VAT Payable Journal Entry
A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at each stage of the production process, from the manufacture to the consumers.
The amount of VAT that is payable depends on the value of the good or service being supplied. VAT is generally included in the price of the good or service, and the consumer pays this tax to the government.
In most countries, VAT is imposed on all goods and services that are traded within the country, including imports and exports. VAT is also typically imposed on goods and services that are sold by businesses to consumers, as well as those that are sold by businesses to other businesses.
The rate of VAT varies from country to country, but it is typically between 10 and 25 percent. In some countries, certain items may be exempt from VAT, such as food and medicine. In others, there may be special rates for certain items, such as books or children’s clothing.
Value-added tax is an important source of revenue for many governments around the world, and it can also help to encourage economic activity by making products more affordable for consumers.
When the company makes sales with vat, it needs to record the vat payable on the balance sheet. VAT payable is the current liability to the government. The company receive cash from customers but has to pay to government.
Journal Entry for VAT Payable
The company record VAT payable when selling the goods or service to the customers. VAT is not the company revenue, but the liability when cash is collected from customers.
The company is only the agent responsible to collect cash from customers and make payments to the government.
When making sales, the journal entry is debiting cash and credit revenue and VAT payable.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXXX | |
| Revenue | XXXX | |
| VAT payable | XXXX |
Subsequently, the company must make payment to the government. It mostly happens at the month’s end.
The journal entry is debiting VAT payable and credit cash.
| Account | Debit | Credit |
|---|---|---|
| VAT Payable | XXXX | |
| Cash | XXXX |
Example
Company ABC sells goods to customer amount $ 100,000. In addition, the company has to charge VAT 10% to the customers. The amount of VAT is $ 10,000, so the customer needs to pay $ 110,000 in total. Please prepare a journal entry for VAT payable.
Company ABC sells goods to the customer and charges a total of $ 110,000. However, it cannot record the revenue for the whole amount. The VAT that the company charge to customer is not its revenue.
ABC has obligation to collect the cash from customers and pay it back to the government. So it is not its revenue. It has to record a liability when the cash is collected. It will reverse liability when making payments to the government.
The journal entry is debiting cash $ 110,000 and credit revenue $ 100,000, VAT payable $ 10,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 110,000 | |
| Revenue | 100,000 | |
| VAT Payable | 10,000 |
The journal entry will increase the cash balance by $ 110,000 when it receives cash from customers. The revenue increases $ 100,000 on the income statement. VAT payable is the liability on the balance sheet.
When the company makes a payment to the tax authority, it will impact the VAT payable and cash balance.
The journal entry is debiting VAT payable $ 10,000 and credit cash $10,000.
| Account | Debit | Credit |
|---|---|---|
| VAT payable | 10,000 | |
| Cash | 10,000 |