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Vat entries

CA Krishna Chaitanya M (Chartered Accountant) (463 Points)

22 August 2011

journal entries to vat

on due date

vat payable a/c Dr

to vat receivable a/c Cr

to cash ( if any) Cr

what are the jounal entries when input tax credit is adjusted like ( input tax credit taken on common inputs ),,

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10 Replies

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 22 August 2011

the entry passed by you is already covering the adjusment of Input tax credit..........

plz elaborate or clarify ur query

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CA Krishna Chaitanya M (Chartered Accountant) (463 Points)
Replied 22 August 2011

at the time of purchase entry is

purchases a/c Dr

vat receivable a/c Dr

to creditors a/c Cr

at the time of sale is

debtors a/c Dr

to sales a/c cr

to vat payable a/c cr

on due date of payment of vat adjusting entry is

vat payable a/c Dr

to vat Receivable a/c Cr

to cash a/c cr

however some common inputs used in exempted goods and taxable goods sales in those circumstances, vat taken on common input is reduced, at the time of purchase we already taken total input tax credit, so on due date vat receivable amount is reduced , i want such reduced amount treatment in books of accounts of assesse

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Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 22 August 2011

i thnk in dat case , the entry should be----

Debit balance written off A/c Dr. Proportionate amount

to Vat receivable A/c

plz correct me if m wrng

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CA Krishna Chaitanya M (Chartered Accountant) (463 Points)
Replied 22 August 2011

if those reduced amount is charged to capital account, proprietors or partners capital account, it makes any difference?

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 22 August 2011

it cant be done.....

since such reversal has to be shown as exp in P&L, coz earlier such part of cost couldnt b recognised in d same......

so, it cant be set off against capital a/c.....since it has nothng to do wid dat.......

plz correct me if m wrng

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CMA Shilpa Shinde (COST ACCOUNTANT) (217 Points)
Replied 24 August 2011

Accounting for VAT & CST

Background

VAT intends to bring harmonization in the tax structure of various States and rationalize the overall tax burden. The essence of VAT is that it provides credit/set-off for input tax, i.e., tax paid on purchases, against the output tax, i.e., tax payable on sales. To reconcile the details submitted in monthly/ quarterly / half yearly return and actual details prevailing as on 31/03/2XXX it is very much imperative to account for VAT Payable, VAT Set Off (on purchases, Expenses and capital goods), set Off used against payment of CST in a systematic and consistent manner to avail the benefit of Set Off. Sometimes due to wrong accounting Set Off is forgone while filing the return.

Let me illustrate how set off is beneficial.

Particulars	Debit	Credit
Sales 12.5%		150000
Vat on Sales 12.5%		18750
Purchases Vat 12.5%	110000
Vat On Purchases 12.5%	13750
CST Sales 2%		70000
CST 2%(on sales)		1400
CST Purchases 2%	40000
CST 2%(on purchases)	800
Vatable Expenses 12.5%(Net)	50000
Vat 12.5% VAT	6250

Case 1: Set Off on Expenses is taken. (exclusive method of accounting is followed)

Vat payable 18750

Set Off

On Purchases 13750

On Expenses 6250

Set Off Available 20000

Set off Utilized for Vat 12.5% on sales 18750 18750

Vat Payable comes to NIL

CST Payable 1400

Set Off Available 20000

Set off Utilized for Vat 12.5% on sales 18750

Set off Available 1250

Set off utilized for CST 2% on Sales 1250

CST Payable 150

Following Journal Entries will have to be passed.

1. Local Sales

Debtors A/c Dr. 168750

To Sales 12.5% 150000

To Vat 12.5%(Sales) 18750

2. Interstate Sales

Debtors A/c Dr. 71400

To Sales 2%(CST) 70000

To CST 2%(Sales) 1400

3. Local Purchases

Purchases 12.5% Dr. 110000

VAT 12.5%(Purchases) Dr. 13750

To Creditors 123750

4. Interstate Purchases

Purchases 2%(OMS) Dr. 40000

CST 2%(Purchases) Dr. 800

To Creditors 40800

5. Expenses

Expenses Dr. 50000

Vat 12.5%(Expenses) Dr. 6250

To Creditors for Expenses 56250
At the end of month pass following Entries.

