Department of Commercial Accounting

Unit 4: Value Added Tax (VAT)

Chapter 7
 Objectives
Overall objectives
• Explain and discuss the basic accounting principles and the accounting process and
apply these for a sole trader using accounting software.

Learning objectives
• Understand what VAT is
• Measure and recognise value-added tax
• Know how to record VAT in the books of the business

2
 An introduction to Value Added Tax
(VAT)
• All businesses with a turnover (sales income) > R1million must register for VAT.
We refer to these businesses as VAT vendors.
• These businesses collect VAT from customers on behalf of South African
Revenue Services (SARS) and they have to complete VAT return forms (VAT201)
regularly.
• VAT is levied at 15% (was 14% before April 2018) on services provided or goods
sold.
• Certain items are exempt from VAT (no VAT is charged) and other essential items
are zero rated (VAT is charged at 0%).

• Review the tax invoice in the textbook to see how VAT is shown on source
documents and how the amounts are calculated.
• Know how to record VAT in the books of the business

3
An introduction to Value Added Tax
(VAT)

Types of VAT
Supplies

Standard Zero Rated Exempt

VAT charged VAT charged No VAT

at 15% at 0% charged

4
 An introduction to Value Added Tax
(VAT)
Zero Rated supplies include:

• Exports
• Basic food items: e.g. brown bread, maize meal, vegetables and fruits
• Illumination paraffin
• Farming inputs
• Certain grants by government
• Sale of going concern business
• Petrol and diesel
• International transport services
• Sanitary pads

5
 An introduction to Value Added Tax
(VAT)
Exempt supplies include:

• Non-fee related financial services e.g. interest

• Educational services provided by an approved institution
• Residential rental accommodation
• Public and rail transport (passenger).

6
 Business as agent

VAT vendors
(businesses)
act as
collection agent
Customers SARS for SARS VAT
pay VAT to
businesses

Businesses pay VAT

OVER to SARS
7
 VAT example
All other
products and
most
Grocer Ltd services,
Essential include VAT
products
Item Price
@15%. Price
have VAT on the shelf
charged Bread (no VAT) 8.99 includes VAT
at a zero
rate Shampoo 20.52
Total 29.24
VAT @ 15% 2.68
What
customer
actually pays

8
 How is VAT calculated
R17.84 R2.68 R20.52

Amount VAT amount

business collected by R20.52
gets to business on
keep behalf of
(amount SARS Price on the
excluding product
VAT) (amount
including
VAT)
9
 How is VAT calculated

R2.68 R17.84 R20.52

15% 100% 115%

VAT owed
to SARS
+ of what
business
= VAT +
business
keeps share = what
customer
pays

10
 How is VAT calculated

R20.52 R20.52
x x R20.52
100/115 15/115
= + =
= R17.84 R2.68 115%

R20.52 x want (Business share i.e. 100%)

have (Selling price i.e. 115%)
11
 Summary of VAT calculation
If the amount given is inclusive of VAT(in green)

• Amount exclusive of VAT = Amount given x 100/115

• Amount of VAT = Amount given x 15/115

R17.84 R2.68 R20.52

+ =
Amount given Amount given Amount Inclusive
x 100/115 x 15/115 of VAT is given

12
 Summary of VAT calculation
If the amount given is exclusive of VAT (in green)

• Amount inclusive of VAT = Amount given x 115/100

• Amount of VAT = Amount given x 15/100

R17.84 R2.68 R20.52

+ =

Amount Amount given Amount given

exclusive of VAT x 15/100 x 115/100
is given

13
 VAT Input / VAT Output
Recording Input VAT

• Input VAT is the amount of VAT calculated from all the goods bought or
services supplied to a business whether it be cash or credit

• The business pays INPUT VAT

• If the business is a VAT vendor, INPUT VAT is claimed back from SARS

• ASSET (DR)

• VAT control account

14
 VAT Input / VAT Output
General ledger

Dr + Bank (asset) - Cr
1/1 Inventory and
VAT 115

Dr + INPUT VAT (asset) - Cr

1/1 Bank 15

Dr + Inventory (asset) - Cr
1/1 Bank 100

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 VAT Input / VAT Output
Recording Output VAT

• Output is the opposite. Output VAT is VAT calculated from goods sold or
services provided by businesses whether it be cash or credit.

