Day: September 4, 2019

Which of the following statements best describes the treatment of VAT in the accounts of a VAT-registered firm?

Select ONE answer:

1. VAT is an expense arising from the sale of goods and services.
2. VAT is normally a liability, calculated by reference to the purchases and sales of goods, services and other items.
3. VAT is levied on customers and is payable by them to the HMRC.
4. VAT is collected by firms from their customers and is retained by the firms.

Show your workings to arrive at your answer, and explain and justify your reasons:

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This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Incorrect – VAT is not an expense for a VAT-registered firm. Therefore VAT should not appear in the profit and loss account (revenues and expenses should be shown exclusive of VAT). VAT will either be owed to or be recoverable from, the HMRC. This will be shown in the Balance sheet.
2. Correct
3. Incorrect – Customers pay VAT to the firms from whom they buy goods and services – they do not pay VAT directly to the HMRC.
4. Incorrect – VAT is collected by firms from their customers – but on behalf of the HMRC – to whom it must be periodically remitted.

 

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