Assets, Capital and liabiltiies

janakG

I can never understand this type of question especially when its with accruals and prepayments.

Cheesypeesy

The VAT control account has a credit balance due to incurring more output tax than input tax. Therefore, the business owes HMRC the balance on the account.

When the payment is made, this clears the liability on the VAT account. Therefore, liabilities have decreased.

Since cash is being used to settle this liability, the bank account is reduced by the VAT balance. This represents a decrease in assets since we now have less cash.

Since both assets and liabilities have decreased equally, there is no effect on net assets, i.e. capital. Therefore, there is no change in capital.