Lecture 1: Financial Statements and VAT
VAT = Value added tax (BTW in Dutch)
VAT is low for daily necessities
VAT is high for luxury goods.
VAT & BTW perform the same function
All about VAT
Who Levied by governments, source of revenue for governments.
What Consumer tax/Consumption tax
When Started in 1960s in EU, 1970s-80s in South American countries, Central
America, Asian Countries. 1990s in Central and Eastern European countries.
Where 150 countries excluding the USA. In the EU adoption of VAT is required for a
membership
How Imposed on supply of goods & Services; all economic activities unless exempted
Why *Stable form of revenue for government
*Does not affect forms & methods of doing business
*Aid concept of single market: EU
*Simple to administer
VAT exemptions: education, health care, childcare, insurance
9%: food, drink, agriculture
21%: luxury products, everything that does not fall under 0% or 9%
Reporting VAT
When goods are sold, VAT is added to the sales price
A business can reclaim VAT charged to it
A business must pay VAT charged to its customers
A purchase of goods and services leads to a VAT claim
A sale of goods and services leads to a VAT liability.
Example: VAT and reporting
Jack who is the owner of a bookstore has $1,000 cash on his opening balance sheet. He purchases a
finance textbook with a net price of $200. VAT is 20%. He pays $240 to the supplier. He has to claim
$40 VAT from the tax office. Net sales price is set at $300. He receives $360 from a customer. He has
to pay $60 in VAT.
1) Show how the Balance Sheet changes
2) What is the net VAT?
3) What is the added value from the above transactions?
1)
Cash VAT Trade Inventor Total VAT Trade Equity Total Equity &
receivable receivable y Assets payable payables Liabilities
Opening BS 1,00 1,000 1,000 1,000
0
Purchase (240) 40 200 0 0
Sale 360 (200) 160 60 100 160
Closing BS 1,12 40 0 0 1,160 60 0 1,100 1,160
0
2)
Net purchase price to supplier = $200
- Jack (business) pays $240 to supplier
- Jack (business) can claim $40 VAT from tax office
Net sales price = $300
, - Jack (business) receives $360 from customer
- Jack (business) must pay $60 in VAT to tax office
Net VAT payment is thus $20
Jack (business) has created an added value of $300-$200=$100
The VAT is 0.20 * $100 = $20
VAT is collected at every point in the supply chain
Key Points in Reporting VAT
VAT is not included in the Income Statement
( profit = net sales price – net purchase price )
VAT charged by suppliers is not a cost because, you get it back from the tax office
When you make a purchase VAT receivable is impacted
VAT charged to clients is not a revenue, you have to give it to the tax office
When you make a sale VAT payable is impacted
Inventory is recorded at prices net of VAT
Trade receivables and trade payables accounts include VAT
VAT & Balance Sheet VAT & Income Statement VAT & Cash Flow Statement
Creation of VAT VAT does not show up Receipts from
receivable and VAT here as it is neither customers is included
payable accounts revenue nor expense in total sum received
Trade receivables and and payment on
trade payables invoice to suppliers
accounts include VAT include VAT & VAT
Inventory is net of VAT settlement
Workshop 1: VAT
Purchase is based on what you need – what you have
What you need = sales + what you need for end inventory
Edumundo on VAT
VAT is an expense for a company
false
All products have the same % of VAT on top of the sales price
false
The inventory on the balance sheet is excluding VAT
true
The trade payables account on the balance sheet is including VAT
true, the bill we must pay to the supplier includes VAT and is therefore still part of the debt towards
the supplier. The VAT that we pay to the supplier will be recorded under VAT receivable.
The account VAT payable on the balance sheet is a result of sales to customers
true
VAT is….
value added tax
VAT receivable is…
an item on the asset side of the balance sheet. It shows the VAT (that needs to be) paid to a
supplier which the company can reclaim/receive from the government.
VAT payable is…
an item on the liability side of the balance sheet. It shows the VAT (that needs to be) received from
the customer which the company needs to pay to the government.
