AFAC02-6 Topic 1

AFAC02-6
Applied Financial Accounting

Topic 1: Value added tax
What is AFAC02-6?
Module outcomes
Topic 1:
Introduction to Value-Added Tax (VAT)
Introduction
• In this topic we will cover the following:
̶ What is VAT
̶ The calculation of VAT
̶ Categories of VAT supplies
̶ Accounting for VAT
̶ The VAT control account
̶ Mark up on selling and cost price.
What is VAT?
• VAT is an indirect tax on the consumption of goods and services
• It is charged at each stage of the production and distribution process
• That is:
Raw material
Manufacturer Retailer Consumer
producer
(Claims VAT on raw (Claims VAT on goods (Typically individuals,
(Claims VAT on inputs
materials purchased purchased and pay VAT on goods
purchased and
and charges VAT on charges VAT on purchased from the
charges VAT on
finished goods sold goods sold to the retailer. Cannot claim
output sold to
to retailer) consumer) this VAT back)
manufacturer)
• VAT was introduced in South Africa on 30 September 1991, replacing General

Sales Tax (GST)
What is VAT? cont…
• VAT is currently levied at the standard rate of 15% on most goods and
services (Effective from 1 April 2018).
• Any person carrying on business may register for VAT
• However, businesses with annual turnover in excess of R1 million are
mandated to register
• A business with annual turnover of R50 000 may elect to register for VAT
Calculation of VAT
• As indicated, VAT is levied at the standard rate of 15%
• VAT is added to the seller’s price (VAT exclusive price) to arrive at the marked
price (VAT inclusive price)
• The seller’s price, as our starting point, is 100%
• To this price, we add 15% VAT (on standard rated supplies)
• Therefore, the marked price on goods and services is 115%
• That is, the seller’s 100% + SARS’ 15% VAT
Calculation of VAT cont…
• The VAT component, given the seller’s (VAT exclusive) price is calculated as:
15
• VAT = X Selling price
100
• The VAT component, given the marked (VAT inclusive) price is calculated as:
15
• VAT = X Marked price
115
• VAT paid on purchases is called Input VAT, while the VAT charged on sales is
called Output VAT
Example: Calculating VAT
Given a VAT exclusive price:
• The selling price on pair of shoes is R500 (VAT exclusive). If the retailer is
registered for VAT, an amount of R75 (15/100 x R500) should be charged to
the customer as VAT.
• Most retailers display the VAT inclusive price. In the example above, the
marked price will be R575 (R500 + R75).
Given a VAT inclusive price:

• The marked price on a calculator is R805 (VAT inclusive). If the retailer is
registered for VAT, an amount of R105 (15/115 x R805) is included in the
price and should be paid to SARS.
Types of VAT Supplies
• There are three main categories of VAT supplies. These are:
• Standard-rated supplies on which VAT is levied at 15%
– Most goods and services fall into this category
• Zero-rated supplies on which VAT is levied at 0%
– Items in this category include 19 basic foodstuffs, fuel levy goods, farming inputs, and
exports.
• Exempt supplies on which no VAT is levied at all
– Items include educational services, public road and rail transport, and residential rental
accommodation
• NB: VAT may not be claimed on certain standard-rated goods such as motor
cars, entertainment expenses and subscriptions for sporting and social clubs
Accounting for VAT
• There are two main ways of accounting for VAT:
• The invoice basis
– VAT is accounted for when an invoice is issued/received, not when cash is paid/received
– Most businesses use this method
• The cash basis
– VAT is accounted for only when cash is received/paid
– Only NPOs, public authorities and natural persons or partnerships whose taxable supplies do not exceed R2.5
million per annum may register for the cash basis
The VAT Control Account
• The VAT control account shows both the VAT paid (Input VAT) and received
(Output VAT) by the business
• Input VAT is claimed from SARS (asset), while Output VAT is paid over to SARS
(liability)
• The debit side of the VAT Control Account shows the Input VAT for the
relevant period, while the credit side shows the Output VAT for the same
period
• The difference between the debit side and the credit side of the VAT Control
Account represents the amount receivable from (asset) or payable to
(liability) SARS
The VAT Control Account cont.
VAT Control Account
DR CR
Balance b/d XX Balance b/d XX
Input VAT XX Output VAT XX
Balance c/d XX Balance c/d XX
XX XX
Balance b/d XX Balance b/d XX
• The balance b/d can be on either side depending on whether there was VAT
from the previous period owed to SARS (CR) or owed to the business by SARS
(DR)
Example:
• Example:
• The following transactions took place during February 2020:
• Purchased inventory on credit from Clothes Suppliers Ltd, R1 390 paid by
cheque
• Paid wages, R4 560
• Sold inventory for cash, received R1 750
• Purchased stationery for R750, paid by cheque
• Assume that the entity accounts for VAT using the invoice basis and that
all prices are quoted inclusive of VAT, where applicable.
•Prepare journal entries to record the above transactions
•Prepare the VAT control account in the general ledger
Example: general journals
Date Details Debit Credit
28Feb 2020 Inventory 1 209
VAT control (input) 181
Bank 1 390
Wages 4 560
Bank 4 560
Bank 1 750
Sales 1 572
VAT control (output) 178
Stationery 652
VAT control (input) 98
Bank 750
Example: VAT control
Debit (VAT input) Credit (VAT output)
Bank 181 Bank 178
Bank 98 Balance (c/d) 101
279 279
Balance (b/d) 101

