Value-added tax, which is usually referred to as VAT, is a transaction tax or a

consumer tax that was introduced in South Africa in 1991. VAT is a form of
income for the government and arises in that specific entities h ave to
register as vendors in accordance with the VAT Act and have to charge VAT
on the taxable supply of goods or services . A taxable supply is a transaction
that an entity enters into whereby goods are sold or services are delivered
and on which VAT has to be charged. The rate at which VAT is charged can
change from time to time. The standard rate was 14% until 1 April 2018. On 1
April 2018, after 25 years, the standard VAT rate increased to 15%.

When an entity that is a registered VAT vendor makes a ta xable supply, the
sales price (or listed price) must include VAT. For example, if a registered VAT
vendor sells goods at a listed price of for example R5 750, the VAT amount
and the sales price excluding VAT will be calculated as follows by using a VAT
rate of 15%:
R
Consideration (listed price) 5750
VAT (15/115 × R5 750) 750
Selling price excluding VAT (100/115 × R5 750) 5000
In the above-mentioned example, the sales pric e excluding VAT is therefore
R5 000, the VAT component R750 and the listed pric e or sales price R5 750.

In this work, it is mostly only the listed price that is known and it is often
indicated as the selling price (including VAT). VAT is, therefore, either 15/100 of
the sales price excluding VAT (15/100 × R5 000 = R750) or 15/115 o f the sales
price including VAT (15/115 × R5 750 = R750).

In the above-mentioned example, the selling entity (registered VAT vendor)

received R5 750 from the sale of the goods, of which R750 must be paid to
the South African Revenue Services (SARS). There fore, the registered VAT
vendor acts as an agent for SARS by collecting VAT on taxable supplies on
behalf of SARS.
 Registration as a vendor for VAT purposes is compulsory if the total value of
the taxable supplies made by an entity exceeds R1 000 000 in a twelve-month
period. If the total value of taxable supplies ma de by an entity is less than
R1 000 000, but more than R50 000, registration is voluntary . The VAT that a
registered VAT vendor collects in respect of the transactions (taxable
supplies) that the entity entered into with customers must be paid over to
SARS. At the end of a VAT period, the registered VAT vendor will submit a VAT
return that inter alia reflects the amount payable to SARS. The amount due
to SARS in respect of VAT collected on tax able supplies (VAT output) is
reduced by the VAT amount paid to suppliers (VAT input), except for the VAT
paid on certain items that may not be claimed. To enable the registered VAT
vendor to complete the VAT return, the VAT collected from customers and
the VAT paid to suppliers must be correctly accounted for .

VAT is administered by entities that act as agents for SARS. In most cases,
VAT does not involve any additional costs to an entity registered as a vendor
in accordance with the VAT Act, except for the cost of administering VAT on
behalf of SARS. As a result, it is usually the end user who pays the full amount
of VAT.

Manufacturer Wholesaler Retailer

Manufacturer Wholesaler purchases The retailer purchases
manufactures the goods from the goods from the
product and then sells manufacturer and sells wholesaler and sells it
it to the wholesaler it to the retailer to the public
Sales price R1 150 Sales price R1 725 Sales price R4 312,50
VAT output R150 VAT output R225 VAT output R562,50
VAT input Rnil VAT input R150 VAT input R225
Pays to SARS R150 Pays to SARS R75 Pays to SARS R337,50

Remarks
1. The VAT input with regards to the manufacturer is accepted as Rnil to keep the
example simple and to simplify the unders tanding of the example.
SARS, therefore, received a total amount of R562,50 (R150 + R75 + R337,50) from
all the registered VAT vendors. This amount also represents the tax (VAT at
15%) on the total value added (R4 312,50 – Rnil) to this transaction, name ly
R4 312,50 × 15/115. As mentioned above, the end user, who is not registered for
VAT purposes, usually pays the total VAT amount, namely R562,50 in this case.

One of the fundamental principles of the VAT system of South Africa is that the
system is invoice-based. Per the invoice basis, a taxable supply occurs at the
earlier of the following two events:
the date on which the invoice is issued for delivery that has already taken place
(purchases and sales); or
the date on which the payment is made or re ceived.

The requirement of the invoice basis in respect of the recognition of purchases

and sales (taxable supplies) in the records of the registered VAT vendor is
therefore in accordance with accrual accounting.

