Accounting CFAB

Chapter 1, 2, 3, 4, 5
Summary and notes by
contents (part 2)
truongthihanhdung@uel.edu.vn
Restructure the contents, to get better advantages

CONTENTS BY CONTENTS,
NOT CHAPTERS BY CHAPTERS
Other topics: VAT, Discounts, Revenues vs Capital, Payroll issues
…

WEEK 2
CHAPTER 1 -
INCOME VS EXPENDITURE
CLASSIFICATION ISSUES
Chapter 1 knowledge points

1/ How to differentiate the Capital income vs Revenue income?

• Refer to Different income sources in SPL (SCI)
• Capital income: proceeds from the sales of non current assets
• Revenue income: income derived from normal activities

2/ How to differentiate the Capital expenditure vs Revenue expenditure?

• Refer to Different types of expenses incurred after the initial recognition of NCA
• Capital expenditure: increase useful life & capacity of fixed assets: Dr NCA/Cr Cash; and,
• Revenue expenditure: not increase useful life & capacity of fixed assets: Dr Ex/Cr cash
Guidance from IAS 16 about:
Capital expenditure related to PPE (treated as cost of PPE)

Classified as Capital expenditure

and included in cost of PPE
Guidance from IAS 16 about:
Revenue expenditure related to PPE (treated as Ex)

Classified as Revenue expenditure

and included in Expenses on P&L
Interactive question 2:
Capital or revenue expenditure? Capital or revenue income?

(a) The purchase of a property (eg, an office building)

(b) Property depreciation
(c) Solicitors' fees in connection with the purchase of property
(d) The costs of adding extra memory to a computer
(e) Computer repairs and maintenance costs
(f) Profit on the sale of an office building
(g) Revenue from sales paid for by credit card
(h) The cost of new machinery
(i) Customs duty charged on machinery when imported into the country
(j) The delivery costs of transporting the new machinery from the supplier's factory to the premises of the
business purchasing it
(k) The cost of installing the new machinery in the premises of the business
(l) The wages of the machine operators
Guiding interactive questions
(a) Capital expenditure
(b) Depreciation is revenue expenditure
(c) Legal fees associated with purchasing a property may be added to the purchase price and
classified as capital expenditure
(d) Capital expenditure (enhancing an existing non-current asset)
(e) Revenue expenditure (restoring an existing non-current asset)
(f) Capital income (net of the costs of sale)(g) Revenue income
(h) Capital expenditure
(i) If customs duties are borne by the purchaser of the non-current asset, they should be added to the purc
hase cost of the machinery and classified as capital expenditure (Thuế hải quan tính trên máy móc khi nh
ập khẩu vào nước)
If delivery costs are paid for by the purchaser of the non-current asset, they should be(j) included in the co
st of the non-current asset and classified as capital expenditure
(k) Installation fees of a non-current asset are also added to cost and classified as capital expenditure
(l) Revenue expenditure
Gross profit margin

Gross profit X 100%

Revenues
GROSS PROFIT = REVENUES – COST OF SALES

Ratio meaning:
How much profit you make in selling goods before subtracting the operating
expenses.
ST – chap 1
TB chap 1
TB chap 1
CHAPTER 3 –
PETTY CASH ISSUES
(UNDERSTAND IMPREST SYSTEM)
Petty cash book
 Petty cash is small money kept for incidental small expenditure.
 Used in Imprest system (use money before submitting vouchers/receipts
and booking expenses)
The Imprest system applied for Petty cash

Step 1 Step 2 Step 3

Cash receitps from cashier
to open Petty cash fund
(thiết lập quỹ ứng trước).
 Accountant journalizes:
Dr Petty cash 150
Cr Cash 150
Petty cash assisstant use cash for
small expenditures (sử dụng quỹ
ứng trước):
Take out money and take in
vouchers or receipts to evidence for
the expenditures.
 Accountants don‟t know how the
transactions are and don‟t have any
vouchers, so they book NO ENTRY
in this stage.
Assisstant submit vouchers/receipts
to accountants (KT ghi nhận chi phí
và hoàn nhập quỹ ứng trước để tiếp
tục chi tiêu lặt vặt).
Accountant books:
Dr Expenses(postatge, milk, courier..)
Cr Petty cash 100
And then reimburse the fund:
Dr Petty cash 100
Cr Cash 100
So, simplify into one entry of book
expenses and reimburse the fund:
Dr Expenses 100
Cr Cash 100
The Imprest system

