Creditors / Debtors Stated Net of VAT in BS?

Creditors / Debtors Stated Net of VAT in BS?

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I know all the reasons for stating debtors and creditors gross in the balance sheet. But years ago, when double-entry bookkeeping wasn't the norm for small firms, we were instructed to present those figures net of VAT for businesses using VAT cash accounting, on the basis that the VAT liability or credit did not crystallise until the point when payment was made or received (ie after the balance sheet date).

Of course, anyone using Sage or any other double entry bookkeeping program will have debtors and creditors stated gross in their TB; but how about businesses using a single entry system - a cash-book - and employing VAT cash accounting? For businesses fitting the latter description, do other practitioners state their debtor and creditor balances net of VAT in the BS? Hands up anyone who does.

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By Ned Ludd
08th Sep 2009 15:40

i'd be stating gross

id state debtors gross:

say:

DR DEBTORS   £10,000

CR SALES                     £10,000

Then amend for memorandum vat. ie.

DR SALES        £1,304

CR MEMO VAT               £1,304

Vat @ 3/23rds

 

 

 

 

 

 

 

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By Democratus
08th Sep 2009 16:03

Net - if tax point is when paid

If you are recognising turnover when due via a demand statement or some such and accounting for Income Arrears rather than a Trade Debtor then i'd show the "Debtor" as Net. The VAT is posted via cash book.

Though you must have some type of accrual system to do this not just ba cash book.

 

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By zebaa
08th Sep 2009 16:40

I'd go for gross...

I would go for gross, with 'vat on unpaid invoices' as a current liabilaty, unless the firm gave very extended credit. The logic is you expect this liabilaty to arise, but just do not know when (normally less than a year though). Any invoice you are not going to get paid must be a bad debt and needs to be writen off along with the expectation of having to pay vat.

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By I'msorryIhaven'taclue
09th Sep 2009 12:38

Split Vote

Thanks guys - looks like a split vote so far.

Although stating debtors and creditors gross makes more sense to me, it would appear that stating them net is the strictly correct protocol (because with VAT cash accounting the VAT liability or asset does not crystallise unless and until payment is made). We have inherited both types from other accountants and followed their different leads for consistency's sake.

Left to our own choice on a job with VAT cash accounting and a single manual cash-book - no sales or purchase ledgers - I was left wondering whether we are attempting too good a job trying to gross up the debtors list - a couple of hundred debtors invoices of varying VAT rates (15%, 17.5%, some 0% export) - each of which needs to be individually listed. I'm not convinced that we achieve anything by grossing up debtors and current liabilities; that the £200k net the client company is owed presents an adequate true and fair picture, rather than (say) £230k debtors / £30k creditor liabilities.

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By stephenkendrew
09th Sep 2009 13:27

I'd say gross

Assuming an invoice for £1,000 + VAT was raised before the year end, the company is owed £1,150 by the customer and owes £115 to HMRC. 

Under the FRSSE (paragraph 2.11) "the amount of each individual asset or liability ... must be determined separately... assets may not be set off against ... liabilities"  

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Euan's picture
By Euan MacLennan
09th Sep 2009 13:57

Must be stated gross

VAT Cash Accounting is just an administrative procedure which enables a client to ease his cash flow by delaying the payment of his VAT liability to HMRC.  It has no effect whatsoever on the (gross) amounts due from customers or the (gross) amounts payable to suppliers.  It would be an absolutely incorrect protocol to state the debtors and creditors of a VAT-registered client net of VAT.  The same applies to a client on the VAT Flat Rate Scheme.

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By I'msorryIhaven'taclue
09th Sep 2009 16:52

Thanks Stephen and Euan

Two solid reasons for stating debtors and creditors gross when VAT cash accounting.

Just to play Devil's Advocate, should we not be applying that same logic to accruals, for example by accruing our accountancy fee (say £2k net) as £2,300 gross and posting a corresponding £300 entry to our VAT control a/c, and thus to creditors, in the BS?

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Euan's picture
By Euan MacLennan
09th Sep 2009 17:54

No VAT on accruals

VAT only becomes due when an invoice is issued or if earlier, a payment is made.  Accruals, by definition, are costs incurred in the accounting period which have not yet been invoiced by the accounting date.

