Why don't you add VAT to credit sales in the cash book receipts?

• A. Because VAT has already been entered in the accounts at the point of sale
• B. Because VAT is charged only on cash sales
• C. Because VAT is calculated on a different schedule
• D. Because VAT is not applicable to credit sales

Answer: (A)

When a sale is made on credit, VAT is charged and recorded at the moment of the sale. The sale creates two things: revenue (net of VAT) and a liability for the VAT due to the tax authorities. Later, when the customer pays, the cash book entry just records the cash received and settles the debtor; the VAT portion has already been accounted for separately. Adding VAT again at the time of receipt would double-count VAT and distort the accounts. So the receipts entry doesn’t include VAT because the VAT was entered earlier in the records. VAT applies to credit sales just as it does to cash sales.