Accounting Entries for VAT

What is Value Added Tax (VAT)?

Value added Tax (Vat) is an indirect tax which is charged on the supply of taxable goods and rendering of taxable services. Manufacturer, wholesaler and retailer of taxable supplier pays vat on the value addition but they are entitled to take rebate of such vat. The final consumer of goods are paid all of the vat payable amount.

Points to be remembered that VAT is not income or expenses of the company. This is charged on the goods or services on invoice amount. If any discount exist on invoice amount, VAT will be charged  after subtracting trade discount and cash discount,.i.e on net invoice amount.

Records of Goods

Every manufacturer of taxable supply shall have to be maintained proper and complete records of supplied goods. The manufacturer and trader shall be maintained sufficient records to ensure that Vat liability can be readily assessed. Records must be complete and authentic to support all tax credit that may be claimed. However, every trader and manufacturer shall have to maintained the following records:

  • 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 tax free 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.

Accounting Entries of VAT

A) In respect of Sales: 

The following journal to be passed when goods are sold:

Trade Receivable A/c (including Vat)Debit
Sales A/c (excluding Vat)Credit
Vat Payable A/c (output tax)Credit


Suppose, ABC Co. sales 50 Ton steel product @ $ 1,000 (including VAT) to XYZ Co. Ltd. Total sales amount is $ 50,000. How ABC Co. record this transaction? Say, VAT rate is 5%.


XYZ A/c (Trade Receivable A/c)Debit50,000
Sales A/c (50,000/105*100)Credit47,619
Vat A/c (Output Tax) (50,000/105*5)Credit 2,381

B) In respect of Purchase:

The following journal to be passed when goods are purchased:

Purchase A/c (Net Payment)Debit
Vat (input tax)Debit
Accounts Payable A/c (total amount)Credit


Suppose, XYZ Ltd purchase 50 Ton steel product @ 1,000 (including VAT) from ABC Ltd. Total Purchase is $50,000. How XYZ Co. record this transaction? Say, VAT rate is 5%.


Purchase A/c (Net Payment) (50,000/105*100)Debit47,619
Vat Payable A/c (input tax) (50,000/105*5)Debit2,381
ABC Co. (A/c Payable) A/cCredit50,000