Smaller entities can apply with SARS to use the payment basis instead of the
invoice basis to account for VAT. In accordance with the payment basis, VAT is
accounted for on the date on which the cash flow occurred in respect of
taxable supplies that took place. The payment basis is not used in this work.

In this chapter, the recognition of VAT in the accounting records is dealt with
on an introductory basis. Attention is paid to the following:
× VAT input and VAT output;
× the recognition of sales and purchases of goods and services that represe nt
taxable supplies in the records of a registered VAT vendor;
× the recognition of miscellaneous transactions (taxable supplies) in the records
of a registered VAT vendor;
× supplies in respect of which the VAT input may not be accounted for against
the VAT output;
× zero-rated supplies;
× exempt supplies;
× events and VAT;
× the VAT return; and
× VAT input as an asset and VAT output as a liability.

In taxation, detailed attention is paid to the stipulations of the VAT Act.

When a registered VAT vendor purchases goods from another registered VAT
vendor and the transaction represents a taxable supply in accordance with the
VAT Act, the purchase price includes VAT. The VAT which is paid to the supplier
is VAT input or input tax i n the hands of the purchasing entity. The VAT which is
received from the purchasing entity is VAT output or output tax in the hands
of the selling entity.

Taxable supplies are defined in the VAT Act. In this work, only some taxable
supplies are dealt with.

VAT is isolated and recognised at the initial recognition of assets, expenses and
income.

VAT input arises from the purchase (in cash and on credit) of goods (e.g. trade
inventories, office supplies and certain non -current assets) and services that are
taxable supplies and is, at the initial recognition of the relevant asset -item or
expense-item, isolated and recognised as an asset. VAT input, therefore, does not
form part of the cost of the relevant assetitem or expense -item. Instead, VAT
input represents the tax (VAT) paid on taxable supplies and can be claimed from
SARS in respect of most transactions.

VAT output arises from the sale (in cash and on credit) of goods (e.g. trade
inventories and non-current assets) and the delivery of services that are
taxable supplies and is, at the initial recognition of the relevant income -item,
isolated and recognised as a liability. VAT output, therefore, does not form part
of the relevant income-item. Instead, VAT output represents the tax (VAT)
charged on taxable supplies and must be paid over to SARS. VAT output also
arises from transactions that SARS deems as disposals. These would include
transactions such as insurance settlement for damaged items, and donations.

To determine the amount due to or receivab le from SARS, VAT input is deducted
from the VAT output account. The entity owes SARS if the VAT output exceeds
the VAT input account. However, should the VAT input exceed the VAT output
account, the entity has a claim against SARS. This is all done through the VAT
control account at the end of the VAT period.
 The VAT input account is classified as an asset and VAT output as a liability . In
paragraphs 58 and 59, VAT input and VAT output satisfy the definition of an
asset and a liability, respectively.

On 15 January 2017, AC (Pty) Ltd, a registered VAT vendor, received trade

inventories that were purchased from a registered VAT vendor on this day for
cash. The invoice indicates the purchase price as R9 430 (including VAT).
Required:
Recognise the above-mentioned transaction in the records (general journal) of AC
(Pty) Ltd for the month ended 31 January 2017 if it is accepted that:
a) AC (Pty) Ltd uses the perpetual inventory system; and
b) AC (Pty) Ltd uses the periodic inventory syst em.

a) Journal entry – perpetual inventory system

J1
2017 Dr Cr
15 Jan Trade inventories (SFP) (9 430 × 100/115) 8 200
VAT input (SFP) (9 430 × 15/115) 1 230
Bank (SFP) 9 430
Recognise trade inventories purchased for cash
b) Journal entry – periodic inventory system
J1
2017 Dr Cr
15 Jan Purchases (P/L) (9 430 × 100/115) 8 200
VAT input (SFP) (9 430 × 15/115) 1 230
Bank (SFP) 9 430
Recognise trade inventories purchased for cash
Remark in respect of the above
1. If the entity is registered as a VAT vendor, VAT input does not form part of the
cost of trade inventories, or the cost of non -current assets, or the cost of
expenses.
 On 20 January 2017, AC (Pty) Ltd, a registered VAT vendor, delivered trade
inventories that were sold on this day for cash. The invoice indicates the selling
price as R23 575 (including VAT). The cost of th e trade inventories sold was
R8 200.
Required:
Recognise the above-mentioned transaction in the records (general journal) of AC
(Pty) Ltd for the month ended 31 January 2017 if it is accepted that:
a) AC (Pty) Ltd uses the perpetual inventory system; and
b) AC (Pty) Ltd uses the periodic inventory system.