6.Transfer VAT liability to VAT Payable A/c.

Vat 12.5%(Sales) Dr. 18750

To Vat Payable 18750

(Note: Pass any other VAT liability say VAT 4%,

1%, to Vat Payable A/c)

7. Transfer VAT Set Off to VAT Set Off A/c.

Vat Set Off A/c Dr. 20000

To Vat 12.5%(Purchases) 13750

To Vat 12.5%(Expenses) 6250

(Note: Pass any other VAT set off to Vat Set Off

A/c. Say Set off taken on capital assets)

8. Transfer CST Liability to CST Payable A/c

CST 2%(Sales) Dr. 1400

To CST Payable A/c 1400

At the time of making payment pass following entries.

9. Payment Entry for VAT liability

Vat Payable Dr. 18750

To Vat Set Off 18750

(Note: if Vat Set Off< Vat Payable. Credit

Cash/Bank A/c for the difference)

10. Payment Entry for CST Liability

CST Payable Dr. 1400

To Vat set Off 1250

To Cash/Bank/ 150

NOTE: CST paid on inter state purchases can not be claimed as set off, due to following reasons.

CST is centrally levied though collected by state and it is revenue for state government. VAT is purely a state level tax.

If credit is given for CST paid in OMS purchases then state (in which goods are purchased) will have to part with its revenue from its treasury which no state will accept.

CST liability can be off set against Vat Set Off for administrative smoothness. As collection of CST on one hand and refunding Vat set off on other hand will involve only Procedural formalities.

Due to above fact CST paid on purchases should be added to purchases while making financial statement. This will not lead into inconsistency in accounting on the ground that purchases are recorded inclusive of CST whereas sales are recorded exclusive of CST because set off on such purchases can not be claimed and is non refundable duty so there is no harm in claiming such CST paid as expenses. Alternatively it could be shown as expenses in the Profit and Loss A/c.

However if above accounting is adhered to then differential liability of vat and cst at any time during the year is known. If any entries remains to be passed in the previous period which comes to the notice after return is filed then it becomes very easy to revise the return if changes are substantial or incorporate such changes in the return of next period.

Profit and Loss Account As On 31.03.2XXX

Particulars		Amount	Particulars		Amount
Purchases			Sales
Local 12.5%	110000		Local 12.5%	150000
OMS 2%	40000		OMS 2%	70000	220000
Cst 2%	800	150800

Gross Profit		69200
		220000			220000

Expenses		50000	Gross Profit		69200
Net Profit		19200

		69200			69200

Balance Sheet as on 31.03.2XXX

Liabilities	Amount	Assets	Amount
Net Profit	19200	Current Assets
		Sundry Debtors	240150
Current Liability
Creditors For Goods	164550
Creditors For Expenses	56250
Bank Overdraft	150

	240150		240150

Tax Liability under income tax

Net Profit for the Year 19200

Tax Payable Comes to @ 30.9% 5933

So, Total Tax Paid:

Income Tax 5933

Vat NIL

Cst 150

Total Paid 6083

Case 2: Set Off on Expenses is not taken. (Exclusive method of accounting is followed.)

Vat payable 18750

Set Off

On Purchases 13750

Set Off Available 13750

Set off Utilized for Vat 12.5% on sales 13750 13750

Vat Payable comes to 5000

CST Payable 1400

Set Off Available 13750

Set off Utilized for Vat 12.5% on sales 13750

Set off Available NIL

Set off utilized for CST 2% on Sales NIL
CST Payable 1400

All the Journal Entries passed in case 1 will have to be passed except changes in following entries.

