Prepaid VAT

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Jabir Aslam (Querist)
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07 February 2023 Hi all,

In my question, I would like to know about accounting treatment for an expense where VAT is paid in advance and the expense is payable on a recurring basis. i will explain the scenario,-

my office rent payable for the year is 36000+1800 VAT =37800, we have to pay rent in 3 payments of 12000. as the first payment we paid 13800(12000 1st payment + 1800 total VAT ), now I want to claim this VAT with the current quarterly payment ( January to March), but 2nd payment will become due on April and third payment will become due on August.

I am using TALLY, I have to post the full amount of rent to claim this full amount of VAT, but the full amount of 36000 will show in my January expense. i want to treat this expense as recurring basis, and I want to claim VAT in current period. how is it possible ? what are the journal entries

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 July 2024 To handle the scenario where VAT is paid in advance and the expense is payable on a recurring basis (such as rent), you can follow these steps:

### 1. Initial Payment Entry (January):
When you make the first payment which includes rent and VAT:

- **Journal Entry:**
```
Dr. Rent Expense 12,000
Dr. VAT Input (Current Asset) 1,800
Cr. Bank Account 13,800
```

Explanation:
- **Rent Expense:** Debit the Rent Expense account for the amount of rent paid (12,000).
- **VAT Input (Current Asset):** Debit the VAT Input account to record the VAT paid on the rent (1,800). This is an asset account where you temporarily hold the VAT amount until you can claim it back.
- **Bank Account:** Credit your Bank Account for the total amount paid (13,800).

### 2. Monthly Adjustment (End of January):
At the end of January, adjust your accounts to reflect the portion of rent and VAT that pertains to the current period (January to March).

- **Journal Entry to Allocate Rent Expense:**
```
Dr. Prepaid Rent (Current Asset) 9,000
Cr. Rent Expense 9,000
```

Explanation:
- **Prepaid Rent:** Debit the Prepaid Rent account for the portion of rent that relates to February and March (9,000).
- **Rent Expense:** Credit the Rent Expense account to reduce it by the amount of rent allocated to January (9,000).

- **Journal Entry to Allocate VAT Input:**
```
Dr. VAT Input (Current Asset) 1,350
Cr. VAT Payable 1,350
```

Explanation:
- **VAT Input:** Debit the VAT Input account for the portion of VAT that relates to January (1,350).
- **VAT Payable:** Credit the VAT Payable account for the VAT amount that you will pay in the current VAT return period (1,350).

### 3. Subsequent Payments (February and March):
When you make the second and third payments for rent:

- **Journal Entry for February (assuming the same split as January):**
```
Dr. Rent Expense 12,000
Dr. Prepaid Rent (Current Asset) 9,000
Dr. VAT Input (Current Asset) 1,350
Cr. Bank Account 22,350
```

- **Journal Entry for March (assuming the same split as January):**
```
Dr. Rent Expense 12,000
Dr. Prepaid Rent (Current Asset) 9,000
Dr. VAT Input (Current Asset) 1,350
Cr. Bank Account 22,350
```

### Explanation:
- Each month, you allocate the rent expense and VAT input based on the portion that relates to that month.
- The Prepaid Rent account helps in spreading the rent expense over the months it covers.
- The VAT Input account holds the VAT amount that you will claim back in your next VAT return.

### Final Notes:
- Ensure that your VAT Input account reflects the correct amount of VAT that you can claim back in your VAT returns.
- Adjustments may vary based on the exact timing and frequency of your payments and VAT return periods.
- If you're using Tally, you should be able to post these journal entries directly in the software to maintain accurate records and facilitate easy reporting.

By following this approach, you effectively allocate the rent expense and VAT input across the periods they cover, aligning with your requirement to claim VAT in the current period while treating the expense on a recurring basis.