a) Journal entry – perpetual inventory system

J1
2017 Dr Cr
20 Jan Bank (SFP) 23 575
VAT output (SFP) (23 575 × 15/115) 3 075
Revenue (P/L) (23 575 × 100/115) 20 500
Recognise trade inventories sold for cash
Remark in respect of the above
1. If the entity is registered as a VAT vendor, the VAT output does not form part
of the income-item sales.
J2
2017 Dr Cr
20 Jan Cost of sales (P/L) 8 200
Trade inventories (SFP) 8 200
Recognise the cost of the trade inventories sold
b) Journal entry – periodic inventory system
The journal entry to recognise the sales transaction in the records of AC (Pty)
Ltd is the same as for the perpetual inventory system. (Refer to (a) above.) The
periodic inventory system does not isolate the cost of sales in respect of
individual sales transactions, and, consequently, there is no journal entry to
recognise cost of sales. Cost of sales is recognised in accordance with the
periodic inventory system only as part of the year -end review process.
 Remark in respect of Examples 8.1 and 8.2
1. If AC (Pty) Ltd (only regarding Examples 8.1 and 8.2 above) had completed a VAT
return at the end of the VAT period, the return would have reflected that AC
(Pty) Ltd would have to pay an amount of R1 845 to SARS. The amount of R1 845
is calculated by reducing the VAT output (R3 075) with the VAT input (R1 230).

For a purchasing entity that is a registered VAT vendor, the purchase price of
the following goods and services that are purchased from a selling entity that is
a registered VAT vendor includes VAT input:
non-current assets such as machinery, furniture, equipment and delivery
vehicles;
current assets such as trade inventories; and
expenses such as office supplies, water and electricity, telephone, insurance,
rent of commercial property and bank charges.

Subsequently, attention is paid to some transactions that cause VAT input to be

recognised as an asset.

In the case of the cash purchase of goods and services representing taxable
supplies, VAT input is recognised as an asset with the initial recognition of the
transaction.

The cash purchase of a delivery vehicle from a registered VAT ven dor for R373
750 (including VAT) that was delivered on 15 December 2017, will be recognised as
follows:
2017 Dr Cr
15 Dec Delivery vehicle (SFP) (373 750 × 100/115) 325 000
VAT input (SFP) (373 750 × 15/115) 48 750
Bank (SFP) 373 750
Recognise delivery vehicle purchased for cash
 The cash purchase of trade inventories from a registered VAT vendor for R51 750
(including VAT) that were delivered on 10 December 2017 will be recognised as
follows:
Cash purchase of trade inventories – perpetual inventory system
2017 Dr Cr
10 Dec Trade inventories (SFP) (51 750 × 100/115) 45 000
VAT input (SFP) (51 750 × 15/115) 6 750
Bank (SFP) 51 750
Recognise trade inventories purchased for cash

Cash purchase of trade inventories – periodic inventory system

2017 Dr Cr
10 Dec Purchases (P/L) (51 750 × 100/115) 45 000
VAT input (SFP) (51 750 × 15/115) 6 750
Bank (SFP) 51 750
Recognise trade inventories purchased for cash
The payment of the December 2017 lease instalment in respect of commercial
property (accept that the lessee is a registered VAT vendor and the le ase term
is short-term) to the amount of R23 000 (including VAT) on 2 December 2017, will
be recognised as follows:
2017 Dr Cr
2 Dec Rent expense (P/L) (23 000 × 100/115) 20 000
VAT input (SFP) (23 000 × 15/115) 3 000
Bank (SFP) 23 000
Recognise rent of property for December 2017

The payment of the insurance premium in cash to the amo unt of R13 225
(including VAT) on 3 December 2017 to a registered VAT vendor, will be recognised
as follows:
2017 Dr Cr
3 Dec Insurance (P/L) (13 225 × 100/115) 11 500
VAT input (SFP) (13 225 × 15/115) 1 725
Bank (SFP) 13 225
Recognise insurance premium for December 2017
 In the case of the credit purchase of goods and services th at represent taxable
supplies, the VAT input is recognised as an asset with the initial recog nition of
the credit purchase. There is no VAT implication on the set tlement of the
liability.