5. Expenses

Expenses (50000+6250) Dr. 56250

To Creditors for Expenses 56250

7. Transfer VAT Set Off to VAT Set Off A/c.

Vat Set Off A/c Dr. 13750

To Vat 12.5% (Purchases) 13750

(Note: Pass any other VAT set off to Vat Set Off

A/c. Say Set off taken on capital assets)

9. Payment Entry for VAT liability

Vat Payable Dr. 18750

To Vat Set Off 13750

To Cash/Bank 5000

10. Payment Entry for CST Liability

CST Payable Dr. 1400

To Cash/Bank/ 1400

Profit and Loss Account As On 31.03.2XXX

Particulars		Amount	Particulars		Amount
Purchases			Sales
Local 12.5%	110000		Local 12.5%	150000
OMS 2%	40000		OMS 2%	70000	220000
Cst 2%	800	150800

Gross Profit		69200
		220000			220000

Expenses		56250	Gross Profit		69200
Net Profit		12950

		69200			69200

Balance Sheet as on 31.03.2XXX

Liabilities	Amount	Assets	Amount
Net Profit	12950	Current Assets
		Sundry Debtors	240150
Current Liability
Creditors For Goods	164550
Creditors For Expenses	56250
Bank Overdraft	6400

	240150		240150

Tax Liability under income tax

Net Profit for the Year 12950

Tax Payable Comes to @ 30.9% 4002

So, Total Tax Paid:

Income Tax 4002

Vat 5000

Cst 1400

Total Paid 10422

Inference

Tax Paid when set off is not claimed 10422

Tax Paid when set off is claimed 6083

Tax Savings if Set Off is claimed 4339

Case 3: Set Off on Expenses is taken.

(inclusive method of accounting is followed u/s 145A)

Profit and Loss Account As On 31.03.2XXX

Particulars	Amount	Amount	Particulars	Amount	Amount
Purchases			Sales
Local 12.5%	110000		Local 12.5%	150000
Vat 12.5%	13750		Vat 12.5%	18750
OMS 2%	40000		OMS 2%	70000
CST 2%	800	164500	CST 2%	1400	240150

Gross Profit		75600
		220000			220000

Expenses (50000+6250)		56250	Gross Profit		75600
Vat Paid		NIL
Cst Paid		150
Net Profit		19200

Balance Sheet as on 31.03.2XXX

Liabilities	Amount	Assets	Amount
Net Profit	19200	Current Assets
		Sundry Debtors	240150
Current Liability
Creditors For Goods	164550
Creditors For Expenses	56250
Bank Overdraft	6400

	240150		240150

Case 4: Set Off on Expenses is not taken.

(inclusive method of accounting is followed u/s 145A)

Profit and Loss Account As On 31.03.2XXX

Particulars	Amount	Amount	Particulars	Amount	Amount
Purchases			Sales
Local 12.5%	110000		Local 12.5%	150000
Vat 12.5%	13750		Vat 12.5%	18750
OMS 2%	40000		OMS 2%	70000
CST 2%	800	164500	CST 2%	1400	240150

Gross Profit		75600
		220000			220000

Expenses (50000+6250)		56250	Gross Profit		75600
Vat Paid		5000
Cst Paid		1400
Net Profit		12950

		69200			69200

Balance Sheet as on 31.03.2XXX

Liabilities	Amount	Assets	Amount
Net Profit	12950	Current Assets
		Sundry Debtors	240150
Current Liability
Creditors For Goods	164550
Creditors For Expenses	56250
Bank Overdraft	6400

	240150		240150

Inference:

Tax liability will not alter whether inclusive or exclusive method is followed.

See Case 1 and Case 3.

See Case 2 and Case 4.

1. When Assets is sold on which Vat is collectible.

Gross amount is received Rs. 50000 on sale of Car.