Petty cash imprest system

Under the 'imprest system':
Cash still held in petty cash: X
Plus voucher payments X
Must equal the agreed sum or float X

Reimbursement is made equal to the voucher payments to bring the float back up
to the imprest amount.
If not agreed: Dr or Cr Cash over and short
The Imprest system applied for Petty cash
- with Cash over and short
Step 1
Cash receitps from cashier
to open Petty cash fund.
 Accountant journalizes:
Dr Petty cash 150
Cr Cash 150
Step 2 Step 3
Petty cash assisstant use cash for Assisstant submit vouchers/receipts
small expenditures (sử dụng quỹ to accountants.
ứng trước): Accountant books:
Take out money $143 ($7 cash left) Dr Expenses 143,5
and take in vouchers or receipts to Cr Cash 143
evidence for the expenditures of Cr Cash over&short 0,5
total amount $143,5
 NO ENTRY in this stage.
$7 + 143,5 amounts in vouchers > Record OTHER GAIN
Fund amount (thu nhập khác)
The Imprest system applied for Petty cash
- with Cash over and short

Step 1 Step 2 Step 3

Cash receitps from cashier
to open Petty cash fund.
 Accountant journalizes:
Dr Petty cash 150
Cr Cash 150
Petty cash assisstant use cash for Assisstant submit vouchers/receipts
small expenditures (sử dụng quỹ to accountants.
ứng trước): Accountant books:
Take out money $143 ($7 cash left) Dr Expenses 142,5
and take in vouchers or receipts to Dr Cash over&short 0,5
evidence for the expenditures of Cr Cash 143
total amount $142,5
 NO ENTRY in this stage.

$7 + 142,5 amounts in vouchers < Record OTHER LOSS

Fund amount (thu nhập khác)
Petty cash book
Recei Date Narrative Payments VAT (£) Milk (£) Postage (£) Travel (£) Other £)
pts (£) (£)

20x7

250 Sep 1 Bal b/d (opening b/l)

Milk bill 25 25
Postage stamps 5 5

Taxi fare 10 10
Flowers – sick staff 15 15

Bal c/f (ending b/l) 195 0 25 5 10 15

250 250
Double entry for petty cash
1/ Set up the fund:
Dr Petty cash 1,000
Cr Cash at bank 1,000
2/ Use the fund: keep the receipts until the end of month or compensating the last dollars in fund. Then
you book:
Dr Expenses 800
Cr Cash at bank 800
(maintain the petty cash fund at 1,000 always in the period)
3/ Increase/decrease the fund:
Dr Petty cash 200
Cr Cash at bank 200
NOTES: this approach the same with textbook POV but slightly different in the way we book entries. Textb
ook recommend: DR EX/Cr Petty cash, and than everything else be solved in the petty cash book (which i
s much more difficult to understand!). But who cares of entries and journals, IASB just control the FSs pre
sentation.
ST chap 3, 4
ST, TB CHAP 3
TB CHAP 3
CHAPTER 3 -
UK PAYROLL ISSUES
The payroll (book/journal)

 Is the record of wages and salaries costs and is the source document for expenses
relating to employees.
Gross pay to employees:
†PAYE (pay as you earn) income tax  to HMRC (Her Majesty's Revenue and Customs)
†Employee‟s NI (National insurance) contributions  to HMRC
†Employee‟s pension contributions  to Pension trustees
†Net pay (cash paid to employees)  to pocket of employees
Additional costs for the employers:
†Employer‟s NI contributions  to HMRC
†Pension contributions to Pension trustees
The Payroll - example

 Total NI submit to HMRC for each employee?

 Total Pension submit to Pension Trustees for each employee?
The payroll
Total payroll costs for employer:

28
CHAPTER 3 -
MANUAL OR COMPUTERISED
ACCOUNTING SYSTEM
Modern accounting –
Computerized accounting system

• Source documents
Processes • Reports
• Standing data • Journals (prime • Trial balance
entries) • Financial
• Ledgers (T Accounts) statements
• Calculations
• Record keeping

Inputs
Outputs
Some key points about
computerized accounting system (self-read)
Accounting software package
• “Off-the-shelf” programmes for small business
• Fully integrated system for big corporations

Standing data (Input)

