Accounting Q&A · Taxation · Topic 5
Practise VAT and GST calculations, invoices, input credits, returns and journal entries. Try each question before opening the answer. The examples use hypothetical amounts and rates. Check the rules for your jurisdiction and tax year before applying them.
Worked example
Tax-exclusive sales are 5,000 and eligible purchases are 2,000. At a hypothetical 10% rate, output tax is 500 and eligible input tax is 200, leaving 300 payable.
Key concepts
1. What is VAT?
A consumption tax generally collected in stages through the supply chain.
2. What is GST?
A name used in some jurisdictions for a tax on goods and services, often structured like VAT.
3. What is output tax?
Tax charged or accounted for on taxable supplies.
4. What is input tax?
Tax incurred on purchases or imports.
5. When can input tax be credited?
When the applicable registration, business-use, evidence and other conditions are met.
6. What is a taxable supply?
A supply falling within the tax rules and subject to a rate, which may be zero.
7. How does zero-rating differ from exemption?
Zero-rated supplies are taxed at zero and may preserve input recovery. Exempt supplies often restrict it.
8. What is a VAT registration threshold?
A local rule determining when registration is required, typically based on a defined turnover measure.
9. What is a tax point?
The date used to determine the period in which tax is accounted for.
10. Why check place-of-supply rules?
They help determine which jurisdiction may tax a transaction.
Applying the rules
11. What tax is added to 800 at 10%?
80, making the invoice 880.
12. A total of 660 includes 10% tax. What is the base?
600. Divide by 1.10.
13. What is the tax included in that 660?
60.
14. How is an 880 credit sale split?
Debit receivables 880, credit sales 800 and credit output tax payable 80.
15. How is a 550 purchase with fully recoverable 10% tax recorded?
Debit the relevant purchase account 500 and input tax 50. Credit payables 550.
16. Output tax is 800 and recoverable input tax 600. What is the net amount?
200 payable before other adjustments.
17. What if recoverable inputs exceed output tax?
A credit or refund may arise depending on local rules.
18. What is a reverse charge?
A mechanism requiring the recipient to account for tax on specified supplies.
19. Why issue a credit note for returned goods?
It documents the reduction and supports any allowed tax adjustment.
Review questions
20. How should mixed taxable and exempt purchases be reviewed?
Allocate or apportion input tax under applicable recovery rules.
21. What if input tax is irrecoverable?
Include it in the relevant cost or expense as appropriate.
22. What evidence supports a credit?
An eligible invoice or import document and evidence of qualifying use.
23. Why reconcile returns to the sales ledger?
To identify omissions, duplicates, classification errors and period differences.
24. What should be checked for cross-border services?
Place of supply, registration, reverse charge and documentary requirements.
25. What should the return worksheet show?
Sales by treatment, output tax, eligible credits, adjustments and net liability.