VAT accounting entries with worked examples

VAT accounting entries: the short answer

VAT accounting entries record the tax a business charges on its sales (output VAT, a liability) and the tax it pays on its purchases (input VAT, an asset), then net the two in a VAT control account that is settled with the tax authority. For a fully taxable business VAT is neither income nor expense. It matters because every VAT error flows directly into cash owed to the state.

The principle is written into IFRS as well as tax law. IFRS 15 para 47 excludes amounts collected on behalf of third parties, such as sales taxes, from the transaction price, so revenue is always net of VAT. IAS 2 and IAS 16 exclude recoverable taxes from the cost of inventory and equipment. This guide works through the entries at a 20% rate, then covers credit notes, reverse charge, irrecoverable VAT, bad-debt relief and the reconciliation to the return. The examples use EUR, and the mechanics apply equally to GST and HST in Canada and to VAT in the Gulf.

Everyday entries: sales, purchases, expenses and assets

Each entry splits the gross amount into the net value, which goes to revenue, inventory, expense or an asset account, and the VAT, which goes to the output or input VAT account. Keeping separate output and input accounts, rather than one VAT account, makes the reconciliation to the return far easier because returns report the two sides separately.

The input VAT on the equipment is recovered in full even though the equipment itself is depreciated over several years. VAT recovery follows the tax rules on the invoice, not the accounting life of the asset.

• Credit sale of EUR 10,000 net: Dr Trade receivables 12,000 / Cr Revenue 10,000 / Cr Output VAT 2,000.
• Cash sale of EUR 500 net: Dr Cash 600 / Cr Revenue 500 / Cr Output VAT 100.
• Purchase of stock for EUR 6,000 net on credit: Dr Inventory 6,000 / Dr Input VAT 1,200 / Cr Trade payables 7,200.
• Office expense of EUR 1,500 net paid by card: Dr Office expenses 1,500 / Dr Input VAT 300 / Cr Bank 1,800.
• Equipment for EUR 4,000 net on credit: Dr Equipment 4,000 / Dr Input VAT 800 / Cr Trade payables 4,800.
• Customer pays the credit sale: Dr Bank 12,000 / Cr Trade receivables 12,000 (no VAT entry; VAT was recorded on the invoice).

The VAT control account and the quarterly settlement

At the end of each VAT period the output and input accounts are cleared into a VAT control account (sometimes called VAT payable or the VAT liability account), which then shows the net amount owed to or due from the tax authority. The balance on the control account after the transfers should equal the net figure on the VAT return.

Example. For the quarter, output VAT totals EUR 30,000 and input VAT totals EUR 18,500, so EUR 11,500 is payable. If input VAT had exceeded output VAT, the control account would show a debit balance, a VAT receivable, and the entry on repayment would be Dr Bank / Cr VAT control. Some businesses skip the transfer step and let the return be prepared from the two accounts directly; either works as long as the period's balances are clearly separated from the next period's postings.

• Transfer output VAT: Dr Output VAT 30,000 / Cr VAT control 30,000.
• Transfer input VAT: Dr VAT control 18,500 / Cr Input VAT 18,500.
• VAT control balance: 30,000 - 18,500 = 11,500 credit, the amount on the return.
• Pay the authority: Dr VAT control 11,500 / Cr Bank 11,500.
• After payment the control account for that quarter is nil.

Credit notes, returns and discounts

A credit note reverses VAT in the same proportion as the value it reverses, and it must refer to the original invoice. When a customer returns goods sold at EUR 1,000 net, the seller posts Dr Sales returns 1,000 / Dr Output VAT 200 / Cr Trade receivables 1,200, reducing the VAT due in the period the credit note is issued. The customer posts the mirror entry: Dr Trade payables 1,200 / Cr Purchases 1,000 / Cr Input VAT 200.

Discounts need care because the rules differ. A trade discount shown on the invoice simply reduces the taxable amount. The treatment of a prompt-payment discount offered but not yet taken varies between countries: in some, VAT is charged on the discounted amount from the start; in others, VAT is charged on the full price and adjusted by credit note only if the discount is taken. Check the national rule before setting up invoice templates.

Reverse charge entries

Under the reverse charge, the customer rather than the supplier accounts for the VAT. In the EU the general rule for business-to-business services is that the place of supply is where the customer is established (VAT Directive Article 44), and where the supplier is not established there, the customer is liable for the VAT (Article 196). The supplier invoices without VAT and states that the reverse charge applies; the customer self-accounts for output VAT and, if entitled, deducts the same amount as input VAT in the same return.

Example. A company in one member state buys consulting services for EUR 5,000 from a supplier established in another member state, and its local rate is 20%. For a fully taxable business the two VAT lines cancel, so there is no cash cost, but both must appear on the return. The same mechanics apply to intra-EU acquisitions of goods and, in several countries, to domestic reverse-charge sectors such as construction services or scrap metal.

In Canada a similar self-assessment applies to certain imported services and intangible property, mainly where the buyer is not entitled to full input tax credits, so the accounting pattern of a self-assessed liability and, where allowed, an offsetting credit is the same.