• Reference data for the computerised accounting system (not regularly change)
• Examples: name and registered address of the business, payment terms for goods sold on credit, the VAT registration number
and relevant VAT rates, wage rates for payroll

Processes - The recordings into system may be: real-time or batch processing
• Real-time processing: at the point at which the transaction takes place (textbook point of view)
• Batch processing: processing a number of transactions together in a group, or batch, usually at the end of each day or each
week

Cloud computing - access to software and data storage via the internet
• Cloud accounting is an application
ST CHAP 3
TB CHAP 3
ST CHAP 3
TB CHAP 3
CHAPTER 4 -
DISCOUNTS ISSUES
(IN INTERNATIONAL TRADING)
Accounting for discounts
Cash discount
Trade
discount

DISCOUNTS
Trade discounts

Trade discount: resulting from buying goods in bulk or regular customers

/important customers.
 Cash price/invoice amount/selling price =
Listed/quoted price – Trade discount
No accounting treatment for Trade discount (no separate ledger account
for trade discount).
Early settlement discount/ Cash discounts

Cash discount: A reduction in the amount payable in return for immediate payment in cash
, or for payment within an agreed period (identified by credit term, and we read credit term
on the invoice:
• 2/10, n/30: 2% settlement discount if paying within 10 days, otherwise must pay in 30
days starting from the date of the invoice;
• 3/5, n/20 EOM;
• 2/10, n/30 ROG…)

Know the key terms:

- Discount allowed to customer: Sales discount (US) = Discount allowed (UK/international)
- Discount received from supplier: Purchase discount (US) = Discount received (UK/international)
CASH DISCOUNTS
– new rule of treatment
Discounts offered to customers Discounts received from suppliers
(Discounts allowed) (Discounts received)

Discount is expected to be • At the initial recognition, deduct out of the • Deduct out of the Purchases
taken Revenues and Receivables. (expense) and Payable.
• Later on, if Discount is actually not taken, • If Discount is actually not taken,
Increase Revenue. Increase Expense.

Discount is not expected to • Do not deduct out of the Revenues and • Do not deduct out of the Purchases
be taken Receivables. (expense) and Payable.
• If Discount is unexpectedly taken, Reduce R • If Discount is unexpectedly taken,
evenue and Receivable. Reduce Expenses and Payables.

Understand key points:

─ Old rule Discounts treatment: accept only “Incurred settlement discount” (US still apply)
─ New rule Discounts treatment: accept “expected settlement discount” to converge to the
guidance of IFRS 15 (EU & international)
WORKED EXAMPLE
Finnie has normal credit terms of 30 days but offers a prompt payment discount of 5% to
customers if they settle invoices within 10 days. On 19 April, Finnie sold goods totalling $500 to
Ruby. Ruby normally takes advantage of the prompt payment discount offered. On 22 April,
Finnie sold goods to Sarah totalling $340. Sarah normally takes a full 30 days to settle her
invoices.
Record the transactions with Ruby and Sarah in the ledger accounts of Finnie.
Prepare Ruby‟s ledger accounts to show how Ruby would record the purchase transaction
assuming that she expected to take advantages of the early settlement discount but then did not
pay within 10 days.
Solution – Finnie’s accounts
CUSTOMER RUBY (expect take advantages of CUSTOMER SARAH (do not expect take advantages of
cash discounts) cash discounts)
At the time of sales: At the time of sales:
Dr TR $475 Dr TR $340
Cr Sales revenues $475 Cr Sales revenues $340
Payment within 10 days: Payment after 30 days:
Dr Cash at bank 475 Dr Cash at bank 340
Cr TR 475 Cr TR 340
Payment farther than 10 days: Payment within 10 days:
Dr Cash at bank 500 Dr Cash at bank 323
Cr TR 475 Dr Sales Revenue 17
Cr Revenues (from discount not taken) 25 Cr TR 340
Understand:
Dr Cash at bank 323
Dr Sales discounts (Discounts allowed) 17
Cr TR 340
 Use Sales discounts/Discounts allowed
(contra-sales) to trace the discounts in the system.
RUBY’S ENTRIES

At the time of sales:

Dr Purchases $475
Cr Trade payables $475
Payment farther than 10 days:
Dr TP 475
Dr Purchases 25
Cr Cash at bank 500
SARAH’S ENTRIES
At the time of sales:
Dr Purchases $340
Cr Trade payables $ 340
Payment WITHIN 10 days:
Dr TP 340
Cr Purchases 17
Cr Cash at bank 323
Interactive example
Items Amounts
Purchases at gross cost 120,000
Trade discounts received 4,000
Cash discounts received 1,500
Cash sales 34,000
Credit sales at invoice price 150,000
Cash discounts allowed 8,000
Distribution costs 32,000
Administrative expenses 40,000
Drawings by owner 22,000

Prepare the IS for this company? Checking figures = (10,500)

What happen if Data is “Purchases at net cost”?

