Value Added Tax and Cash Book

Value-Added Tax (VAT)

• VAT is an indirect tax on the value added by producers, suppliers, and service providers at each stage of the supply chain.
• The cost of VAT is usually passed on to the consumer.
• Some countries use a Goods and Services Tax (GST), which is similar to VAT.
• VAT was first implemented in France in the late 1950s, after being tested in Côte d’Ivoire, a former French colony.
• Brazil adopted the first comprehensive version of VAT in 1967.
• Most wealthy nations and many low- to middle-income countries have adopted VAT, particularly since the 1980s.
• VAT and other sales taxes can account for one-third or more of developing countries’ tax revenues.

Collection Method: Credit Invoice

• Almost all countries with VAT use the ‘credit invoice’ method.
• Businesses charge VAT on sales to customers and remit it to the government.
• Businesses receive a tax credit or refund for VAT paid on inputs.
• VAT is included on all invoices along the supply chain, creating a paper trail that helps tax authorities verify payments and credits.

Cost Burden

• The cost of VAT is passed down the supply chain until it reaches the consumer, who cannot pass it on.
• VAT is generally considered to be borne by the consumer.
• VAT differs from traditional sales tax, which is paid only at the final point of sale.

VAT Refunds and Exemptions

• Companies can claim VAT refunds or credits if they pay more VAT on inputs than they collect on sales.
• Small companies are often exempt from VAT and instead pay a turnover tax, which is simpler to account for.
• Turnover tax is based on gross sales rather than a string of invoices.

Spread and Revenue Impact

• VAT has rapidly spread across developing countries and become a major source of government revenue.
• Between 2012 and 2016, Uganda raised over a third of its tax revenues from VAT, while Ghana raised about 29%.
• The adoption of VAT aligns with the ideology of open markets and free trade promoted by organizations like the IMF.
• This ideology suggests that consumption taxes are less distorting to investment decisions than income or capital taxes.
• The spread of VAT has often coincided with lower corporate income tax rates and more tax incentives for investment.
• VAT has frequently replaced trade taxes, which developing countries have been pressured to reduce.

Political Aspects

• VAT may be favored by governments due to its wide reach across society, potentially facing less resistance than taxes focused on the wealthy.
• However, excessive VAT increases have led to protests, such as those in South Africa in 2018.
• Governments often implement multiple VAT rates to promote or discourage specific business activities or consumption.
• Annual budgets commonly include small adjustments to the VAT regime, resulting in numerous minor differences in classification.

Exemptions and Zero-Rating

• Basic foods or domestic fuel may be exempted from VAT or zero-rated.
• Zero-rating means VAT is charged at 0%, effectively making the item VAT-free.
• VAT may still be charged on inputs for both exempted and zero-rated items.
• If an item is exempt, suppliers cannot claim refunds on inputs, potentially increasing consumer prices.
• Under zero-rating, businesses can claim refunds throughout the supply chain.
• Exemptions may be easier for tax authorities to manage, as there are no VAT refunds to track.

VAT, Poverty, and Gender

• VAT is often considered regressive, meaning it disproportionately affects the poor because they spend a larger share of their income on consumption.
• Since women make up a larger percentage of the poor, consumption taxes like VAT may disproportionately affect women.
• The actual impact of VAT on the poor varies depending on which goods and services are taxed, exempted, or zero-rated.
• Governments use exemptions and zero-rating to reduce the tax burden on the poor.
• However, these measures are not always accurate; some essential items for the poor may not be exempted.
• ActionAid has campaigned to remove VAT from women’s sanitary towels.

Incidence of VAT

• Many smaller firms in developing countries may not be subject to VAT or may not be registered to pay it.
• If sellers to consumers are not registered, the poor may avoid some of the VAT burden.

Making VAT More Progressive

• Civil society groups advocate relieving VAT on items widely used by the poor.
• Due to complications with exemptions and zero-ratings, some suggest reducing the standard VAT rate instead.

Understanding Consumption Patterns

• Making VAT more progressive requires analyzing which goods and services are heavily consumed by marginalized people, considering both men’s and women’s consumption.
• Governments should exempt or zero-rate items used by the poor while raising VAT on items consumed by the wealthy.
• Governments should conduct impact assessments, and civil society groups can catalyze action by producing their own assessments.
• It’s essential to know what the poor consume and which items are subject to VAT or are exempted/zero-rated.
• Household data may not fully capture spending decisions within households, such as the roles of men and women.
• Collecting better data on the economic activities of individuals within households is important.

Recommendations for Governments

• Continuously assess how VAT exemptions and zero-ratings align with the consumption patterns and needs of the poorest citizens, especially women in poverty.
• Publish impact assessments for use by civil society.
• Exempt or zero-rate goods and services disproportionately used by the poorest, and remove exemptions from items used mainly by the better-off.
• Allocate more resources to tax administrations to ensure VAT compliance and combat fraud.
• Reduce headline VAT rates as more revenue is raised from other progressive taxes.