Bank A/c Dr. 50000

To Car A/c 44444

To Vat 12.5%(Sales Others) 5556

2. Transfer VAT liability to VAT Payable A/c.

Vat 12.5%(Sales Assets) Dr. 5556

To Vat Payable A/c 5556

3. Purchases of New Motor Car

Basic Price	779663
Octroi	38025
Vat 12.5%	102211
Insurance Charges	23388
RTO Charges	68708

New Motor Car A/c Dr. 909784

Vat 12.5% (Purchases Assets) Dr. 102211

To Bank 1011995

4. Transfer above VAT Set Off to VAT Set Off A/c.

Vat 12.5%(Purchases Assets) Dr. 102211

To Vat Set off A/c 102211

5. Expenses on which Set Off is claimed subject to reduction.

Expenses incurred for packing of Tax Free Goods.

Net 1000

Vat 12.5% 125

Total 1125

(a)Expenses A/c Dr. 1000

Vat 12.5%(Expenses) Dr. 125

To Creditors For Expenses 1125

(b)Expenses A/c Dr. 20

To Vat 12.5%(Expenses) 20

(Reversal of Vat Set off to the extent of 2%)

(125/12.5*2=Rs.20/-)

6. Treatment of Output Tax on Debtors becoming insolvent.

Sales 12.5% 100000

Vat 12.5% 12500

On sale of goods

Debtors A/c Dr. 112500

To Sales 12.5% 100000

To Vat 12.5% 12500

On Debtors becoming insolvent

Vat 12.5% Dr. 12500

Bad Debts Dr. 100000

To Debtors 112500

7. Interstate Sales Return after 6 months.

OMS Sales 2% 10000

CST 2% 200

CST/Vat collected and paid to government is not reversible if goods are returned beyond 6 months.

Sales 2%(CST) Dr. 10000

To Debtors 10000

AS 9 and IAS 18

AS- 9 on Revenue Recognition is silent regarding treatment of Revenue from sales. However IAS 18 on Revenue clarify that amounts collected on behalf of third parties such as Sales tax, Service Tax, Excise Duty should be excluded from revenue.

AS-2, Section 145A and Clause 12(b) of form 3CD.

AS-2 states that the costs of purchase and value of closing stock in trade consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities) freight inwards and other expenditure directly attributable to the acquisition

Section 145A states that purchases and sales are recorded inclusive of any tax and duty.

Clause 12(b) of form 3CD asking for Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.

However Section 145A for Tax Audit purpose is deviated if exclusive method of accouting is followed. However the ultimate profitability will not be altered in either case.(see case 1 and case 3 OR case 2 and case 4).

Conclusion:

So in general abovementioned accounting is considered for recording local and interstate transaction. If VAT Act of particular state requires some specific treatment then that is to be followed. For instance in some state Vat Set off on purchases of fixed assets available immediately whereas in some other state it is available over a period of time

4 Like

CMA Shilpa Shinde (COST ACCOUNTANT) (217 Points)
Replied 24 August 2011

ALSO REFER TO : delhi.gov.in/wps/wcm/connect/doit.../VAT+Related+FAQs/

CMA Shilpa Shinde (COST ACCOUNTANT) (217 Points)
Replied 24 August 2011

FOLLOW THE LINK: https://webcache.googleusercontent.com/search?hl=en&q=cache:KGPXamou01kJ:https://delhi.gov.in/wps/wcm/connect/doit_tradeandtaxes/TradeAndTaxes/Home/VAT+Related+FAQs/+vat+on+exempt+goods+and+taxable+goods+in+india&ct=clnk

Dinesh Kumar Agarwal (Article clerk) (117 Points)
Replied 26 August 2011

you are saying that part on input vat not treated for input tax credit. It should be charged to profit & loss account under the head cost of goods sold. Since vat amount not eligible for credit should be added to purchase cost. It should not be directly transferred to capital a/c. because in later case profit for thear may gone up by such amount.