SOLUTION
SCI/INCOME STATEMENT
REVENUES (150+34-8) 176,000
PURCHASES (COGS) (120- 4-1,5) (114,500)
GROSS PROFIT 61,500
OPERATING EXPENSES:
DISTRIBUTION COSTS 32,000
ADMINISTRATIVE EXPENSES 40,000
NET LOSS (10,500)

What happen if Data is “Purchases at net cost”?

TB CHAP 4
TB CHAP 4
ST CHAP 4
CHAPTER 4 -
VAT TAX
Make students understand bigger than the textbook picture,
they won't scare the test!
 UK VAT SYSTEM
(LECTURE NOTES UPDATE 2021)

51
Accounting for VAT
VAT is an (indirect) consumption tax on the supply of goods and services.
Tax is collected at each transfer point in the chain from prime producer to
final consumer.

Other countries have different names for the same general concept. For
example, Australians have the Australian Goods and Services Tax (GST).
VAT - Final bearers
The consumer bears the tax in full and any tax paid earlier in
the chain can be recovered by a registered trader who paid it.

SELL GOODS,
COLLECT VAT

CONSUMER
BUSINESS

Final VAT bearer

Accounting for VAT
VAT on sales (output VAT):
Dr Trade receivables (part of the posting from the sales day book – including VAT, called gross)
£600,000
Cr VAT liability account (owed to HMRC)(20%x £500,000) – output tax 100,000
Cr Sales (exclude VAT, called Net) 500,000

VAT on purchases (input VAT):

Dr Purchases (net) £400
Dr VAT liability account (due from HMRC) – input tax 20% 40
Cr Payables (part of the posting from the purchases day book)-gross 480
Net amount of VAT owed to HMRC is paid to HMRC regularly. This amount included in
Other payables or Other receivables in the SFP.
Accounting for VAT – Example
ABC manufacturing company purchases raw materials at a cost of £1,000
plus VAT at the standard rate of 20%. From the raw material, ABC makes
finished products which it sells to a retailer XYZ outlet, for £1,600 plus
VAT at 20%. XYZ sells the products to customers at a total price of £2,000
plus VAT at 20%.
How much VAT is paid at each stage in the chain?
Accounting for VAT – Example
Value of goods sold £ VAT 20% £

Supply to ABC (ABC paid £200 but recover it later) 1,000 200
Value added by ABC 600
Sell to XYZ (XYZ paid 320 but recover it later) 1,600 320

Value added by XYZ 400

Sell to consumers (customers pay £400 VAT but cannot reco 2,000 400
ver it)

ABC‟s VAT input = £200 (OTHER RECEIVABLES); ABC‟s VAT output = £320 (OTHER PAYABLES)
ABC’s due to HMRC (net VAT) = £120

XYZ‟s VAT input = £320 ; XYZ‟s VAT output = £400 (final consumers bear this tax)
XYZ’s due to HMRC (net VAT) = £80
Total VAT through chain = 120 + 80 = 200 (20% added value from chain = 20% (600+400) )
Registered and non-registered persons

Unregistered traders: do not charge VAT outputs or reclaim VAT inputs

(Read more: https://www.gov.uk/vat-returns).
Registered traders: have 2 groups of outputs: taxable or exempt.
Special traders with exempt activities (such as bank): cannot charge
VAT outputs or reclaim VAT inputs.

57
VAT registration in UK?
 Businesses (sole traders/corporations/partnerships) must register for VAT if
annual VAT taxable turnover goes over £85,000 („VAT threshold‟), or exceeded
the VAT threshold in the past 12 months or they know that it will exceed the
VAT threshold in the next 30-day period.
 VAT taxable turnover is the total of everything sold that is not VAT exempt.
 Business can also register for VAT voluntarily.

Why would business register

for VAT if they don’t have to?

