What is VAT and how is it generally shown in bookkeeping?

• A. VAT excludes any tax on purchases.
• B. VAT is recorded only when cash is paid.
• C. Value Added Tax is a consumption tax; businesses record output VAT on sales and input VAT on purchases to determine net VAT payable.
• D. VAT is the only tax businesses must record.

Answer: (C)

VAT is a consumption tax collected at each stage of the supply chain. In bookkeeping, businesses record the tax charged to customers as output VAT and the tax paid on purchases as input VAT. The important idea is to subtract the input VAT from the output VAT to determine the net amount payable to the tax authority (or reclaim if the input exceeds the output). This reflects how VAT should tax final consumption while allowing businesses to recover the tax paid on their purchases.

For example, if you make a sale with VAT of 200, that’s output VAT. If your purchases incur VAT of 100, that’s input VAT. Net VAT payable would be 100. If input VAT were higher than output VAT, you’d typically reclaim the difference or carry it forward as a credit.

The other statements don’t fit because VAT is not excluded from purchases (input VAT matters), it isn’t recorded only when cash is paid (invoices establish the VAT), and VAT isn’t the only tax businesses must record.