CHAPTER 20

VALUE-ADDED TAX

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Learning outcomes 20 - 2

20.1 Introduction 20 - 3

20.2 The mechanics of VAT 20 - 3

20.3 Accounting treatment 20 - 7

Questions 20 - 14

20 - 1
At the end of the chapter students should be able to:

- distinguish between input VAT and output VAT

- understand the mechanics of VAT

- apply the accounting treatment of VAT

20 - 2
20.1 Introduction

Value-Added Tax (abbreviated VAT) is an indirect system of taxation that was introduced
on 30 September 1991 and is regulated by the Value-Added Tax Act No 89 of 2091. VAT
replaced General Sales Tax (GST).

VAT is currently levied at 15% on the value of the majority of goods and services (not
money) supplied by vendors. VAT is also collected by the Department of Customs and
Excise on all imports of goods.

VAT is basically a tax on goods and services used in the RSA. Only people registered as
VAT vendors are required to levy VAT on goods and services.

There are some exemptions from VAT and also certain deemed supplies of goods and
services, but for the purposes of Financial Accounting 188 it can be accepted that VAT will
be paid on all services, goods and fixed assets acquired from registered vendors (as well
as all imports of goods and services) and that VAT will be levied on all services rendered,
goods and fixed assets sold by registered vendors (except exports), except were the
question states differently.

20.2 The mechanics of VAT

VAT payable by or refundable to a registered vendor is the difference between output and
input taxes.

Output tax is the tax that the vendor charges on the delivery of goods or services in the
execution of an operation. Input tax is the tax paid by the vendor in respect of goods or
services delivered.

VAT is levied at 15% on the selling price. A seller would have to ask the purchaser R115 in
order to make a R100 sale. R15 is payable to SARS and is known as output tax. The
remaining R100 is the sales amount.

The price paid for purchases includes VAT. The VAT can be calculated as 15/115 x price.
The VAT is the input tax and can be claimed back from SARS.

Assume a truck is purchased for R230 000. 15/115 x R230 000 = R30 000 is VAT paid to
the seller. The remaining R200 000 (R230 000 x 100/115) is the cost price of the truck on
which depreciation can be written off.

The purchaser pays the R30 000 over to the seller and the purchaser can claim it back
from the Receiver. The VAT on the truck does not “cost” him anything. The seller receives
the R30 000 from the purchaser, but it is not his money. He received it on behalf of the
Receiver of Revenue and should pay it over to the Receiver. He has neither made nor lost
money with regards to the VAT.

If an entity is registered for VAT purposes he is purely a collecting agent of VAT on behalf
of the Receiver of Revenue. All the VAT he receives on behalf of the Receiver he pays
over and all VAT he pays, he claims back from the Receiver.

20 - 3
VAT is levied at each point in the production and distribution channels. In the example
illustrated on the next page, you may assume that all four entities are registered for VAT
purposes and all four entities must therefore collect VAT on behalf of SARS on all goods
sold by the entities. However, all four can also claim back from SARS the VAT paid on their
purchases.

ILLUSTRATION

TRANSACTIONS VAT RETURN VAT OWING

TO SARS
1. MANUFACTURER
Sales 100 Tax on Sales 15
VAT 15 (Output tax)
R115 LESS
Tax on Purchases
(Input tax) (0)
VAT payable R15 15

2. WHOLESALER
Sales 400 Tax on Sales 60
VAT 60 (Output tax)
R460 LESS
Tax on purchases
(Input tax) (15)
VAT payable R45 45

3. RETAILER
Sales 600 Tax on Sales 90
VAT 90 (Output tax)
R690 LESS
Tax on purchases
(Input tax) (60)
VAT payable R30 30

4. SHOP
Sales 900 Tax on Sales 135
VAT 135 (Output tax)
R1035 LESS
Tax on purchases
(Input tax) (90)
VAT payable R45 45
R135

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EXPLANATION

1. The manufacturer wants to earn R100 on the sale of goods to the wholesaler. The
manufacturer is registered for VAT and is required to charge 15% VAT output tax on
the selling price and must therefore sell the goods for R115. The wholesaler owes the
manufacturer R115.

The transaction will be recorded as follows in the records of the manufacturer:

Dr Wholesaler (debtor) 115

Cr Sales 100
Cr VAT-control 15

The VAT does not belong to the manufacturer and must be paid over to SARS. The
credit balance on the VAT-control account therefore represents a liability in the records
of the manufacturer until this amount is paid over to SARS.

2. As the wholesaler is registered for VAT purposes, the entity is entitled to claim back all
VAT he paid on purchases as input tax.

The wholesaler records this purchase transaction in the books as follows:

Dr Purchases 100
Dr VAT-control 15
Cr Creditors 115

The R15 debit balance on the VAT-control account represents the VAT that SARS
should pay back to the wholesaler.

3. The wholesaler wants to earn R400 on the sale of goods to the retailer. The wholesaler
must also charge VAT on the sale of goods and therefore the goods sell at R460 to the
retailer.

