• Journal Entries for VAT and VAT Reverse Charge Mechanism

  • Purchase records:  Purchase book records all of the purchases details on which tax has been paid, purchase made without payment of tax and purchases from exempted unit. Purchases records to be maintained date wise and numerical order.
  • Sales records: Sales records shows separately made at different tax rates, zero rated taxable sales and exempt sales. Copies of tax invoices related to taxable sales and invoices related to exempted sales shall be retained date wise and numerical order. Records of inter company transfer also properly documented.
  • Vat Account: Vat Account to be clearly stated regarding total output tax, total input tax and net tax payable or excess tax credit which to be refunded or adjusted with the output tax.
  • Details of input tax calculation should be properly documented.
  • Stock records to be maintained properly which will show total stock receipt, deliveries and manufacturing records. Stock records also state the particulars of the goods retained in cold storage, warehouse, godown or any other place taken on rent.
  • Invoice of Sales and Challan to be recorded at date wise and numerical orders.

1. When Goods are bought and you have to pay both purchase value and VAT input or paid both, at that time, following journal entry will be passed.

Purchase Account Dr. (Value of Purchase)

VAT Input Account Dr. ( VAT on Purchase)

Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)

Reason of this Journal Entry :We have bought the goods, it increases our inventory or expense as the case may be. Increase of asset or an expense will always be debit. VAT input is recoverable and hence considered an asset.

2. When Goods are Sold following journal entry will be passed

Cash or Bank or Name of Customer Account Dr. (Value of Purchase + VAT output)

Sale Account Cr. (Value of Sale)

VAT Output Account Cr. (VAT on Sale)

Reason of this Journal Entry :

When we sell any goods we receive cash or funds in bank. If we sell the goods on credit, the customer account is debited. The credit VAT is liability of the company. This is also called output VAT and is payable to VAT authority.

3. When We pay the Net VAT (Payable) to Government. At that time, following journal entry will be passed.

Net VAT Payable Account Dr. ( Excess of VAT Output over VAT Input)

Bank Account Cr.

Reason of this Journal Entry :

The input VAT is deducted from output VAT. The net amount credit represents payable to vat authority. The debit amount represents refundable position.


ACCOUNTING ENTRIES FOR REVERSE CHARGE MECHANISM (RCM)

The net result of reverse charge mechanism is same as that of forward charge basis. The only difference in reverse charge VAT is the shift in the responsibility of paying VAT which is moved from supplier to the recipient.


1. Purchase

Purchase A/C & Expense A/c xxxx

Input Vat -RCM A/C xxxx

To Bank Creditors A/C xxxx

To Vat payable RCM a/c xxxx

2 For Sales:

Bank / Debtor A/C  xxx

To Sales A/C xxx

To Output Vat A/C xxx

3. Quarterly/Monthly Journal for VAT Payment

Output Vat A/C xxx

Vat payable RCM a/c xxx

To Input Vat RCM A/C xxx

To Vat Payable A/C xxx

4. Payment to FTA

Vat Payable A/C xxx

To Bank A/C Xxx

5. Quarterly / Monthly Journal for VAT Refund

Vat Refund A/C Xxxx

Output Vat A/C Xxx

Vat payable RCM a/c Xxx

To Input Vat RCM A/C Xxx

6. Refund received from FTA

Bank A/C Xxx

To Vat Refund A/C xxxx