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Category Archives: Errors
There is sometimes confusion over what the difference between Zero-Rate VAT, VAT Exempt & Out of Scope VAT. Zero-Rate VAT items, such as books, childrens clothes and some food, do have VAT on them, it’s just at zero percent, so the actual VAT is nil. (In Sage, the VAT code to use would be T0). However, the net purchase cost of zero-rate items still goes in Box 7 of a VAT Return. Suppliers of zero-rated goods/services can still reclaim all their input VAT (the VAT on their own purchases) VAT Exempt items, such as postage stamps, do not have VAT on them (not even at 0%). The VAT is nil. (In Sage, the VAT code to use would be T2). However, the net purchase cost of VAT Exempt items still goes in Box 7 of a VAT Return. Suppliers of Exempt goods cannot reclaim the input VAT (the VAT on their own purchases) relating to Exempt Supplies. Out of Scope items would be those purchases made from unregistered businesses and private individuals. (In Sage, the VAT Code would be T9). These purchases do not appear at all in the VAT Return (Clearly, there was no VAT charged, but also, as they are completely outside the VAT system, the cost should not appear in Box 7 of the VAT Return either) Out of Scope & VAT Codes in Sage There is some confusion, even in accounting circles (as demonstrated on Accounting Web), regarding how to deal with Out of Scope items. Some suggest that the T0 or T1 Sage code be used for these transactions (and manually overriding the automatically calculated VAT figure, in the case of the T1 code). This is incorrect. Even though the goods/services might ordinarily be VATable, until the supplier is VAT Registered, it’s out of scope. A side effect of erroneously including these transactions in the VAT Return, is that Box 7 would be artificially high. This may not be significant amount, but be warned that HMRC do carry out statistical checks to ensure that Box 1 & 6 and Box 4 and 7 do correlate to each other.
Following the previous post, for those using Sage, the process is greatly automated, provided that you have used the correct Sage VAT Codes, of course.
- Go into Financials and select the VAT Return option.
- Enter the correct start and end dates for the VAT Quarter in question.
- Click the “Calculate” button (at this point, provided you have marked the previous quarter’s VAT transactions as reconciled, you can opt to choose “Yes” to include unreconciled transactions, if that option appears)
- Print both the VAT Return and the Detailed report (either in hard copy or to pdf)
- As an additional check, you could also print the Nominal Activity Report for the same date range, and check that it agrees to the figures on the VAT return report.
- Once happy, take a backup of the Sage data.
- Mark the VAT Transactions as reconciled by clicking the “Reconcile” button. This ensures that the transactions won’t be included on a future VAT return by accident.
- Run the VAT Transfer Wizard (from the Modules menu). The VAT Liability nominal code is usually 2202. Date the transfer journal as at the last day of the VAT quarter that is being completed. This clears the Sales & Purchase VAT codes to zero (assuming that there were no errors) and makes future errors easier to find. It also credits the VAT Liability Code, 2202 with the amount of VAT to be paid to HMRC.
- Submit the Return by paper, online or alternatively (depending on your version of Sage) using Sage’s online submission.
- When the VAT is actually paid to HMRC, process this a bank payment using the same VAT Liability Nominal Code (usually 2202) as above. Sage will automatically debit this nominal code bringing it down to zero.
The point of carrying out a bank reconciliation is to check that nothing has been missed from the business’s records and also to ensure that there have been no bank errors.
A business’s cash book will rarely agree to the bank statement and it can be easy to miss transactions, such as direct debit payments if a bank reconciliation is not done. Similarly, banks sometimes make errors too which may otherwise go unnoticed.
Bank reconciliation is a standard part of bookkeeping. If you have not done a bank reconciliation as part of your bookkeeping, your accountant’s fees will almost certainly be much higher. Many accountants will insist on a bank reconciliation having been done prior to their doing your statutory accounts.
A journal is usually used to correct errors that have been made. The errors must be able to be corrected by means of a double entry, to be able to put it right by journalling.
So, if £500 of sales of square widgets had been incorrectly posted to sales of round widgets, the correcting journal would be as follows:
DEBIT Sales of Round Widgets £500
CREDIT Sales of Square Widgets £500
Thus, the overall effect would be that the sales of square widgets ledger account would have a correct credit of £500 and sales of round widgets ledger account would have both a credit entry of £500 and a debit entry of £500 which would cancel eachother out.
T accounts are what ledger accounts might look like if they were kept on paper (as opposed to using computer software).
They are nothing mysterious, drawn on paper, a T account is quite literally a large T! The title of the ledger (for example, “motor expenses” is written across the top), debit entries against that account are written on the left hand side of the vertical line and credit entries are written on the right hand side.
At the end of an accounting period, a balance is calculated for each T account. All this means is that all the debit entries are added up and the total recorded at the bottom (on the left, as that’s where all the debit entries are) and all the credit entries are similarly totalled on the right hand side.
If the total debits exceed the total credits, then there is said to be a debit balance on that account.
T accounts are the building blocks of accounting and sometimes, it’s helpful to consider going back to basics and professional bookkeepers and accountants sometimes do go back to drawing up T Accounts if things don’t balance as they should.
However, if you use an accounting software package and/or an accountant, it’s perfectly possible that you will never come across a T account. Some accouting software does make reference to T accounts, particularly those aimed for use by accountants and specialised accounts departments.
To use the sales ledger spreadsheet is easy. Just record all your sales invoices as you raise them. Allow one row per invoice.
Enter the total amounts in columns D and E (if VAT registered) and check that the figure in column F is as you have put in your actual sales invoice.
If you give different periods of credit to different customers, record the number of days credit that you have allowed. Otherwise, just copy the same number down onto all the rows or leave blank if no credit is given.
Record the date that the invoice is paid in column I. Column J will then calculate how many days of credit were actually taken, which may assist you in future credit control and/or cash flow forecasting.
If you are not giving your customers a credit period before payment falls due, then columns G, H, I and J can be omitted.
The notes column is just a space to record extra detail, for example, if the invoice is under query by the customer, or the details of when you chased your customer for payment. If you have an accountant, you might use also this column to flag a query with them – for example, if the invoice becomes a bad debt and why.
For example, you wish to record an invoice, dated 6 August 2007 to Bloggs & Co for £117.50 including VAT. You normally allow 30 days credit.
- column A (Date): 6 August 2007
- column B (Invoice number):xx (your sales invoice number, normally sequential and unique)
- column C (customer): Bloggs & Co
- column D (net amount): 100
- column E (VAT): 17.50
- column F (Gross): 117.50 (automatically filled in)
- column G (Credit period given): 30 (as in 30 days)
- column H (Date Invoice is due): 5 September 2007
- column I (Date Invoice is paid): this is completed when payment is received. (Make sure that it is a proper date that is entered here, otherwise column J will not calculate properly)
- column J (Credit Days actually taken): this is automatically calculated and over time, will enable you to see which of your customers pay on time and which don’t.
Afterwards, you check that the figure in column F agrees to the amount that you have put on the actual sales invoice.
Always file your sales invoices sequentially. It will help you to find an invoice in the event of a copy invoice being requested and may help to cut down your accounting fees if you use an accountant.
The spreadsheet described this week is particularly suitable for a sole trader, a consultant trading through a limited company or a start up enterprise.