The purchase of a delivery vehicle on credit from Payable L (a registered VAT

vendor) to the amount of R431 250 (including VAT), which was delivered on 15
December 2017, will be recognised as follows:
2017 Dr Cr
15 Dec Delivery vehicle (SFP) (431 250 × 100/115) 375 000
VAT input (SFP) (431 250 × 15/115) 56 250
Payable L (SFP) 431 250
Recognise delivery vehicle and the accompanying
liability
2017 Dr Cr
xxx Payable L (SFP) 431 250
xxx Bank (SFP) 431 250
Derecognise payable due to settlement
Remark
1. Interest is classified as an exempt supply and therefore has no VAT. The impact
of interest is not shown in this example for simplicity.

The purchase of machinery with a supplier’s loan from Supplier M ( a registered

VAT vendor) to the amount of R460 000 (including VAT), which was delivered on
31 December 2017, will be recognised as follows:
2017 Dr Cr
31 Dec Machinery (SFP) (460 000 × 100/115) 400 000
VAT input (SFP) (460 000 × 15/115) 60 000
Loan from Supplier M (SFP) 460 000
Recognise machinery and the accompanying
liability
2017 Dr Cr
xxx Loan from supplier M (SFP) 460 000
xxx Bank (SFP) 460 000
Derecognise liability due to settlement
 Remark
1. Interest is an exempt supply and therefore has no VAT. The i mpact of interest
is not shown in this example for simplicity.

The purchase of trade inventories on credit from Payable K (a registered VAT

vendor) to the amount of R86 250 (including VAT), which goods were delivered on
12 December 2017, will be recognised as follows:
Credit purchase of trade inventories – perpetual inventory system
2017 Dr Cr
12 Dec Trade inventories (SFP) (86 250 × 100/115) 75 000
VAT input (SFP) (86 250 × 15/115) 11 250
Payable K (SFP) 86 250
Recognise trade inventories and the
accompanying liability
2017 Dr Cr
xxx Payable K (SFP) 86 250
xxx Bank (SFP) 86 250
Derecognise payable due to settlement

Credit purchase of trade inventori es – periodic inventory system

2017 Dr Cr
9 Dec Purchases (P/L) (86 250 × 100/115) 75 000
VAT input (SFP) (86 250 × 15/115) 11 250
xxx Payable K (SFP) 86 250
Recognise purchases and the accompanying liability
2017 Dr Cr
15 Jan Payable K (SFP) 86 250
Bank (SFP) 86 250
Derecognise payable due to settlement
The purchase of office supplies on credit from Payable N (a registered VAT
vendor) to the amount of R14 490 (including VAT), which were delivered on 9
December 2017, will be recognised as follows:
2017 Dr Cr
9 Dec Office supplies (P/L) (14 490 × 100/115) 12 600
VAT input (SFP) (14 490 × 15/115) 1 890
Payable N (SFP) 14 490
Recognise office supplies and the accompanying liability
2017 Dr Cr
xxx Payable N (SFP) 14 490
xxx Bank (SFP) 14 490
Derecognise payable due to settlement
Receipt of the statement from Payable Telkom (a registe red VAT vendor) on 31 December
2017 to the amount of R14 145 (including VAT), in respect of the telephone usage for
December 2017 that will be settled in 2018, will be recognised as follows:
2017 Dr Cr
31 Dec Telephone (P/L) (14 145 × 100/115) 12 300
VAT input (SFP) (14 145 × 15/115) 1 845
Payable Telkom (SFP) 14 145
Recognise telephone expense for December 2017 and
the accompanying liability
2017 Dr Cr
xxx Payable Telkom (SFP) 14 145
xxx Bank (SFP) 14 145
Derecognise payable due to settlement
The incurring of repairs on credit from Payable O (a registere d VAT vendor) to the amount
of R19 780 (including VAT), which were completed to the owner’s satisfaction on 30
December 2017, will be recognised as follows:
2017 Dr Cr
30 Dec Repairs (P/L) (19 780 × 100/115) 17 200
VAT input (SFP) (19 780 × 15/115) 2 580
Payable O (SFP) 19 780
Recognise repairs and the accompanying l iability
2017 Dr Cr
xxx Payable O (SFP) 19 780
xxx Bank (SFP) 19 780
Derecognise payable due to settlement

For a selling entity that is a registered VAT vendor, the sellin g price of the following
goods includes VAT output:
× sale of trade inventories;
× rent income in respect of the letting of commercial property; and
× sale of certain non -current assets.