If you want to get into an arcane argument, ask whether we should accrue in the first place for the fees for preparing the annual accounts.  After all, the service is not even provided until after the year-end, so how can it be a cost incurred in the accounting period?

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By I'msorryIhaven'taclue
09th Sep 2009 20:44

Playing Devil's Advocate

Hi Euan, thanks for your reply.

Ok, in the style and true spirit of the Monty Python team, I'll have the 5 minute (arcane) argument. Playing Devil's advocate:

Why State Debtors & Creditors Gross, but Accruals net of VAT?

" ...ask whether we should accrue in the first place for the fees for preparing the annual accounts.  After all, the service is not even provided until after the year-end, so how can it be a cost incurred in the accounting period?"

It's a cost related to that AP. That of course is the whole idea of the accruals concept. But I see what you're driving at - the cost isn't actually / physically / legally incurred in the AP, so you're asking how could the VAT possibly be racked up / generated / become due in that same AP (?). Nevertheless, the substance is that the accrued accountancy fee exists at the BS date; so therefore the VAT liability must also exist at the BS date. After all, if you believe you're going to pay an accrued accountancy fee, or for that matter collect some accrued income, then you must also believe the VAT will be payable / collectible. It seems a little illogical that we state (in the BS) debtors and creditors gross (of VAT) but accruals net of VAT.

 

VAT Crystallises Upon Payment in VAT Cash Accounting:

"VAT only becomes due when an invoice is issued or, if earlier, a payment is made."

That might be the tax point, but surely for a firm using VAT cash accounting the substance behind (let's say) a sales invoice is that VAT only becomes due when payment is received.  I'm going to argue that VAT cannot be due when the invoice is issued under VAT cash accounting, but (normally) some time later upon actual payment - after all, if there is no payment forthcoming then no VAT is due. 

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By I'msorryIhaven'taclue
10th Sep 2009 21:31

Sage Balance Sheets Show Debtors & Creditors net of VAT

Apparently Quickbooks and Sage have different views on whether debtors & creditors should be stated gross or net of VAT (I assume when using VAT cash accounting) in the Balance Sheets produced by their software:

QUOTE:

"Having entered three months books and records I have printed a standard balance sheet report and have noticed that the trade debtors and trade creditors are shown vat-inclusive. When preparing accounts on sage the debtors and creditors on sage balance sheet always showed up net of vat."
 

source: quickbooks community thread at

http://community.intuit.ca/discussion/index.php?showtopic=25785

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By I'msorryIhaven'taclue
10th Sep 2009 22:26

Setting Assets Against Liabilities

I've given some thought to what you said, Stephen:

Under the FRSSE (paragraph 2.11) "the amount of each individual asset or liability ... must be determined separately... assets may not be set off against ... liabilities"

I'm not convinced that isn't a red herring. Why? Because VAT assets are already effectively set off against VAT liabilities in the VAT control account, which produces a single VAT debtor or VAT creditor balance. For example, a firm with £1,000 of output VAT and £700 of input VAT would display in its Balance Sheet a single net balance of £300 under creditors. Were we to take what the FRSSE says literally we would be prohibited from metting off the £700 VAT debtor and VAT creditor, and would instead need to display the full £1,000 under creditors and £700 under debtors.

Of course, we would all opt for the single £300 VAT creditor in our Balance Sheets. It's ok to net of a VAT creditor with a VAT debtor, because the essence of the thing is that £300 is the net amount that the firm will pay - hiking up both sides of the balance sheet by £700 of VAT would not reflect the underlying reality.

So should we not apply that same logic and treatment to a (let's say £1,000) debtor in the balance sheet when using VAT cash accounting? It should be ok to net of a VAT creditor with a VAT debtor - just as in the previous paragraph above - because the essence of the thing is that £1,000 is the net amount the firm will receive - hiking up both sides of the balance sheet by £150 of VAT would not reflect the underlying reality (which is that the VAT will not become payable unless and until payment from the debtor is received).    

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