Cash Book

• A cash book records all transactions related to cash receipts and payments.
• It starts with cash or bank balances at the beginning of a period, typically monthly.
• Maintained by all organizations, regardless of size or profit status.
• Serves as both a journal and a ledger (cash account).
• Also called the book of original entry.
• When a cashbook is maintained, cash transactions are not recorded in the journal, and no separate cash or bank account is required in the ledger.

Advantages of Cash Book

• Simplifies entry of cash transactions.
• Traces Mistakes: Balance can be verified against actual cash in hand, easily detecting errors.
• Daily Record: Cash transactions are promptly recorded, maintaining a regular record.
• Ascertain Receipts and Payments: Receipts and payments can be easily determined for a specific date.
• Identifies Default: Defaults, theft, or cash evasion can be identified while verifying the cash book balance.
• Determines Cash in Hand: Provides a clear picture of the remaining cash balance.
• Saves Time, Cost, and Labor: Reduces effort compared to recording in a journal and then posting to a ledger.
• A cash book initiates creating of a single book of accounts and thus saves a lot of time, efforts and expense incurred while preparing these two separate books.

Types of Cash Book

• Varies based on complexity and business needs.

General Cash Book

• Serves as a journal for initial recording and replaces the cash account in a ledger.
• Subdivided into three categories:

Single Column Cash Book

• Records all cash transactions in chronological order.
• Only one amount column on each side (debit and credit).

Double Column Cash Book

• Two columns: cash and discount.
• Records cash discounts allowed or received during payments.
• Discount allowed (loss) shown on the debit side; discount received (gain) on the credit side.

Three Column Cash Book

• Includes columns for cash, bank, and discount.
• Reflects banking habits where payments are made and received via cheques.
• Cash and bank columns represent cash a/c and bank a/c, respectively.

Contra Entries

• Transactions affecting both sides of the Cash Book.
• Example: Cash deposited into bank:
  • Debit side: “To Cash” in the bank column.
  • Credit side: “By Bank” in the cash column.
• Example: Cash withdrawn from bank:
  • Debit side: “To Bank” in the cash column.
  • Credit side: “By Cash” in the bank column.
• Letter “C” in the L.F. column indicates such entries.
• Double entry is complete in the Cash Book itself; no further posting in the ledger is required.

Rules for Recording Transactions

1. Cash receipts in the cash column of the receipt side; cash payments in the payment side.
2. Discount allowed on the debit side and discount received on the credit side [in the discount columns].
3. Cheques received from customers and deposited immediately are entered in the bank column of the Cash Book [debit side]. If they are sent to the bank at a later date, it becomes deposit of money into bank and, therefore, a ‘contra’ entry.
   • It is shown on the bank column on the debit side and cash column on the credit side.
4. If cheques are received by the business and endorsed to creditors, they are taken into cash columns as cash receipt and cash payment.

Illustration

Cash Book
[With Cash, Bank, and Discount columns]

Petty Cash Book

• Used for recording small payments like conveyance, postage, etc.
• Appoints a petty cashier to manage these transactions.
• Petty cashier works on the Imprest system.
• A fixed sum (e.g., Rs. 2,000) is given to the petty cashier at the beginning of a period. This is the imprest amount.
• The petty cashier makes small payments out of this amount.
• When a substantial portion is spent (e.g., Rs. 1,780), the petty cashier is reimbursed by the head cashier.
• Petty cash reimbursed weekly, fortnightly, or monthly.

Petty Cash Book Structure:

• Multiple columns on the payment (credit) side
• Amount column
• Columns for specific payment items (most common)
• Miscellaneous column
• Remarks column
• One amount column on the receipt (debit) side.
• Columns for date, voucher number, and particulars are common for both receipts and payments.

Imprest System:

• Fixed amount (e.g., Rs. 5,000) given to the petty cashier for small expenses. This is the imprest money.
• The petty cashier makes all authorized payments.
• Reimbursement is made for the actual amount spent.
• The petty cashier once again has the full imprest amount at the beginning of the next period.
• Reimbursement is made weekly, fortnightly, or monthly.
• Sometimes the petty cash system is operated through the main cash book; no separate petty cash book is maintained.

Advantages of Petty Cash Book

(i) Reduces the labor:

• Based on division of labor and imprest system, reducing the main cashier's workload.

(ii) Controls irregular expenses:

• Appointing a petty cashier to control irregular expenses. Easier to monitor and control necessities.

(iii) Main cash book does not become over bulky:

• Keeps the main cash book compact by recording small items in the petty cash book.

(iv) Quick payment possible:

• Petty items are recorded and paid quickly without waiting for higher authority approval.

Types of Petty Cash Books:

*(i) Simple Petty Cash Book

*(ii) Analytical Petty Cash Book or Columnar Petty Cash Book

I. Simple Petty Cash Book:

• One column for receipt of cash from the main cashier and one for payment of petty expenses.
• ‘Date’ and ‘Particulars’ columns are shared.
• C.B. Folio’ column shows the page number of cash book.
• Items are mentioned in the particular column.
• V .No’ column, voucher number of the transactions are recorded
• L.F.’ column shows where the posting of these items have been made in respective ledgers.
• Amount’ column shows the money value of the transactions.

