VAT

System

Can anyone help with this question please...

Prepare a journal entry to record the following transaction:

A credit note from a supplier for purchases was entered into the ledgers as a purchase invoice. The credit note was for £470 including VAT at 17.5%

I've made a journal entry to credit purchases with £400 and put the double entry for this as a debit in purchase returns but I'm not sure what to do with the VAT.

Any help would be greatly appreciated.

System

Re:VAT

What I always do if there's a slightly tricky journal entry to prepare is draw up T accounts for the amounts concerned. So in this case the (incorrect) accounts would be:

Purchases
Dr 400

VAT
Dr 70

Purchase Ledger Control
Cr 470

This makes it easier to see what needs to be done to put things right. You should credit Purchases to clear it, you will also need to credit Purchase Returns with 400 - PR always has a credit balance, the opposite of the Purchases a/c.

VAT needs to be credited with 140 - 70 to clear and 70 for the VAT credit on the purchase return.

That leaves you with the PLC which needs to be debited with 940 - 470 to clear and 470 to add the return.

So your corrected T accounts will be:-

Purchases
Dr 400
Cr 400
Bal 0

Purchase Returns
Cr 400

VAT
Dr 70
Cr 140
Bal Cr 70

PLC
Cr 470
Dr 940
Bal Dr 470

From this it should be easy to see what your journal entries will be.

A bit long winded, but I hope that helps.

Chris

System

Re:VAT

Thanks for that, I'm at work at the moment but should be able to follow things through tonight.