Chapter 2 - Accounting for VAT and payroll

How do we account for a cash/credit sale including VAT?

Dr Bank/RLCA with gross

Cr Sales with net

Cr VAT with VAT

How do we account for a cash/credit sale return including VAT?

Dr Sales Returns with net

Dr VAT with VAT

Cr Bank/RLCA with gross

How do we account for a cash/credit purchase including VAT?

Dr Purchases with net

Dr VAT with VAT

Cr Bank/PLCA with gross

How do we account for a cash/credit purchase return including VAT?

Dr Bank/PLCA with gross

Cr Purchase Returns with net

Cr VAT with VAT

List examples of debit entries in the VAT control account.

1. VAT on credit purchases/expenses

2. VAT on cash purchases/expenses

3. VAT on sales returns

4. VAT on irrecoverable debts written off

5. VAT on discounts allowed (prompt payment discounts)

List examples of credit entries in the VAT control account.

1. VAT on credit sales

2. VAT on cash sales

3. VAT on purchase returns

4. VAT on discounts received (prompt payment discounts)

When is VAT calculated on an amount?

1. After trade and bulk discounts are deducted from original list price (on the net)

What is the impact of a prompt payment discount?

1. Offered on invoice but not disclosed

2. Does not impact VAT until discount is taken advantage of

How do we account for a discount allowed to a credit customer?

Dr Discounts Allowed with net

Dr VAT with VAT

Cr RLCA with gross

How do we account for a discount received from a credit supplier?

Dr PLCA with gross

Cr Discounts Received with net

Cr VAT with VAT

What are the main responsibilities of payroll staff?

1. Correctly calculating amount of pay due to each employee

2. Ensuring each employee is paid on time with correct amount

3. Ensuring amounts due to external parties (including HMRC) are correctly determined and paid on time

What is gross pay?

1. Wage/salary due to employee for amount of work done in period

What is net pay?

1. Gross pay - employee's deductions (PAYE and NIC)

What is the PAYE scheme?

1. National scheme

2. Employers withhold tax and other deductions from employees' wage/salary and pay this over to HMRC

What is national insurance?

1. State scheme run by HMRC

2. Allows for benefits including:

   • Retirement pensions

   • Widow's allowances and pensions

   • Jobseeker's allowances

   • Incapacity benefits

   • Maternity allowances

3. Funded by people currently in employment and have earnings above specified level

List the ledger accounts that are used for payroll and explain the function of each one

1. Wages and salaries control account

   • All transactions for payroll pass through this account

   • Should have nil balance when all payroll entries have been dealt with

2. Wages expense account

   • Includes full cost of employing staff

   • = Gross pay + employer's NIC + employer pension and other contributions

3. HMRC liability account

   • Includes PAYE + employee and employer NICs

4. Pension liability account

   • Includes amounts payable to external pension funds

   • May include both employee and employer contributions

How do we account for payroll?

Dr Wages Expense with full cost

Cr Wages Control with full cost

-

Dr Wages Control with net pay

Cr Bank with net pay

-

Dr Wages Control with HMRC liability

Cr HMRC Liability with HMRC liability

-

Dr Wages Control with pension/other liability

Cr Pension/Other with pension/other liability