payable Account Dr. ( Excess of VAT Output over VAT Input)

Bank Account Cr.

Reason of this Journal Entry :

When we will debit VAT Payable account, it means, we are decreasing our current tax
liability. Every payment through bank account will decrease our current asset, so bank
account will credit. We have to show only excess of VAT output over VAT Input because the
VAT which we have to pay already through purchasing need to pay again. So, we will deduct
VAT input from VAT output.

4. When there is the Change in VAT input or VAT output Rates, at that time
following Entry will be passed.

I have already explained that State Govt. can change the VAT Rates and its applying date.
So, if you have passed the journal entries with old rate, you need to adjust your VAT Entries.
Different accounting software have different procedure to adjust it more fastly, you can
learn the procedure at here. Adjustment journal entry will be different, if we have different
case. Means, VAT input same but increased VAT Output. Or VAT input increased but same
the VAT Output. If both VAT input and VAT out has increased. Following is its example

Because VAT is increased from 4% to 5%. It means net increase in input vat is only 1%. Total
purchase is Rs. 1000. Total purchase's 1% is Rs. 10 and surcharge is 10% which is calculated
on Rs. 50 and it will be Rs. 5. So, total value of vat increase is Rs. 15.

It means our (creditors) current liability will increase. So,

VAT input account Dr. 15

Creditor Account Cr. 15

Accept the voucher entry.

Pass next voucher entry for adjusting vat output.

Because VAT Out is increased from 4% to 5%. It means net increase in Output vat is only
1%. Total sale is Rs. 2000. Total sale's 1% is Rs. 20 and surcharge is 10% which is calculated
on Rs. 100 and it will be Rs. 10. So, total value of vat increase is Rs. 20+ 10 = Rs. 30

It means our (debtors) current asset will increase. So,

Debtor Account Dr. 30

Output VAT Account Cr. 30

Difference between VAT output and VAT input is Rs. 15 and if we pay this Rs. 15 to Govt.
following entry will pass.

VAT Payable Account Dr. 15