Subsequently, attention is paid to some transactions that cause VAT output to be

recognised as a liability, also known as deemed supplies.
 In the case of the cash sale of goods which represent taxable supplies, VAT
output is recognised as a liability with the initi al recognition of the cash
transaction. VAT output is not paid over to SARS immediately. This is discussed in
detail in paragraphs 54 and 55.

In respect of all the transactions below, it is accepted that the selling entity is
a registered VAT vendor.

The cash sale of trade inventories for R287 500 (includi ng VAT) that were
delivered on 30 December 2017, will be recognised as follows:
2017 Dr Cr
30 Dec Bank (SFP) 287 500
VAT output (SFP) (287 500 × 15/115) 37 500
Revenue (P/L) (287 500 × 100/115 250 000
Recognise cash sale of trade inventories

The cost of the trade inventories that were sold and delivered on 30 December
2017, amounted to R100 000 and will be recognised as follows:
Recognition of cost of sales – perpetual inventory system
2017 Dr Cr
30 Dec Cost of sales (P/L) 100 000
Trade inventories (SFP) 100 000
Recognise cost of trade inventories sold
Remarks in respect of the above
1. The above-mentioned journal is only applicable in respect of the perpetual
inventory system since the cost of the sold trade inventories for individual
transactions is available only for the perpetual inventory system.
2. The VAT input has already been isolated and recognised as separate asset with
the purchase and delivery of the trade inventories. Consequently, the cost price
of the trade inventories and therefore also the cost of sales, excludes VAT.

The receipt of the December 2017 lease payment from the lessee for a short -
term lease to the amount of R23 000 (including VAT), on 2 De cember 2017, will be
recognised as follows:
 2017 Dr Cr
2 Dec Bank (SFP) 23 000
VAT output (SFP) (23 000 × 15/115) 3 000
Rent income (P/L) (23 000 × 100/115) 20 000
Recognise rent income for December 2017

In the case of the credit sale of goods which represent taxab le supplies, the
VAT output is recognised as a liability with the initial recognition of the credit
transaction.

The sale and delivery of trade inventories on credit by a registered VAT vendor
to Receivable A on 30 December 2017, to the amount of R431 250 (including VAT)
will be recognised as follows:
2017 Dr Cr
30 Dec Receivable A (SFP) 431 250
VAT output (SFP) (431 250 × 15/115) 56 250
Revenue (P/L) (431 250 × 100/115) 375 000
Recognise credit sale of trade inventories
The cost of the trade inventories sold and delivered on 30 December 2017,
amounted to R150 000 and will be recognised as follows:
Recognition of cost of sales – perpetual inventory system
2017 Dr Cr
30 Dec Cost of sales (P/L) 150 000
Trade inventories (SFP) 150 000
Recognise cost of trade inventories sold
Remarks in respect of the above
1. The above-mentioned journal is only applicable in respect of the pe rpetual
inventory system, since the cost of the sold trade inventories for individual
transactions is available only for the perpetual inventory system.
2. VAT input has already been isolated and recognised as a separate asset with the
purchase and delivery of trade inventories. Consequently, the cost price of trade
inventories and cost of sales exclude VAT.
 In this section, the following transactions, which do not repre sent taxable
supplies but have an effect on VAT, will be deal t with using the following
examples:
× write-off of a trade receivable’s debt as irrecoverable;
× recoupment of a trade receivable’s debt that has previously been written off
as irrecoverable; and
× donation of trade inventories.

AC (Pty) Ltd is a registered VAT vendor.

After numerous fruitless attempts to collect the outstanding debt from Receivable
J, which occurred over several months, the entity decided to write off the debt to
the amount of R36 800 as irrecoverable (usually the debt includes VAT). On 31
December 2017, the write-off was authorised.
Required:
Recognise the above -mentioned event in the records (general jo urnal) of AC (Pty) Ltd
for the reporting period ended 31 December 2017.

Journal entry
J1
2017 Dr Cr
31 Dec Bad debts (P/L) (36 800 × 100/115) 32 000
VAT input (SFP) (36 800 × 15/115) 4 800
Receivable J (SFP) 36 800
Derecognise Receivable J as per authorisation by
owner
Remarks in respect of Example 8.3
1. If it is accepted that the original credit sale occurred on 3 March 2017, the
following journal would have been recognised in respect of the recognition of the
trade receivable on this date:
2017 Dr Cr
3 Mar Receivable J (SFP) 36 800
VAT output (SFP) 4 800
Revenue (P/L) 32 000
Recognise credit sale of trade inventories
2. VAT output for March 2017 (which includes the R4 800) wou ld be reduced by the
VAT input amount for March 2017, and the net amount would have been paid over
to SARS.
3. The write-off of the trade receivable’s debt as irrecoverable resu lts in the
establishment of an expense. Although the write -off does not represent a
taxable supply, SARS provided relief in that the VAT input that arises in respect
of the expense may be claimed from SARS. In this manner, the VAT output that
was previously ‘paid too much’ (when the credit sale was recognised) is recouped.

