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VAT is a consumption tax applied at each stage of production and distribution where value is added. For businesses registered for VAT, maintaining accurate records is important for compliance and tracking tax liabilities.

Recording a Purchase with VAT (Input VAT)

When a business purchases goods or services from a VAT-registered supplier, it pays VAT (Input VAT) that can typically be reclaimed. This reclaimed VAT is considered an asset.

Example: Buying office supplies for £100 with 20% VAT.

2025-01-01 * Purchase office supplies
    expenses:office supplies                    £100
    assets:vat:input                             £20
    assets:cash                                -£120

Recording a Sale with VAT (Output VAT)

When a business sells goods or services, it collects VAT (Output VAT) from the customer and owes this amount to the tax authorities. Output VAT is considered a liability.

Example: Selling goods for £500 with 20% VAT.

2025-01-02 * Sale of goods
    assets:cash                                 £600
    income:sales                               -£500
    liabilities:vat:output                     -£100

Balancing VAT at the end of the Period

At the end of a VAT period (e.g., monthly or quarterly), the business balances the Input VAT and Output VAT accounts to determine the net VAT payable or receivable.

Example (VAT Payable): Output VAT is £100 and Input VAT is £20.

2025-01-31 * VAT adjustment
    ; consolidate smaller into larger
    assets:vat:input                            -£20 = £0
    liabilities:vat:output                       £20
    ; convert to a payable or receivable
    liabilities:vat:output                       £80 = £0
    liabilities:vat:payable                     -£80

Settling VAT

When VAT is payable, the business pays the tax authorities.

Example: Paying the above £80 VAT payable.

2025-02-15 * VAT payment
    liabilities:vat:payable                      £80 = £0
    assets:bank                                 -£80

If VAT was receivable, the business would receive a refund from the tax authorities instead.

2025-02-15 * VAT refund
    assets:vat:receivable                       -£80 = £0
    assets:bank                                  £80