Unit 5(Value Added Tax)

Activity 2

Answer:

VAT Output

A liability is:

Definition
A present obligation of the entity
application
With regards to output VAT an entity (VAT
vendor) has a legal obligation that arises due to
the VAT Act, to collect Output VAT on the sale
of taxable supplies and pay it to SARS.
The entity has no realistic alternative to settling
the obligation towards SARS, it must pay.

To transfer economic resources The entity must transfer economic resources in

the form of payments towards SARS.

As a result of a past event The past event is the sale of taxable supplies by
the VAT vendor.

Conclusion VAT output is a liability

An asset is:

Definition
An economic resource
Controlled by the entity
As a result of a past event
Application
VAT input is an economic resource in that a
registered VAT vendor has a present legal right
that arises due to the VAT Act to either collect
the amount of input VAT from SARS or use it to
offset it Output VAT obligation.
This right produces economic benefits in the
form of the reduction of the VAT output
obligation or the cash due from SARS.
The entity controls the VAT input in that it can
direct it.
This evidenced by the fact that the entity can
use it to settle its VAT output obligation and
that the entity can restrict other parties from
having access to such a benefit.
The VAT vendor has access to economic
benefits beyond those that can be accessed by
other parties.
The past event is the purchase and delivery of
taxable supplies by the VAT vendor from other
VAT vendors.
Conclusion

VAT INPUT IS AN ASSET.

Recognition criteria

For information to be recognized in the financial statements it needs to be relevant and a faithful
representation.

Faith representation

To be faithfully represented information needs to be:

1. Complete
 The omission of either input or output VAT would render the financial
statements incomplete.

2.Neutral

 The presentation of both input and output VAT does not influence user of
financial statements to make certain decisions, favourable or unfavourable,
based on the financial statements.

3.Free from error

 A VAT vendor is to calculate VAT input and output in such a sway that the
figures are accurate as required by the VAT Act.

Relevant

1.VAT input and output information is relevant in that it has the ability to influence decisions made
by users based on the financial statements.

2. VAT output and input information has both predictive and confirmatory value.

 It has predictive value in that it can be used to predict future payments of

VAT towards SARS.
 It has confirmatory value in that it can be juxtaposed against past predictions.

3.The VAT input and output information is material.