AC (Pty) Ltd is a registered VAT vendor.

The bank statement for December 2017 indicated an electronic deposit of R2 875
on 22 December 2017 from AB Executors, the liquidator of Receivable E’s
insolvent estate. Receivable E’s debt of R11 500 was written off as irrecoverable
in June 2017. The liquidation distribution is 25c in the rand.
Required:
Recognise the above-mentioned transaction in the records (general journal) of
(Pty) Ltd for the reporting period ended 31 December 2017.

Journal entry
J1
2017 Dr Cr
22 Dec Bank (SFP) 2 875
VAT output (SFP) (2 875 × 15/115) 375
Bad debts (P/L) (2 875 × 100/115) 2 500
Recognise liquidation dividend deposited by AB Executors in
respect of Receivable E previously written off

Remark in respect of Example 8.4

1. The recoupment of debt previously written off as irrecoverable, results in the
decrease in bad debts expense. SARS deems this recoupment as a taxable supply
and consequently VAT output has to be recognised.
 AC (Pty) Ltd is a registered VAT vendor.
On 21 December 2017 trade inventories with a cost price o f R17 500 (excluding
VAT) were donated to a local welfare organisation.
Required:
Recognise the above-mentioned transaction in the records (genera l journal) of AC
(Pty) Ltd for the reporting period ended 31 December 2017.

Journal entry
J1
2017 Dr Cr
21 Dec Donation (P/L) (17 500 × 115/100) 20 125
VAT output (SFP) (17 500 × 15/100) 2 625
Trade inventories (SFP) 17 500
Recognise the donation of trade inventories
Remark in respect of Example 8.5
1. As with the withdrawal of trade inventories by the shareholde r for personal use,
SARS deems the donation of trade inventories as a taxable supply. Cons equently,
VAT output has to be recognised.

For a registered VAT vendor, the payments in respect of the following taxable
supplies include VAT input, but the VAT input may not be claimed from SARS
(input VAT denied):
purchases of vehicles that are not delivery vehicles (purchases that are a motor
car as defined);
purchases of goods and services for purposes of entertainment; and
membership fees paid to clubs or associations.

VAT input on these items is not recognised separately but forms pa rt of the
asset's cost price or the expense.
 AC (Pty) Ltd is a registered VAT vendor.
On 30 June 2017, AC (Pty) Ltd made cash payments in respect of the following:
A passenger vehicle was purchased for R230 000 (includi ng VAT) cash from a
registered VAT vendor.
Entertainment costs in respect of staff to the amount of R69 00 0 (including
VAT) were paid in cash to a registered VAT vendor.
Required:
Recognise the above-mentioned transactions in the records (genera l journal) of
AC (Pty) Ltd for the month ended 30 June 2017.

Journal entries
J1
2017 Dr Cr
30 Jun Vehicle (SFP) 230 000
Bank (SFP) 230 000
Recognise passenger vehicle purchased for cash

J2
2017 Dr Cr
30 Jun Entertainment (P/L) 69 000
Bank (SFP) 69 000
Recognise entertainment costs in respect of
staff Zero-rated supplies

The VAT rate on the following supplies is zero (0%) and c onsequently includes VAT
at 0% or a Rnil VAT amount for the seller as well as the purchaser:
fuel; and
certain foods e.g. fresh vegetables and fruit, eggs, milk and mielie meal.
 AC (Pty) Ltd is a registered VAT vendor.
The driver of AC (Pty) Ltd’s delivery vehicle purchased fuel using a garage card
or petrol card. The bank statement for the week ended 30 June 2017 indicated
petrol card purchases on 28 June 2017 of R5 000 from a registered VAT vendor.

Remark in respect of a garage card /petrol card

1 A garage card can only be used to purchase fuel and oil at a petr ol station. Any
such purchases through the presentation of the garage card are recouped
electronically from AC (Pty) Ltd’s current account.
Required:
Recognise the above-mentioned transaction in the records (genera l journal) of AC
(Pty) Ltd for the month ended 30 June 2017.

