Haven't even started the Level I course yet, but reading through Marshall's "Mastering Bookkeeping".
Finding it hard to get my head around procedure for early payment discounts. This seems to be journalised against the Customer/Supplier ledger account (Gross) after VAT has been posted. Does this mean it actually comes out of the Net total ? If so, this surely means too much VAT is paid (?)
I don't know if this answers your question but the VAT is calculated on the discounted amount (for early payment) regardless of when the payment is made. For example, if an invoice is made out for an item costing £200 but an early payment discount of 5% then the VAT charged will be £33.25 (i.e. 17.5% of £190) and not £35.
Peter's hit the nail squarely on the head with his answer.
as your just starting out and already dipping your toe in the world of VAT probably worth pointing out the nasty trip wire for the unwary related to VAT.
If you have a figure of £100 inclusive of VAT and the VAT rate is 17.5% the amount of VAT included in the £100 is not actually £17.50.
To calculate the VAT you can either use the text book way which would be 100/117.5*17.5 so you would get £14.89 as the actual amount of VAT.
Or you could do it the way that we (and the revenue) do it which is multiply the figure by 7 and divide by 47.
so, 100*7/47 = £14.89.
Go on, do the reverse calculation and you'll see how it works. Subtract £14.89 from £100 and then multiply by 17.5% (100-14.89=85.11*1.175=100)
So, as you can see, the VAT inclusive in a figure of £100 is actually £14.89, not £17.50.
If you are using 15% the calculation would have been 100*3/23.
The reasoning behind the above of course is that the original figure of £100 was inclusive of VAT and to just calculate a straight 17.5% would have been including the inherent VAT as part of the calculation.
Hope that this proves useful going forwards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I don't know if this answers your question but the VAT is calculated on the discounted amount (for early payment) regardless of when the payment is made.
Been puzzling as to what needs to be done if payment is not made in time ?
How are the adjustments made in the books ?
-- Edited by ProBowlUK on Saturday 16th of January 2010 03:30:55 PM
Bob, nothing needs to be done. It's as Peter said. When there is an early settlement discount the supplier assumes this will be taken and adjusts the VAT to reflect this, however, that's the transaction done, that is the amount of VAT he will pay and whether or not the customer avails himself of the early settlement discount that is the amount of VAT he will deduct.
Bob, nothing needs to be done. It's as Peter said. When there is an early settlement discount the supplier assumes this will be taken and adjusts the VAT to reflect this, however, that's the transaction done, that is the amount of VAT he will pay and whether or not the customer avails himself of the early settlement discount that is the amount of VAT he will deduct.
Can you illustrate this ?
CustomerA is invoiced for Goods £2,000, with 2% discount allowed for early payment, plus VAT. What gets posted, to/from where, if : (a) payment is made on time, (b) payment is too late.
This is just to try and clarify in my mind, not a course assignment.