• Record the supplier invoice: Dr Consulting expense 5,000 / Cr Trade payables 5,000.
• Self-account for VAT: Dr Input VAT 1,000 / Cr Output VAT 1,000.
• If the business can recover only 70% of its input VAT, only 700 is deductible, and 300 is charged to the expense: Dr Consulting expense 300 / Cr Input VAT 300.

Irrecoverable VAT and partial exemption

Input VAT is recoverable only to the extent it relates to taxable supplies. VAT on costs used for exempt supplies, such as most financial services, insurance or residential lettings in many countries, cannot be recovered. Where costs serve both taxable and exempt activities, the VAT Directive sets a pro rata method based on the ratio of taxable turnover to total turnover (Articles 173 to 175), with national variations. Member states also block recovery on certain costs regardless of use, commonly business entertainment and some passenger cars.

Irrecoverable VAT is a cost, so it is added to the item it relates to. IAS 16 includes non-refundable purchase taxes in the cost of property, plant and equipment, and IAS 2 does the same for inventory. Example: a partly exempt business with a 70% recovery rate buys services for EUR 6,000 plus EUR 1,200 VAT. It recovers 70% x 1,200 = EUR 840 and bears EUR 360: Dr Professional fees 6,360 / Dr Input VAT 840 / Cr Trade payables 7,200. Pro rata rates are usually provisional during the year and corrected in an annual adjustment, which is itself an accounting entry to expense or income.

Bad-debt relief

A seller usually pays output VAT when the invoice is issued, before the customer pays. If the customer never pays, bad-debt relief lets the seller recover that VAT. In the EU, Article 90 of the VAT Directive requires the taxable amount to be reduced in cases of non-payment, under conditions set by each member state, and member states may derogate in cases of total or partial non-payment. In the UK, as of September 2026, HMRC's VAT Notice 700/18 allows relief once the debt has been unpaid for six months after the later of the due date and the date of supply, the VAT has been accounted for and paid, and the debt has been written off in a separate bad debt account; the claim must be made within four years and six months. In Canada the Excise Tax Act provides a bad-debt adjustment for GST/HST when a debt is written off.

Example. An invoice of EUR 1,200, of which EUR 200 is VAT, is written off. The accounting write-off and the VAT claim can fall in different periods, so many businesses first charge the full amount to bad debts and reclassify the VAT when the relief conditions are met. The combined effect is Dr Bad debt expense 1,000 / Dr VAT bad-debt relief (or Output VAT) 200 / Cr Trade receivables 1,200. If the customer later pays, the relief must be repaid, and the buyer who never paid may have to repay input VAT it claimed.

Reconciling the VAT accounts to the return

The VAT balances in the general ledger and the figures on the VAT return should agree at every period end. When they do not, the cause is almost always one of a short list of issues, and a standing reconciliation catches them before the tax authority does. A useful sanity check is to multiply each rate's taxable base by the rate: the result should be within rounding of the VAT reported at that rate.

• Map every return box to the ledger accounts that feed it, and keep the mapping on file.
• Agree output VAT per the ledger to the sales VAT on the return, rate by rate.
• Agree input VAT per the ledger to the deductible VAT on the return, including reverse-charge amounts on both sides.
• Investigate manual journals posted to VAT accounts; they bypass the invoice-level tax calculation.
• Check late invoices and credit notes posted into a period after its return was filed.
• Clear small rounding differences from per-line versus per-invoice calculation to a rounding account, with an agreed tolerance.
• Confirm that the control account balance after settlement is nil for filed periods.

Multi-country VAT accounting

A business registered for VAT in several countries files a separate return in each, so it needs separate output, input and control accounts per country, or at least a jurisdiction dimension on every VAT posting. Returns are generally made in the currency of the country where the tax is due, so a EUR-based company registered in a non-euro country converts invoice VAT at the rate the local rules prescribe, and the difference against its ledger rate is an exchange difference, not VAT.

The EU One Stop Shop, in place since 1 July 2021, lets sellers of distance sales of goods and cross-border services to consumers declare VAT for other member states through one return in their home country. The accounting still needs the VAT split by member state and rate, because the OSS return reports it that way. In Canada, GST and HST are reported together on one GST/HST return, while Quebec's QST is reported on a separate return to Revenu Québec, so the ledger should keep GST, HST and QST in separate accounts too.

VAT accounting in Skyline Nexus ERP

In Skyline Nexus ERP tax rates are set up under Settings > Tax Rates, each with a name, a tax category (VAT or Excise / Duty) and a percentage, and several rates can be combined in a tax group. The Fiscal Authority settings hold a VAT Input Account and a VAT Output Account, and a chart of accounts entry can be flagged as a control account of type VAT / Tax. When auto-posting is on, a final sale posts Dr accounts receivable, Cr revenue and Cr VAT output, and output VAT is computed per line in the same way as the tax report, so the ledger VAT and the tax report are built on the same basis. Purchases post input VAT, including a withholding tax split where a line carries it, and sales returns post a reversing entry for revenue, VAT and cost of sales.

For the return itself, Reports > VAT Return prefills a return for a date range and location with return-netted, tax-exclusive sales and purchase bases and their VAT, and Fiscal Authority > Reports > VAT Analysis lists input and output VAT transactions read from the VAT ledger accounts, with a filter and export, which is the ledger side of the reconciliation described above. When a statutory rate changes, the new rate is set up as a separate tax rate and applied to documents from the change date.