The sales transaction is recorded as follows in the records of the wholesaler:

Dr Retailer (debtor) 460

Cr Sales 400
Cr VAT-control 60

VAT-control account in the wholesaler’s books

Input VAT 15 Output VAT 60
Balance 45
60 60
Balance 45

The R45 credit balance on the VAT-control account represents the net amount that the
wholesaler owes SARS.

20 - 5
 Another way to think about the debits and credits of the VAT-control account is to think
of input VAT as an asset. I have already paid the money and someone (SARS) owes
the money to me in other words it is an asset to me. An asset always has a debit
balance.

When I receive output VAT on behalf of the Receiver of Revenue for services rendered
or goods sold, I received the money on behalf of someone (SARS) and I owe the
money to SARS; it is therefore a liability to me. A liability always has a credit balance.

If the VAT-control account has a debit balance at the end of the period it means that in
total there were more inputs than outputs. It is an asset (debit balance) to me and
SARS owes the money to me.

If the VAT-control account has a credit balance at the end of the period it means that in
total there were more outputs than inputs. It is a liability (credit balance) to me and I
owe the money to SARS.

4. As above, the credit balance on the VAT-control account of the retailer will be R30 and
this amount will be paid over to SARS.

The credit balance on the VAT-control account of the shop will be R45 and represents
the amount owed to SARS.

5. The final consumer pays R135 VAT to the shop, which is equal to the total VAT paid
over to SARS by all the different vendors. The final consumers are ordinary persons
who buy the goods in the shop. They are not registered for VAT purposes, they pay the
VAT when they buy the goods but cannot claim back the VAT.

It is important to realise that if a business is registered for VAT, the VAT is not a tax that is
charged on the business. The business is only acting as a collecting agent for SARS. On a
regular basis (monthly, two-monthly, half-yearly or annually) the business will calculate the
difference between the VAT collected on sales (output tax) and the VAT paid on purchases
(input tax), complete a VAT-return and pay over or claim back the net amount from SARS.
The balance on the VAT-control account represents the net amount that should be paid
over or claimed back.

The final consumer is the person that actually pays the tax.

20 - 6
20.3 Accounting treatment

In all the books of first recording a column for VAT is added. The total of every VAT column
is transferred to the VAT-control account at the end of the month. This account can be a
current asset or liability depending on the balance. The balance represents the net amount
payable to or receivable from SARS.

20.3.1 Purchases

Each purchase transaction (of goods and services) is recorded in the purchase journal
from the goods receipt note and/or invoice. If an entity is registered for VAT, a VAT column
will be inserted in the purchase journal (if cash purchase transactions are recorded directly
in the CPJ, a VAT column will also be inserted in the CPJ).

The total purchase price (inclusive of VAT) of a transaction is recorded in the total column
of the purchase journal. The purchase price (excluding the VAT portion) is recorded in the
column of the asset/expense purchases, e.g. Inventory/Purchases. The VAT portion of the
purchase price is recorded in the VAT column.

The total of the total column of the purchase journal is credited to the creditors’ control
account. Each individual transaction is credited to the different creditor accounts in the
creditors’ ledger with the total purchase price (including VAT). The asset/expense (e.g.
Inventory/Purchases) column is debited to the asset/expense account and the VAT
column’s total is debited to the VAT-control account (this is the input tax).

Trade discount received from suppliers is not recorded at all. The reduced purchase price
is used as the purchase price and purchases will be recorded in the records at this lower
value. VAT is levied on the reduced purchase price.

Journal entry – Purchase transactions:

Dt Expense/asset with purchase price (VAT excluded) 100

Dt VAT-control (with VAT input tax) 15
(R115 *15/115 or R100 *15%)
Cr Creditors’ control (with total purchase price including VAT) 115

20 - 7
It is important to know when to multiply with 15% and when to multiply with 15/115 to
calculate the VAT.

The expense, income and asset are always net of VAT and the debtor, creditor and bank
always include VAT.

Expense, Income, Asset + VAT = Debtor, creditor and bank

100 + 15 = 115

The principle is always to take what you have and to multiply it with what you need and
then to divide it again with what you have.

If you have the price = R230, what is the VAT?

R230 X 15/115 = R30

If you have the net price = R200, what is the VAT?

R200 x 15/100 (15%) = R30

Purchase returns are recorded in the purchase returns journal. A VAT column is also
inserted in this journal. The transfer from this journal to the general ledger accounts is the
opposite of the original purchase transaction.

Journal entry – Purchase returns transactions:

Dt Creditors’ control (with total purchase price included VAT of the goods returned) 115
Cr Expense/asset with purchase price (VAT excluded) 100
Cr VAT-control (with VAT portion of purchase price) 15

The outstanding debt equals the purchase transaction. The debt is equal to the purchase
price of the goods that include VAT and is redeemed by payment to the creditor.

No VAT is levied on the payment of the money to creditors.

