Recording a credit sale with VAT

Accounting for credit sales and VAT

As we have already seen, a VAT registered business adds VAT onto the net selling price to come to a gross amount. This gross amount is the amount charged and either received in cash (from a cash sale) or is recognised as a receivable (from a credit sale).

Although the gross amount is received from the customer (whether a cash or credit sale), the VAT registered business must only recognise the net amount (the amount excluding VAT) within the sales account. The VAT amount must be recognised in the VAT control account as being a liability, waiting to be paid to HMRC.

In the video, the Kaplan tutor showed you how to record a credit sale where VAT is involved. Up to now, we have only seen sales where VAT was not involved (just to keep it simple).

Here’s the double entry for a credit sale including VAT, as seen in the video:

Do not forget that, for a VAT registered business, the net amount is the income that the business has earned and this is the amount that will appear in the statement of profit or loss. The VAT will not appear in the statement, as the business is merely acting as an agent to collect it and pay it over to HMRC / tax authorities.