VAT = Value added tax (BTW in Dutch)
VAT is low for daily necessities
VAT is high for luxury goods.
VAT & BTW perform the same function
All about VAT
Who Levied by governments, source of revenue for governments.
What Consumer tax/Consumption tax
When Started in 1960s in EU, 1970s-80s in South American countries, Central
America, Asian Countries. 1990s in Central and Eastern European countries.
Where 150 countries excluding the USA. In the EU adoption of VAT is required for a
membership
How Imposed on supply of goods & Services; all economic activities unless exempted
Why *Stable form of revenue for government
*Does not affect forms & methods of doing business
*Aid concept of single market: EU
*Simple to administer
VAT exemptions: education, health care, childcare, insurance
9%: food, drink, agriculture
21%: luxury products, everything that does not fall under 0% or 9%
Reporting VAT
When goods are sold, VAT is added to the sales price
A business can reclaim VAT charged to it
A business must pay VAT charged to its customers
A purchase of goods and services leads to a VAT claim
A sale of goods and services leads to a VAT liability.
Example: VAT and reporting
Jack who is the owner of a bookstore has $1,000 cash on his opening balance sheet. He purchases a
finance textbook with a net price of $200. VAT is 20%. He pays $240 to the supplier. He has to claim
$40 VAT from the tax office. Net sales price is set at $300. He receives $360 from a customer. He has
to pay $60 in VAT.
1) Show how the Balance Sheet changes
2) What is the net VAT?
3) What is the added value from the above transactions?
1)
Cash VAT Trade Inventor Total VAT Trade Equity Total Equity &
receivable receivable y Assets payable payables Liabilities
Opening BS 1,00 1,000 1,000 1,000
0
Purchase (240) 40 200 0 0
Sale 360 (200) 160 60 100 160
Closing BS 1,12 40 0 0 1,160 60 0 1,100 1,160
0
2)
Net purchase price to supplier = $200
- Jack (business) pays $240 to supplier
- Jack (business) can claim $40 VAT from tax office
Net sales price = $300
, - Jack (business) receives $360 from customer
- Jack (business) must pay $60 in VAT to tax office
Net VAT payment is thus $20
Jack (business) has created an added value of $300-$200=$100
The VAT is 0.20 * $100 = $20
VAT is collected at every point in the supply chain
Key Points in Reporting VAT
VAT is not included in the Income Statement
( profit = net sales price – net purchase price )
VAT charged by suppliers is not a cost because, you get it back from the tax office
When you make a purchase VAT receivable is impacted
VAT charged to clients is not a revenue, you have to give it to the tax office
When you make a sale VAT payable is impacted
Inventory is recorded at prices net of VAT
Trade receivables and trade payables accounts include VAT
VAT & Balance Sheet VAT & Income Statement VAT & Cash Flow Statement
Creation of VAT VAT does not show up Receipts from
receivable and VAT here as it is neither customers is included
payable accounts revenue nor expense in total sum received
Trade receivables and and payment on
trade payables invoice to suppliers
accounts include VAT include VAT & VAT
Inventory is net of VAT settlement
Workshop 1: VAT
Purchase is based on what you need – what you have
What you need = sales + what you need for end inventory
Edumundo on VAT
VAT is an expense for a company
false
All products have the same % of VAT on top of the sales price
false
The inventory on the balance sheet is excluding VAT
true
The trade payables account on the balance sheet is including VAT
true, the bill we must pay to the supplier includes VAT and is therefore still part of the debt towards
the supplier. The VAT that we pay to the supplier will be recorded under VAT receivable.
The account VAT payable on the balance sheet is a result of sales to customers
true
VAT is….
value added tax
VAT receivable is…
an item on the asset side of the balance sheet. It shows the VAT (that needs to be) paid to a
supplier which the company can reclaim/receive from the government.
VAT payable is…
an item on the liability side of the balance sheet. It shows the VAT (that needs to be) received from
the customer which the company needs to pay to the government.
