Help with Accounting?

lee711

would anyone be able to explain to me how to do this type of working?

its from the 2006 HL paper, question 1, working (vi):

'A new warehouse was purchased during the year for 200,000 plus VAT 12.5%. The amount paid to the vendor was entered in the buildings account. No entry was made in the VAT account.'

from the Trial Balance:

......................................... Dr

---

Cr
Buildings (cost 900,000)......855,000
VAT..............................................4,300


I'm just not sure how to treat the VAT, or what to do with it. Any help would be much appreciated

flump_master

Well the amount paid to the vendor was 225,000 (200000 for the building, 25000 VAT). All of the 225,000 was put into the buildings account, however the VAT doesn't belong there. You need to minus 25,000 from buildings.

You then have to deal with the VAT. The catch is, though, that the VAT shown in the trial balance is a liability and the buildings VAT is an expense. You must minus the 25,000 from the existing 2,300. This makes VAT a current asset now, not a liability.

So: Minus 25,000 from buildings. Minus 25,000 from VAT (making it a current asset)

Aaaand watch out for provision on buildings! I was doing that question and made the mistake of thinking the provision was the new figure for buildings minus the net book value. Provision is still 45,000!

Saskatchewan

The VAT should not have been entered in the buildings account so you minus the vat from the buildings.

VAT is a current liability in the question so you minus the VAT of 25000 from it. It's a current asset as the government owe you the money. The value of the VAT in the current asstes is 20700.

Hope that helps

lee711

so the cost of the buildings would be 875,000 and the NBV would be 830,000?

And to make it even clearer, when you purchase something from a vendor, it is the vendor who has to pay the VAT, not you?

lee711

my questions has been answered , thank you both

Saskatchewan

lee711 wrote: »

so the cost of the buildings would be 875,000 and the NBV would be 830,000?

And to make it even clearer, when you purchase something from a vendor, it is the vendor who has to pay the VAT, not you?

Yep.

Well the person buying pays the tax. But it isn't part of the value, so you don't put it in the accounts

lee711

Saskatchewan wrote: »

Yep.

Well the person buying pays the tax. But it isn't part of the value, so you don't put it in the accounts

but it's the vendor who owes the VAT, so the government throws you back the cash for the VAT?