Unit 2 PLCA Double Entry Help!

[Rose_20]

Hellooo!

Can someone please tell me for Unit 2 Making and Recording Payments (skills test). When we have to post the entries to the ledgers. For the VAT ledger why do we have to write the total on the Debit side. Isnt it money going out of the business? So shouldnt it be on the Credit side?

Any help will be appreciated!
Thanks
Rose:001_wub:

[Oy_mate]

When you purchase an item part of the price includes VAT. As a company this VAT can be reclaimed. So the amount you pay at the time of purchase is more than the actual cost.

The VAT that you can reclaim is therefore owed to the business. When money is owed to you, it is a debtor and all debtors should have debit balances.

The VAT account is not always a debtor though as just like when you buy goods/services you can reclaim the VAT, when you sell a good/service you have to charge VAT. The amount of VAT you charge is owed to HM Revenue & Customs and is therefore a creditor.

In conclusion:
Expense - debit VAT
Sales - credit VAT

[CJC]

Rather than think in terms of 'going out', in this case it might be more useful to think in terms of assets and liabilities.

When a business purchases something, that incurs a liability to pay the vendor - liabilities are always a credit entry. Thus there is a credit entry in the PCLA (AKA creditors a/c) for the full amount (cost+VAT) owed.

The other side of this is that we gain an asset, the thing we have purchased. Thus there is a debit entry in the purchases account. So what about the VAT? Well, VAT on (most) purchases is reclaimable by the business - hence it's an asset and goes in the debit side of the VAT account.

Conversely, a business is liable for VAT on sales. This is thus a credit entry in the VAT a/c. What a business ultimately owes in VAT is the difference between VAT on sales and VAT on purchases.

You can worry about zero-rating and exemptions next year :001_smile:

Hope that helps

Chris

PS don't you just hate it when someone posts a reply while you're in the middle of writing one :glare:

[yunfei]

Hellooo!

Can someone please tell me for Unit 2 Making and Recording Payments (skills test). When we have to post the entries to the ledgers. For the VAT ledger why do we have to write the total on the Debit side. Isnt it money going out of the business? So shouldnt it be on the Credit side?

Any help will be appreciated!
Thanks
Rose:001_wub:
Hi, Rose, just think about that INPUT VAT for purchase, that is paid on expense, so it is on the DEBIT side, and OUTPUT VAT is charged on sales, that is your income, so it is on the CREDIT side.

[Rose_20]

Hi again!

I just wanted to thank everyone who answered my question. It makes sense to me now.


"Oy_mate", "CJC", and "yunfei" Thankyou for your help!!!

Rose
:thumbup:

[claire0507]

Hi,

I'm having trouble remembering which side everything goes at the moment, try this:

Purchase
Expenses
Assets

Revenue
Liabilities
Sales

Hope it helps!!!!