Journal entry
J1
2017 Dr Cr
28 Jun Fuel (P/L) 5 000
Bank (SFP) 5 000
Recognise fuel purchases for June 2017

Exempt supplies are transactions that entail the delivery of goods and services
that includes no VAT. Examples of exempt supplies include the following:
capital contributions or cash withdrawals by the owner;
financial services such as
× the incurring of a term deposit;
× interest income earned on a term deposit or a favourable bank balance;
× the incurring of a loan;
× interest expense charged on a mortgage bond, a bank loan, a lease liability, a
supplier’s loan as well as on an overdraft bank balance;
the letting of residential property; and
the transport of passengers in South Africa by means of taxis, buses or trains.
The receipt of or payment in respect of the above -mentioned items by a
registered VAT vendor therefore does not include VAT.
 AC (Pty) Ltd is a registered VAT vendor.
On 30 June 2017, AC (Pty) Ltd invested an amount of R600 000 in a term deposit
with a term of 12 months at 10% per year.
The bank statement for June 2017 indicates the interest on the bank overdraft
as R11 700.
Required:
Recognise the above-mentioned transactions in the records (genera l journal) of
AC (Pty) Ltd for the month ended 30 June 2017.

Journal entries
J1
2017 Dr Cr
30 Jun Term deposit (SFP) 600 000
Bank (SFP) 600 000
Recognise term deposit incurred
J2
2017 Dr Cr
15 Jan Interest expense on bank overdraft (P/L) 11 700
Bank (SFP) 11 700
Recognise interest expense on bank overdraft
Remark in respect of the term deposit
1. The accrued interest income on the term deposit that must be recognised on 31
December 2017, to the amount of R30 000 (R600 000 × 10% × 6/12), represents an
exempt supply and will be recognised by debiting the term deposit account with
R30 000 and crediting the interest income account with the same amount.
 AC (Pty) Ltd is a registered VAT vendor.
On 30 June 2017, AC (Pty) Ltd received an amount of R1 000 000 in respect of a
bank loan. Together with interest, the bank loan must be repaid in one amount on
30 June 2018. The interest rate is 12% per year. The bank statement for June
2017 indicates the interest income on the favourable bank balance as R2 700.
Required:
Recognise the above-mentioned transactions in the records (genera l journal) of
AC (Pty) Ltd for the month ended 30 June 2017.

Journal entries
J1
2017 Dr Cr
30 Jun Bank (SFP) 1 000 000
Bank loan (SFP) 1 000 000
Recognise loan amount received and accompanying
liability

J2
2017 Dr Cr
30 Jun Bank (SFP) 2 700
Interest income on favourable bank balance (P/L) 2 700
Recognise interest income on favourable bank balance
Remark in respect of the loan
1. The accrued interest expense that must be recognised on 31 December 2017, to
the amount of R60 000 (R1 000 000 × 12% × 6/12 ), represents an exempt supply
and will be recognised by debiting the interest expense account with R60 000 and
crediting the bank loan account with the same amount.

Employment is excluded from t he definition of an enterprise. Salaries and wages

paid therefore have no VAT effect.
Events that result from the subsequent measurement of a ssets give rise to
expense and income items that naturally do not include VAT, since it does not
 represent taxable supplies. Examples of such items are depreciation, an
impairment loss in respect of property, plant and equipment items, an increase
or a decrease in the allowance for doubtful debts, the write-off of inventory
shortages (perpetual inventory system) and the write-off of certain inventory
items to the net realisable value thereof.

When an expense (that represents a taxable supply) is incurred, the VAT

involved is isolated and recognised as an asset. The cost at which these expenses
are incurred therefore excludes VAT. If a portion of the expenses is reclassified
as an asset on the reporting date, the cost of the asset also excludes VAT.
Examples of such assets that arise on the reporting date from the
reclassification of an expense are prepaid insurance and office supplies on hand

At the end of the VAT period, each registered VAT vendor has to submit a VAT
return to SARS. Depending on the extent of the annual taxable supplies m ade by
the VAT vendor, the VAT period can be a one-month period, a two-month period,
a six-month period or an annual period. For purposes of this work, it is accepted
that the VAT period is a calendar month. On the VAT return, the registered VAT
vendor will offset the input tax paid to suppliers against the output tax
collected from customers . If the output tax exceeds the input tax, the net
amount must be paid to SARS by the 25th day of the mont h following the end of
the VAT period. If the input tax exceeds the output tax, SARS will pay the
amount due to the registered VAT vendor by making a direct deposit into the
vendor’s bank account. In this work, the output tax will always exceed the
input tax.