SELF-READ Ref: https://www.gov.uk/vat-registration/when-to-register

VAT registration voluntarily
– pros and cons
VAT registration – pros VAT registration – cons
Avoid informing the world business‟s annual Regularly send VAT returns to HMRC 
turnover is less than the VAT threshold (£85,000). paperwork increases!

Recover VAT incurred Increasing the amounts charged to customers 

maybe they don‟t like!

Increase the position and permanence to the

business
If most customers are VAT-registered businesses,
the VAT they pay for goods and services is often
reclaimable they might not be too worried about
the VAT component

SELF-READ
Compulsory VAT registration – examples

Example 1:
On 1 May, you realise that your VAT taxable turnover in the next 30-day period
will take you over the threshold. You must register by 30 May. Your effective date
of registration is 1 May.

Example 2:
Between 10 July 2020 and 9 July 2021 your VAT taxable turnover was £100,000.
That’s the first time it has gone over the VAT threshold. You must register by 30
August 2021. Your effective date of registration is 1 September 2021.

https://www.gov.uk/vat-registration/when-to-register
SELF-READ
60
HOW VAT WORKS FOR A VAT
REGISTERED BUSINESS?

Buy goods
Sell goods

CONSUMER
SUPPLIER BUSINESS
INPUT VAT (paid to OUTPUT VAT (collect from
supplier) consumers)

every 3 months
SHOW ON THE
“VAT RETURN” (TỜ KHAI SUBMIT DUE VAT/
RECLAIM REFUND
THUẾ GTGT) VAT
VAT RETURN (SOURCE DOCUMENT)
The business must inform HMRC of the VAT which is due to be paid (or refunded) by
submitting a VAT return, usually every 3 months.
The VAT Return includes:
 Total sales and purchases
 The amount of VAT the company owes
 The amount of VAT the company can reclaim
 What VAT refund from HMRC is
 The company must submit a VAT Return even if they have no VAT to pay or reclaim.

SELF-READ
In UK, VAT return is
an online form!
ILLUSTRATION FOR VAT RETURN

SELF-READ
Registered and non-registered persons

Taxable outputs are chargeable at 3 rates:

ꟷ0%: on printed books, newspapers..
ꟷ5% (reduced rate): domestic fuel..
ꟷ20% (Standard rate): others
HMRC identifies the category (tax rate) of goods and services.
Persons carrying on taxable activities (even activities taxable at 0%) can
reclaim VAT input.
Some traders have mixture of taxable and exempt activities  can only
reclaim VAT input for taxable outputs.
Taxable outputs/ supplies –
UK real practice
business sales (goods and services)

hiring or loaning goods to someone

selling business assets

VAT is
charged on
Commission
‘taxable supplies’
items sold to staff - for example canteen meals
SELF-READ

business goods used for personal reasons

‘non-sales’ like bartering, part-exchange and gifts

VAT rates – UK real practice
% of VAT What the rate applies to

Standard rate 20% Most goods and services

Reduced rate 5% Some goods and services, eg children‟s car seats and
home energy, domestic
fuel and power

Zero rate 0% Zero-rated goods and services, eg most food and

children‟s clothes

SELF-READ

Read for more detailed rates: Source: https://www.gov.uk/vat-rates

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
VAT Exemption for goods and services
- in UK
SELF-READ
Some goods and services on which VAT is not charged, including:

Insurance, finance and credit

Subscriptions to membership organisations

Essential goods/
Education and training
services

Fundraising events by charities

Selling and leasing of commercial land and buildings

Ref: https://www.gov.uk/guidance/vat-exemption-and-partial-exemption 67
What we should do with items exempt
from VAT?
 Should not include VAT in the price of any exempt items sold;
 Cannot reclaim VAT on any exempt items purchased;
 Sales of VAT-exempt products do not count towards company‟s VAT taxable
turnover
 No need to keep VAT records for VAT-exempt sales.

SELF-READ
Differences between:
VAT exemption vs. 0% VAT products?
Zero-rated products VAT-exempt products
Common features No extra charge added to the original sales price
Major differences:
Sales are considered part of total Yes No
taxable turnover
Sales should be recorded in VAT Yes No
accounts
Entitled to recover/claim back the Yes No
input tax

SELF-READ
SUMMARY CHART
Transactions
(Sales/Purchases)

VAT
VAT Registered
Unregistered
traders
traders

Taxable
VAT Exemption
goods/services

Standard rate Reduced rate

Zero rate 0%
20% 5% SELF-READ
HOW VAT WORKS FOR A VAT SELF-READ

REGISTERED BUSINESS?