The format of simple petty cash book is as under

II. Analytical Petty Cash Book:

• An analytical presentation of cash payments is made.
• Classifies petty payments into different heads and maintains different columns.

The format of the analytical petty cash book is as under

Explains the balancing for Analytical Petty Cash Book

Cost Centre & Cost Category

Introduction

Cost Categories:

• Allow allocation of transactions to several sets of Cost centres (parallel allocation).
  Cost Centres:
• Unit of an organization to which transactions (usually revenue) are allocated.
• Details of all transactions from a cost centre are tracked.
• Ledger account shows the nature of a transaction but not the unit or organization involved.
  Cost Centre (vs. Profit Centre):
• When only costs or expenses are allocated to these centres, they are termed as Cost Centres.
• When Income is also allocated to these centres, they are termed as Profit Centres.
  Note:
• The concept of Cost Centre's and Cost categories are similar to Ledgers and Groups respectively.
• By default Tally maintains a Cost Category as 'Primary'.

Use of Cost Category & Cost Centre

Cost Categories:

• Useful for organizations that require allocation of Revenue and Non-Revenue Items to parallel sets of cost centers.
• Facilitate third dimensional reporting of Expenditure and Revenue.
  Example:
• Company decides to allocate stationary expenses Rs. 5000 within different departments.
• Distribution: Sales department Rs. 2500, Account Department Rs. 1250, purchase Department Rs. 1250.
  Entry:
  $\text{Stationary Expenses a/c…………… Dr 5000}$
  $\text{To Cash a/c……………………………………………….. 5000}$

Enabling Multiple Cost Categories

To enable the option for more than one Payroll/Cost Category, follow these steps:

• F11: Features
• Accounting Features
• Set "Maintain Cost Centres" to Yes
• Set "More than ONE Payroll/Cost Category" to Yes.

Creating a Single Cost Category

• Navigate to: Gateway of Tally -> Accounts Info -> Cost Categories -> Single Cost Category -> Create
• Fields:
  • Name: The name of the Cost category.
  • Allocate Revenue Items: Set to 'YES' to allow allocation of revenue items against this category.
  • Allocate Non-Revenue Items: Set to 'YES' to allocate non-revenue items like assets and liabilities.

Creating a Single Cost Centre

• Navigate to: Gateway of Tally -> Accounts Info -> Cost Centre -> Create.
• Fields:
  • Category: Select the Cost Category.
  • Name: The name of the Cost Centre.
  • Under: Select Primary unless it's under an existing cost centre.

Voucher Entry for Expense Allocation

• Pass the entry in payment mode (GOT -> Accounting Vouchers -> F5).
• Ensure cost centers are applicable in the ledger creation screen.
• Allocate the expense between Cost Centres with corresponding amounts.

Cost Category Summary Report

• View report from Gateway of Tally -> Display -> Statement of Accounts -> Cost Centres -> Category Summary.

Pre-defined Cost Centre Allocation

• Tally allows pre-defining cost centre percentages for a particular cost category. Set up: From GOT->Company feature (F11) Accounting Feature>Use Pre-defined Cost Centre Allocation during Entry
  • Activate the option from GOT→Company feature (F11) Accounting Feature>Use Pre-defined Cost Centre Allocation during Entry
    Pass the entry with predefined cost center allocation

Creating Multiple Cost Categories

• Gateway of Tally → Accounts Info → Cost Categories → Multiple Cost Categories Creation

Creating Multiple Cost Centres

*Gateway of Tally → Accounts Info → Cost Centres → Multiple Cost Centres Creation

Note: Cost Centres can be deleted only in Single Alter mode. New Primary Cost Centres can not be created in Multiple Create mode.

Purchase of Assets (Non Trading Item)

• Pass the Entry for purchase non trading items such as fixed asset.
• Set Allow Expense/Fixed Assets in Purchase Vouchers
  From Gateway of Tally Configuration (F12) Voucher Entry
• Configure the setting such as to accept Expenses/Assets heads
• Ledger Creation

Sale of Assets (Non Trading Item)

*Before selling of fixed assets you have to calculate written down value of Delivery Van, it helps to calculate profit or loss on sale of fixed assets.
*To calculate profits and loss on sales

Depreciation Entry:

Depreciation A/c……………Dr 17,500
To Provision for Depreciation A/c……………………17,500
(Being Half year depreciation amount ($3, 50,000<em>10/100</em>6/12$))

Sale Entry:

Kanha Motors A/c………………………………..Dr 3,25,500
Provision for Depreciation A/c……………………Dr 17,500
Loss on Sale of Assets A/c…………………………Dr 7,000
To Delivery Van A/c………………………3,50,000

Then check report and analysis

Assignment 1 & 2 is provided

Creating a Company

• Creating a Company involves providing basic information about the company whose books of accounts are to be maintained in Tally.ERP 9.
  1. Go to Gateway of Tally > (Alt+F3) Company Info. > Create Company
  2. The Company Creation screen appears as shown
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