VAT & Financial Reporting?

VAT will impact the financial reporting in UAE. VAT-registered businesses will have to account for VAT on purchase/expense invoices and Sales invoices. Companies will have to pay VAT on purchases or expenses (depending upon the nature of purchases and expenses i.e taxable or not) to suppliers. This tax on purchases/expenses is known as input VAT. 

The company will charge and collect VAT through sales price from its customers. This is known as Output VAT.The difference between input and Output VAT will be either paid to tax authorities or received. If input VAT is greater than the Output VAT then the difference will be refunded the to company and if output VAT is greater than the input VAT  then the company will pay the difference to tax authorities.

For this purpose, an account named as " VAT" is created to account for the input VAT, Output VAT, VAT payments or VAT receipts.

The net balance of this VAT account will be shown in BS under CA or CL depending upon the net balance.

As far as the book-keeping is concerned, Book-keepers or accountant have to record the invoices with greater care ( charging correct VAT rate, separate recording of the Net amount, VAT, and gross amount ) keeping in mind that supplies received or provided are either taxable or not.

For larger organizations, companies will have to hire ERP specialist so that chart of accounts, coding, mapping, and configuration can be updated according to VAT.

There will be two accounts opened in chart of account1: Input VAT2: Output VAT

VAT included in Purchases value will be recorded in Input VAT Account.

VAT included in Sales Vale will be recorded in Output VAT Account.

At the end of financial year, adjustment will be made.

When output VAT is greater, company has to pay the greater amount to government. If company pay at or before ending day of financial year then no effect will be recorded in other financial reports otherwise it will stand current liability in balance sheet. 

When Input VAT is greater, it will stand current asset (Receivable) in balance sheet.

I think the answers by  Tanzeel Ur Rehman  and  Ubaid Ullah Sajid  covers good deal of that question.

Value Added Tax (VAT) will have a major impact on the VAT registered businesses dealing with taxable supplies.

Impact on the Income Statement:

VAT registered businesses will act as collecting agents for Customs and Excise authority in the country.

As the VAT on sales (Output VAT) does not belong to the business but to the tax authority it would not be a part of the business's turnover. Similarly the VAT on their purchases(Input VAT) would not be a part of their cost/expense.

Hence there will be no impact on the Income statement.

Impact on the Statement of Financial Position:

At the end of every VAT period if the Output VAT will exceed the Input VAT, there will be creditor on the Balance Sheet and a Debtor if otherwise.

For most of the VAT registered businesses it will always be a Creditor unless they sell exempt or zero rated products in which case their input VAT may exceed the Output VAT giving rise to a Debtor.

Agreed with the answer added by Tanzeel Ur Rehman . 

Answer added by: Tanzeel Ur Rehman   Accounts Senior Consultant 7 days agoAnswer added by: Ubaid Ullah Sajid   Accountant 6 days agoAnswer added by: WAQAS KHAN   Semi Senior Accountant 6 days agoThe best and correct answers are added by the above three financial professionals.