• The business charges OUTPUT VAT

• If the business is a VAT vendor, the OUTPUT VAT is paid over to SARS

• LIABILITY (CR)

• VAT control account

16
 VAT Input / VAT Output
General ledger

Dr + Bank (asset) - Cr
2/1 Sales and
VAT 230

Dr - OUTPUT VAT (liability) + Cr

2/1 Bank 30

Dr - Sales (equity) + Cr
2/1 Bank 200
Could use a single account – SARS (VAT).
DR balance = asset
CR balance =liability

17
 Net VAT position
• VAT outputs > VAT inputs:

Total VAT Output R5 000

Less: Total VAT Inputs (R3 000)
Net VAT due to SARS R2 000

• VAT outputs < VAT inputs:

Total VAT Output R3 000

Less: Total VAT Inputs (R5 000)
Net VAT refundable by SARS (R2 000)

18
 VAT Examples

Hairdressing business

1.Purchased 30 shampoos for R600 (incl. VAT) in total for

resale
2.Pay rent for office premises R1200 (excl. VAT)
3.Sold 10 shampoos for R280 (excl. VAT) in total
4.Cut and styled a client’s hair for R1200 (incl. VAT)
5.Pay wages to the receptionist R150

19
1. Purchased 30 shampoos for R600 (incl. VAT) in total for resale.
Calculation of amounts
100% 15% 115%
#
(Amount Excl. VAT) (VAT Amount) (Amount Incl. VAT)

1 R 521,74 (R 600 * 100/115) R 78,26 (R 600 x 15/115) R 600 (given)

Accounting Equation
# ASSETS = EQUITY + LIABILITIES
1 Inventory + 521.74 DR 0 0
Bank - 600.00 CR
VAT input +78.26 DR

Journal entry
Date Debit (DR) Credit (CR)
01/03/ Inventory (SFP) 521.74
23 VAT Input (SFP) 78.26
Bank (SFP) 600
Purchase of inventory 20
2. Pay rent for office premises R1200 (excl. VAT)
Calculation of amounts
100% 15% 115%
#
(Amount Excl. VAT) (VAT Amount) (Amount Incl. VAT)

R 1200 (Given) R 180 (R 1200 x 15/100) R 1380 (R1200 x 115/100)

2

Accounting Equation
# ASSETS = EQUITY + LIABILITIES
Rent
2 Bank - 1 380 CR Expense - 1 200 DR 0

VAT Input + 180 DR

Journal entry
Date Debit (DR) Credit (CR)
2 Rent Expense (SPL) 1 200
VAT Input (SFP) 180
Bank (SFP) 1 380
Payment of rent expense 21
3. Sold 10 shampoos for R280 (excl. VAT) in total
Calculation of amounts
100% 15% 115%
#
(Amount Excl. VAT) (VAT Amount) (Amount Incl. VAT)

3
R 280 (Given) R 42 (R 280 x 15/100) R 322 (R280 x 115/100)

Accounting Equation
# ASSETS = EQUITY + LIABILITIES
3 Bank + 322 DR Sales + 280 CR Vat output +42 CR
Purchased trans. 1:
Cost of
=600/30 x 100/115 x 10
Inventory -174 CR Sales -174 DR =R173.91
Journal entry
Date Debit (DR) Credit (CR)
3 Bank (SFP) 322
Sales (SPL) 280
VAT Output (SFP) 42
Cash sale
Cost of Sales (SPL) 174
Inventory (SFP) 174
22

Inventory sold and expensed in CoS

4. Cut and styled a client’s hair for R1200 (incl. VAT)
Calculation of amounts
100% 15% 115%
#
(Amount Excl. VAT) (VAT Amount) (Amount Incl. VAT)

R1043,48(R1200 * 100/115) R 156,52 (R1200 x 15/115) R 1200(given)

4

Accounting Equation
# ASSETS = EQUITY + LIABILITIES
Services
4 Bank + 1 200 DR rendered + 1 043 CR 0

VAT Output + 157 CR

Journal entry
Date Debit (DR) Credit (CR)
4 Bank (SFP) 1 200
Services Rendered (SPL) 1043
Output VAT (SFP) 157
Rendered services for cash 23
5. Pay wages to the receptionist R150
Calculation of amounts
100% 15% 115%
#
(Amount Excl. VAT) (VAT Amount) (Amount Incl. VAT)

5
R 150 No VAT R 150

NO VAT on salaries and

wages - Not part of the
enterprise.

Accounting Equation
# ASSETS = EQUITY + LIABILITIES
5 Bank - 150 CR Wages - 150 DR 0

Journal entry
Date Debit (DR) Credit (CR)
5 Bank (SFP) 150
Wages (SPL) 150
Payment of wages (expense) 24