Impact of VAT on Cash Flow
• VAT returns are submitted either:
• Monthly - taxable supplies exceed R30 million annually, vendor has
repeatedly failed to comply or has applied for this option;
• Every six months - vendors carrying on farming activities and with taxable
supplies not exceeding R1.5 million annually and micro enterprises;
• Annually - companies and trusts letting goods and providing
administrative services to related persons on an annual basis; or
• Every two months - applies to all other businesses that do not fall in the
above
• VAT returns and payments are made on the 25th of the relevant month
Impact of VAT on Cash Flow cont...
• The impact of VAT on a business’ cash flows depends on the method the
business is allowed to use to account for VAT
• The invoice basis can have a significant impact on a business’ cash flows
since VAT is paid/received before actual receipt of cash from customers or
payment of cash to suppliers
• Paying Output VAT before collecting from customers means that a business
may have to use its own resources or borrow to pay SARS
• Paying cash for inputs means that a business has to wait (for a month, two,
six or twelve months) before claiming a refund from SARS.
Impact of VAT on Cash Flow cont...
• Claiming Input VAT before making payments to suppliers can result in a

positive impact on cash flows
• The cash basis can result can have either a positive or negative impact on
cash flows depending on when the cash is received/paid in relation to the
25th of the relevant month
Calculation of Cost Price, Selling Price, Mark-Up and Margin
• Cost price is the total cost of a product or service while selling

price is the price at which an item is sold.
• Selling Price = Cost Price + Profit
• The profit earned on the sale of inventory can be expressed as a
percentage of the selling price (gross margin) or cost of the inventory
(mark-up).
• Gross margin is calculated as:
(Selling price − Cost price) Gross profit
• x 100 or x 100
Selling price Selling price
• Mark-up is calculated as:

(Selling price − Cost price) Gross profit
• x 100 or x 100
Cost price Cost price
Calculation of Cost Price, Selling Price, Mark-Up
and Margin
If given cost price and mark-up on cost price:

Selling price = cost price X (1 + mark-up%)
If given selling price and mark-up on selling price:

Cost price = Selling price x (1 – mark-up on selling price)
Practical example – NB!!
• If the cost price is R5000 and mark-up on cost price is
25%. What is the selling price?
Amount * (1 + mark-up%)
Therefore: R5 000 * (1 + 0.25) = R6 250
• If the selling price is R10 000 and mark-up on selling
price is 25%. What is the cost price?
Amount * (1 – mark-up%)
Therefore: R10 000 * (1 – 0.25) = R7 500
Mark-Up and Margin cont.
• To convert a mark-up to a gross margin, divide the mark-up % by the sum

of the mark-up % and 100% (the cost price is 100%):
Mark−up %
• x 100
(100% + Mark−up %)
• To convert a gross margin to mark-up, divide the gross margin by the sum
of the gross margin and 100% (the selling price is 100%):
Gross profit %
• (100% − Gross profit %)
x 100
• NOTE: VAT is to be calculated only after the mark-up/margin has been added unto the
final price and likewise mark-up/margin is to be calculated on the VAT exclusive price.

AFAC02-6 Topic 1

Uploaded by

Copyright:

Available Formats

AFAC02-6 Topic 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AFAC02-6 Topic 1

Uploaded by

Copyright:

Available Formats

AFAC02-6

Applied Financial Accounting

• VAT was introduced in South Africa on 30 September 1991, replacing General

Given a VAT inclusive price:

Bank 181 Bank 178

Bank 98 Balance (c/d) 101

Balance (b/d) 101

• Claiming Input VAT before making payments to suppliers can result in a

• Cost price is the total cost of a product or service while selling

• Mark-up is calculated as:

If given cost price and mark-up on cost price:

If given selling price and mark-up on selling price:

• To convert a mark-up to a gross margin, divide the mark-up % by the sum

You might also like