Which entries correctly record a purchase of inventory on credit including VAT of 20%?

• A. Debits Purchases; Credits VAT Input and Trade Creditors.
• B. Debits Purchases and VAT Input; Credits Trade Creditors.
• C. Debits VAT Input; Credits Purchases and Trade Creditors.
• D. Debits Purchases; Credits Trade Creditors.

Answer: (B)

When inventory is bought on credit and VAT is charged, you record the net cost of the stock in the Purchases account (a debit), the VAT amount in the VAT Input account (a debit), and the total amount owed to the supplier in Trade Creditors (a credit). This mirrors the happening that you’ve acquired stock (recorded as Purchases), you’ve paid VAT that you can reclaim (recorded as VAT Input), and you now owe the supplier the gross amount (net plus VAT). Since the VAT rate is 20%, the VAT Input will be 20% of the net purchases, and the Trade Creditors total will be the net cost plus that VAT.

This is the best fit because it correctly separates the purchase cost from the recoverable VAT and shows the liability to the supplier. If you omitted the VAT Input, you’d fail to record reclaimable VAT; if you omitted the Purchases, you wouldn’t reflect the stock cost; if you didn’t credit the Trade Creditors, you wouldn’t show the liability to pay the supplier.