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Module 5

NOTE OF BOOKKEEPING

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4 views

Module 5

NOTE OF BOOKKEEPING

Uploaded by

educassistteam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Module 5

Managing VAT and other Taxes:


1- Understanding VAT Calculation:
Let's break down VAT (Value Added Tax) calculation in an easy way.

What is VAT?
VAT is a type of tax that is added at each stage of production or sale
of goods and services. It's called "Value Added Tax" because it is
charged on the value added at each stage of production or
distribution.

How Does VAT Work?


1. **Production Stage**: A manufacturer creates a product. They
buy raw materials and pay VAT on those materials.

2. **Selling Stage**: The manufacturer sells the finished product to


a retailer. They charge VAT on the sale price of the product.

3. **Retail Stage**: The retailer sells the product to the final


customer, again adding VAT to the selling price.

How is VAT Calculated?


Here’s a simple example:

1. **Determine VAT Rate**: Let’s say the VAT rate is 20%.

2. **Cost Calculation**:
- **Raw Material Cost**: $100 (manufacturer buys this and pays
VAT).
- **VAT on Raw Materials**: $100 x 20% = $20.
- **Total Cost for Manufacturer**: $100 + $20 = $120.

3. **Sale Price for Manufacturer**: Let’s say they sell the product to
a retailer for $150.
- **VAT Charged to Retailer**: $150 x 20% = $30.
- **Total Price for Retailer**: $150 + $30 = $180.

4. **Retail Sale**: The retailer sells the product to the customer for
$200.
- **VAT Charged to Customer**: $200 x 20% = $40.
- **Total Price for Customer**: $200 + $40 = $240.

Recovering VAT
- **Manufacturer**: They can claim back the $20 VAT they paid on
raw materials.
- **Retailer**: They can also claim back the $30 VAT they paid to the
manufacturer when they sell to the final customer and pay $40 VAT.

Summary
- VAT is charged at each stage of the sale, but businesses can
recover the VAT they paid on their purchases.
- The final consumer ends up paying the total VAT without any
recovery options.

Key Formula
1. **VAT Amount** = Price x VAT Rate
2. **Total Price (Including VAT)** = Price + VAT Amount

That's the basic idea of how VAT works! It can seem complicated,
but once you understand the flow, it makes more sense.

2- Recording and reporting VAT transaction:

Let's break down the process of recording and reporting


VAT (Value Added Tax) transactions in a simple way.

### What is VAT?


VAT is a tax that is added to the price of goods and
services. When businesses sell products or services, they
charge VAT on top of the selling price. They also can
reclaim VAT on items they purchase for their business.

### Recording VAT Transactions


1. **When You Sell Something: **
- **Charge VAT: ** When you sell a product or service,
you add VAT to the price. For example, if you sell a
product for $100 and the VAT rate is 20%, you would
charge your customer $120 ($100 + $20 VAT).
- **Record the Sale: ** In your records, you would note
the total sale amount and how much VAT you collected.
This would look like:
- Sale Amount: $100
- VAT Charged: $20
- Total Amount: $120

2. **When You Buy Something: **


- **Pay VAT: ** When you purchase items for your
business, you will also pay VAT on those items. For
instance, if you buy supplies for $50 and the VAT is 20%,
you pay $60 ($50 + $10 VAT).
- **Record the Purchase: ** Your records would show:
- Purchase Amount: $50
- VAT Paid: $10
- Total Amount: $60

### Reporting VAT Transactions


1. **Regular Reporting: ** Most businesses need to report
their VAT transactions to the tax authorities regularly
(usually quarterly or annually).

2. **VAT Return: ** This is a document where you


summarize the VAT you collected from sales and the VAT
you paid on purchases:
- **Total VAT Collected: ** Add up all the VAT from your
sales. For example, if in a month you collected $100 in
VAT from sales.
- **Total VAT Paid: ** Add up all the VAT from your
purchases. Suppose you paid $30 in VAT.
- **Calculate VAT Payable: ** Subtract the VAT you paid
from the VAT you collected. In this case, $100 (collected)
- $30 (paid) = $70. This is the amount you need to send
to the tax authorities.

3. **Filing: ** You fill out the VAT return form with these
figures and send it to the tax authority. If you've paid
more VAT on your purchases than you collected on your
sales, you may be able to claim a refund.

### Summary
- **Collect VAT on Sales: ** Add VAT to your sales prices
and record it.
- **Pay VAT on Purchases: ** Add VAT to your costs and
record it.
- **Report Regularly: ** Summarize your VAT collected
and paid to determine what you owe or what you can
reclaim.

By keeping good records of your sales and purchases,


you'll make the process of recording and reporting VAT
much easier!

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