Buy goods
Sell goods

CONSUMER
SUPPLIER BUSINESS
INPUT VAT (paid to OUTPUT VAT (collect from
supplier) consumers)

every 3 months
SHOW ON THE
“VAT RETURN” (TỜ KHAI SUBMIT DUE VAT/
RECLAIM REFUND
THUẾ GTGT) VAT
Registered and non-registered persons

Traders usually account quaterly to HMRC for VAT.

Most of traders have to pay HMRC (output VAT > input VAT)  Tax payable
Traders who make zero-rate products will receive cash from HMRC (output
VAT<input VAT)
Accounting for recoverable VAT

Trader‟s ledger account should reflect the trader‟s role as tax collector 
VAT should not be included in income or in expenses.
Separate VAT input and VAT output, then submit or collect for/from HMRC
the net amount.
Irrecoverable VAT (input tax non-deductible)
Traders suffer irrecoverable VAT as a cost, in the following cases, VAT should be included
as an expense (it means, cannot be claimed as input tax):
1. Traders not registered for VAT will suffer VAT on inputs as a cost (increase their expenses
and the cost of any NCA they purchase).
2. Registered traders who also carry on exempted activities may suffer VAT on certain inpu
ts (only increase the expense of these inputs).
3. Non-deductible inputs will be borne by all traders for:
• VAT on cars purchased and used in the business (VAT on a car acquired new
for resale – car trader – is reclaimable)  PHẢI HIỂU LÀ PRIVATE USE OF
BUSINESS CAR IS NONDEDUCTIBLE!)
• VAT on business entertaining is not deductible as input tax other than VAT on
entertaining staff (employee entertaining).

VAT is not recoverable must be included in cost of items purchased and present
ed on SPL or SFP as appropriate.
74
SOME DEFINITIONS SELF-READ
Source: VAT Notice 700/65- Business entertainment rule, https://www.gov.uk/

Employee entertainment/Staff
Entertainment Business entertainment (BE)
entertainment (EE)
•Defined as hospitality of any kind, e.g: •All of the following conditions are met: •Where an employer provides
•provision of food and drink •+ entertainment is provided entertainment for the benefit of
employees, i.e, to reward them for
•provision of accommodation (such as •+ it’s provided to persons who are not
good work or to maintain and improve
in hotels) employees of the business
staff morale (not for business
•provision of theatre and concert •+ it’s provided free
purposes). E.g, staff parties, team
tickets •Business entertainment provided to
building exercises, staff outings and
•entry to sporting events and facilities ‘overseas customers’ is not blocked
similar events
•entry to clubs and nightclubs (VAT input could be
recovered/deductible/ reclaimed)
•use of capital assets such as yachts
and aircraft for the purpose of
entertaining HMRC allows tax relief and the
claiming of VAT input on EE expenses
Cannot recover input tax incurred on the provision of BE (entertaining business's employees):
expenses (entertaining business's non - employees): Dr Ex/Purchases
Dr Ex/Purchases Dr VAT account (input tax)
Cr TP Cr TP
75
Who are Employees and Non-employees SELF-READ
under BE rules?

Employees  EE Non-employees  BE

• An employee includes: • Customers/potential customers

• + a person employed by the business • Pensioners and former employees
•+ directors - or anyone engaged in the • Job applicants and interviewees
management of the business (including partners) • Shareholders
• + self employed persons (subsistence expenses only)
- treated by you in the same way for subsistence
purposes as an employee
• + helpers, stewards and other people essential to
the running of sporting or similar events
BE vs EE – normal examples
Expenses/Purchases incurred in VAT registered traders Business entertainment VAT input
or Employee recovery
entertainment (BE or EE) (Yes/No)

Use of capital assets: yachts and aircrafts for the purpose of

entertaining UK potential customers
Use of capital assets: yachts and aircrafts for the purpose of
entertaining employees in staff outings

Provision of accommodation/concert tickets/food and drinks/entry

to clubs and nightclubs to Pensioners and former employees/Job
applicants and interviewees

Provision of accommodation/concert tickets/food and drinks/entry

to clubs and nightclubs to helpers to run The UEFA European
Football Championship
BE vs EE – some exceptions
Expenses/Purchases incurred in VAT registered traders Business entertainment or VAT input
Employee entertainment recovery
(BE or EE) (Y/N)

Subsistence expenses (overnight accommodation, food, drinks, car fuel…) for

employees (including business owners or directors) working away from their
normal place of business

Staff entertainment costs only for owners, directors or partners of a business

Business entertainment provided to overseas customers (non-UK)

British Aikido Board (Recognised sporting body) provides necessity free

accommodation and meals to amateur sports persons and officials who attend
an national event.

