One of my clients (Ltd Co.) has had a VAT inspection where it was found that VAT had been under declared from a few years ago (before my time I hasten to add!) no penalty was levied but interest has been charged on the under declared amount.
My query is how this should be accounted for in the books, I have given it some thought myself and think it should be as follows but would appreciate your comments -
DR Sales with under declared VAT amount
DR a code say in the 7900's on the P&L with the interest charged - I appreciate this amount may have to be added back for Corporation Tax purposes.
CR the total amount (VAT + interest) to the VAT liability account on the Balance Sheet.
The DR to the sales account would be incorrect. The other 2 entries are correct
The DR for the under-declared VAT would depend on whether it is recoverable or not. Is it likely that this can be re-invoiced (if to a VAT registered company should not be a problem as this can be recovered by them)
If so I would DR other debtors and then this would be cleared when the re-invoiced amount has been settled.
If it is not recoverable from the customer then I would write it off as a bad debt. So the DR entry would go to Bad debts written off....
Hope that helps,
Jeremy
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