It can be indicated as follows that VAT input satisfies the definition and
recognition criteria of an asset:
Definition of an asset Application - VAT input
An asset is a present economic VAT input is a present economic resource for
resource the entity since it is an amount that is, in
accordance with the VAT Act, collectible
from SARS and can therefore be utilised (in
the future) to reduce the obligation in
respect of VAT output. The entity has the
right to receive such money.
controlled by the entity as a The purchasing entity controls VAT input as
result of past events it (the purchasing entity) has the right to
claim the VAT from SARS. As a result, the
entity will have the ability to direct the
right to use the VAT input and obtain
substantially all the remaining benefits from
the VAT input.
The past event is a result of purchase
transactions incurred by the registered VAT
vendor in respect of goods and services
(that are taxable supplies) and that already
occurred.

It can be indicated as follows that VAT output satisfies the defin ition and
recognition criteria of a liability:
Definition of a liability Application - VAT output
A liability is a present obligation of The VAT vendor (selling entity) has a
the entity present, legal obligation towards SARS as a
result of taxable supplies made by the entity
in accordance with the VAT Act. This
requires the VAT vendor to pay VAT output,
collected from customers on behalf of SARS,
over to SARS, and the vendor has no
practical ability to avoid this payment.
to transfer an economic resource The past events are the sales transactions
as a result of past events in respect of goods or services (which are
taxable supplies) incurred by the VAT vendor.
As a result, the entity has to pay money
over to SARS to settle its VAT liability.

AC (Pty) Ltd’s VAT period is a calendar month, and the current reporting date i s
31 December 2017.

On 24 December 2017, AC (Pty) Ltd’s records contained, amo ng other things, the
following balances:
Dr Cr
VAT input 224 000
VAT output 314 000
Bank 449 500
Trade payables 763 200
 Additional information
1. On 24 December 2017 the following appeared on the VAT return for November 2017:
VAT output R172 700
VAT input R123 200
Amount due to SARS R49 500
2. The amount due in respect of the November 2017 VAT return was paid to the
SARS on 24 December 2017 by means of an EFT.
3. Every year, AC (Pty) Ltd closes for business from 25 De cember to 1 January of
the new calendar year.
Required:
a) Journalise the entries in respect of the payment of the VAT to SARS in the
records (general journal) of AC (Pty) Ltd.
b) Present the balances in the VAT input and VAT output accounts in the
statement of financial position of AC (Pty) Ltd as at 31 December 2017.

a) Journal entries
J1
2017 Dr Cr
24 Dec VAT output (SFP) 172 700
VAT input (SFP) 123 200
VAT payment control (SFP) 49 500
Recognise the closing-off of VAT output and VAT
input, as it appears on the November 2017 VAT return,
against the VAT payment control account
J2
2017 Dr Cr
24 Dec VAT payment control (SFP) 49 500
Bank (SFP) 49 500
Recognise the settlement of the VAT owing
according to the November VAT return
Remark in respect of the above
1. The VAT payment control account is known in account ing as a memorandum
account. A memorandum account is used to make the recognition of a tr ansaction
easier and more understandable.
 The following informal T-accounts are provided to confirm the principles and
entries under discussion:
Dr VAT input Cr
2017 2017
24 Dec Balance bd 224 000 24 Dec VAT payment control 123 200
31 Dec Balance cf 100 800
224 000 224 000
2018
1 Jan Balance bd 100 800
Dr VAT output Cr
2017 2017
24 Dec VAT payment control 172 700 24 Dec Balance bd 314 000
Balance cf 141 300
314 000 314 000
2018
1 Jan Balance bd 141 300
Dr VAT payment control Cr
2017 2017
24 Dec VAT input 123 200 24 Dec VAT output 172 700
Bank 49 500
172 700 172 700

b) Presentation of VAT balances

AC (PTY) LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017

2017
EQUITY AND LIABILITIES R
Current liabilities
Trade and other payables 803 700
(cr 763 200, (cr 314 000, dr 172 700), (dr 224 000, cr 123 200))
Remark in respect of the above
1. As indicated above, the amount due to SARS of R40 500 (R141 300 – R100 800) (in
other words VAT output less VAT input) is presented as a current liability as
part of the line item ‘Trade and other payables’.