British Airways (Airlines) provide catering and accommodation expenses for

passengers who have been delayed.
Nondeductible VAT - examples
Expenses/Purchases incurred in VAT registered traders VAT input recovery Entry
(Y/N)
VAT on purchasing a new car if your company use it only for
business.

VAT on purchasing a new car if it‟s mainly used:

- as a taxi
- for driving instruction
- for self-drive hire

VAT for buying a commercial vehicle (like a van, lorry or

tractor) if you only use it for business.

VAT on fuel costs if your vehicle is used only for business.

VAT on purchasing cars for personal or private use

VAT and discounts

Trade discount: VAT is charged on sales amount net of the trade discounts.
Cash discount: output VAT is accounted for on the amount that is actually received
from the customer. -- 2 methods of recording for cash discounts with VAT:
1.The supplier issues invoice with VAT on the sale price, ignoring the offered
cash discounts. If the customer takes up the cash discount supplier issues
credit note on the amount of the discount, including the VAT.
2.The supplier must issue an invoice in full value, contains the term of cash
discount and a statement that the customer can only recover as input tax the VAT
paid to the supplier.
EXHIBIT FOR VAT & DISCOUNTS SELF-READ
VAT and irrecoverable debts

Registered persons have to record VAT when selling products (issuing

invoice) maybe, output tax has to be paid to HMRC before it has all
been received from customers.
If the Trade receivables turn into irrecoverable debts, the VAT element
may not be recoverable from the HMRC for some time after the sale.
SUMMARISING
1/ Inputs 1/Outputs
Dr Purchases Dr TR
Dr VAT input – reclaimed from HMRC Cr Sales
Cr TP CR VAT output – paid to HMRC
2/ Irrecoverable VAT on expenses or non-current assets must be included in the cost of
the expense or NCA in the SPL or SFP.

3/ The net amount due to (or from) HMRC should be included in other payables (or other
receivables) in the SFP.
EX: Calculating VAT from gross amount

Gross selling amount is £240. Compute VAT 20%?

 VAT = £240 X 20%/120% = £40
Net selling amount is £200. Compute VAT 20%?
 VAT = £200x20%= £40
VAT example

ABC is preparing financial statements for the year ended 31 May 20x9. Included
in its SFP as at 31 May 20x8 was a balance for VAT due from HMRC of £15,000.
ABC summary of SPL for the year to 31 May 20x9 as in table follows.
In respect of VAT payments of £5,000, £15,000 and £20,000 have been made in
the year to HMRC and a repayment of £12,000 was received.
Required:
What is the balance for VAT in the SFP 31 May 20x9? VAT 20%.

85
VAT example
£‘000
Revenues (net) (applied standard rate) 500
Purchases (net) (applied standard rate) (120)
Gross profit 380
Expenses (see Notes) (280)
Net profit 100
Notes Expenses:
Wages and salaries (VAT exempt) 162
Entertainment expenditure (£40 + irrecoverable VAT £8) 48
Other (VAT 20% applied) 70
Total 280

86
VAT example – bisexual accounts
VAT account
VAT due from HMRC (opening):£15,000
VAT input: VAT output:
Purchases (120,000 x 20%) = 24,000 Sales (500,000x20%)=100,000
Other expenes (70,000x20%) =14,000 Cash received = 12,000
Cash paid totalled = 40,000

93.000 112.000
19.000

Dr VAT accounts 40,000 Dr Cash

Cr Cash 40,000 Cr VAT account 12,000
VAT account (TK luong tinh)
VAT account Debit balance: Due from HMRC (other receivables)
VAT account Credit balance: Due to HMRC (other payables)

88
ST CHAP 4
 ABCD
TB CHAP 4
 ABCD
TB CHAP 4
 ABCD
HOMEWORK FOR PRACTICE
ADDITIONAL ISSUES AND FINANCIAL STATEMENTS
ALL THE BEST, THANK YOU!