Journal entry – Redemption of legal claim of creditor:

Dt Creditors’ control (with total purchase price including VAT) 115

Cr Bank (with total purchase price including VAT) 115

20 - 8
20.3.2 Sales

All sales transactions are recorded from the sales invoices in the sales journal. If an entity
is registered for VAT, VAT must be charged on all sales transactions and a VAT column
should therefore be inserted in the sales journal (if cash sale transactions are recorded
directly in the CRJ, a VAT column will also be inserted in the CRJ).

The total selling price, including VAT, is recorded in the total column. The sales price,
excluding VAT is recorded in the sales column and the VAT portion in the VAT column.
The total of the total column of the sales journal is debited against the debtors’ control
account. Individual sales transactions are debited at the total sales price (VAT included)
against the relevant debtors in the debtors’ ledger. The sales column’s total is credited
against sales and that of the VAT column total is credited against the VAT-control account.

Trade discount granted to clients is not recorded at all. The reduced selling price is used as
the actual selling price and sales will be recorded at the reduced value. VAT is levied on
the reduced selling price.

Journal entry – Sales transactions:

Dt Debtors (with total selling price including VAT) 115

Cr Income with selling price (excluding VAT) 100
Cr VAT-control (with VAT output tax) 15

Sales returns are recorded in the sales returns journal. A VAT column is also inserted in
the sales returns journal. The entries in the ledger accounts are the opposite of the entries
of the original sales transaction.

Journal entry – Sales returns transactions:

Dt Sales Returns with selling price (VAT excluded) 100

Dt VAT-control (with VAT portion of selling price) 15
Cr Debtors (with total selling price of goods returned that includes VAT) 115

The redemption of debt is recorded from the receipt to the cash receipt journal. No VAT is
levied on the receipt of money.

Journal entry – Redemption of the liability by the debtor:

Dt Bank (with total selling price including VAT) 115

Cr Debtors (with total selling price including VAT) 115

20 - 9
Example 20.1

Transactions of XYZ during May 20x9 (all prices include VAT of 15% on cost price):

1. Purchase inventory for R1 725 on credit from A.

2. Pay cash for inventory to the value of R2 300.

3. Return inventory to the value of R287.50 to A.

4. Purchase inventory for R2 875 on credit from B.

5. Purchase a delivery vehicle for R57 500 on credit from C.

6. Pay repairs of R12 075 cash.

7. Pay B's account in full.

8. Pay C R57 500.

9. Sell inventory for R3 910 cash.

10. Sell an unused computer for R1 150 on credit to D.

11. Sell inventory of R1 035 on credit to E.

12. E returns inventory to the value of R460 and settles his account in full.

REQUIRED

Record the abovementioned transactions.

20 - 10
GENERAL LEDGER

Creditors’ control
Purchase return journal 287.50 Purchase journal 62 100
Bank 60 375 (1725+2875+57500)
(2875+57500)
Balance 1 437.50
62 100 62 100
Balance 1 437.50

Purchases
Creditors 4 000 Returns 250
(1 500 + 2500)
Bank 2 000 Balance 5 750
6 000 6 000
Balance 5 750

Debtors’ control
Sales 2 185 Returns 460
(1150+1035) Bank 575
(1035 – 460)
Balance 1 150
2 185 2 185
Balance 1 150

Sales
Debtors 400 Debtors 900
Balance 3 900 Bank 3 400
4 300 4 300
Balance 3 900

VAT-control
Sales returns (Input) 60 Debtors (Output) 285
(150+135)
Purchases (Input) 8 100 Bank (Output) 510
(225+375+7500)
Bank (Input) 1 875 Purchase returns (Output) 37.50
(300+1575)
Balance 9 202.50
10 035 10 035
Balance 9 202.50

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CREDITORS’ LEDGER

A
Returns 287.50 Purchases 1 725
Balance 1 437.50
1 725 1 725
Balance 1 437.50

B
Bank 2 875 Purchases 2 875
2 850 2 850

C
Bank 57 500 Vehicle 57 500
57 000 57 000

DEBTORS LEDGER

D
Computer 1 150

E
Sales 1 035 Returns 460
Bank 575
1 035 1 035

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 CHAPTER 20
QUESTIONS

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Question 20.1 Treatment of VAT 20 - 14

20 - 13
QUESTION 20.1

Spiga Ltd. is a registered VAT vendor with a 30 September 20X8 financial year-end. The
VAT rate is 15%. The enterprise utilises a perpetual inventory system. All sales and
purchases of inventory are done on credit.

The following balances, amongst others, appeared in the general ledger of Spiga Ltd. on
1 October 20x7:
R
VAT-control (amount receivable) 2 000
Creditor’s control 37 000

Spiga Ltd. incurred the following transactions during the financial year ended
30 September 20X8, all amounts, where applicable, include VAT:

1. Sales of inventory of R386 400.

2. Purchases of inventory of R322 000.
3. Purchase returns of R8 050.
4. Payments from debtors of R376 200.
5. Payments to creditors of R339 720.

YOU ARE REQUIRED TO

a) show the VAT-control account in the general ledger of Spiga Ltd. on

30 September 20X8.

b) calculate the balance of the Creditors’ control account as it will appear in the
financial statements of Spiga Ltd. on 30 September 20X8.

20 - 14