How do I configure my Value Added Tax (VAT) to form part of the value of the items we purchased (As shown on the invoice sent to us by our supplier) while I will use withholding tax to withhold the tax element when paying the invoice.
Does it have to do with setting my Purchase tax template to add ON NET TOTAL or ON ACTUAL?
Or because the Account type of the Ledger account I created for VAT under payable was set as TAX instead of Chargeable?
For Example: If we buy an asset for 2,000,000 with a Value-Added Tax of 150,000 (7.5%). The value of my asset supposed to be 2,150,000
I want my asset ledger to record the cost as 2,150,000 instead of 2,000,000. But when i want to pay the vendor, i can use withholding tax to withhold that tax element of 150,000 for Government and pay my supplier the balance.
Hi. I have a question. It is not claire for me if you want:
- Add the Tax to the valuation of the item so the Tax become a expense and do not make sense with withhold it.
In this case select “Consider Tax or Charge for” as “Valuation and Total” at the VAT´s row on Purchase Tax Template.
- If you just want to see the Tax incluide on Purchase Invoice Price of the item, then just mark the check “Is this Tax included in Basic Rate?”, on the VAT´s row on Purchase Tax Template.
Keep “Consider Tax or Charge for” as “Total” and “Type” as “On Net Total”.
I consider you are looking for the case 2 scenary on my humble accouting experience. Because case 1 no fit for me.
I hope it helps.
Thank you Malvin,
I want the tax to form part of the value of the item
See below a clear illustration of what i want to achieve:
(1) Purchase Motor Vehicle (an asset) from Banner Motors @ 2,000,000 plus 7.5% Value Added Tax (150,000)
What i want: The value of the asset to be recorded in the Ledger as 2,150,000 and my Purchase invoice to show that i am owing the supplier 2,150,000
(2)When i want to pay the supplier:
- Withhold that 150,000 that was added to the invoice earlier
- Withhold WHT (5% x 2,000,000) = 100,000
- Withhold Stamp Duty Tax (1% x 2,000,000) = 20,000
I will then pay the supplier (2,150,000 - 150,000 - 100,000 - 20,000) = 1,880,000
And remit my withholding tax (Payable) of (150,000 + 100,000 + 20,000)= 270,000 to Government
Perfect the explanation. As you are buying an asset the way to solve the register is the configuration I called 1.
- Add the Tax to the valuation of the item so the Tax become a expense.
In this case, go to the Purchase Tax Template and select the VAT row. Change the field “Consider Tax or Charge for” as “Valuation and Total”.
Then if the item in the purchase invoice is correctly configureted as a fixed asset the whole value 2,150,000 will be posted on the fixed asset account.
Later you can register the payments and the withholds as usual with a Payment Entry o Joutnal Entry.
I hope it is what you need.
Thank you, Malvin.
Yes, your suggested approach solved my issue.
One more question if you don’t mind: The Account head I will tie to the VAT on the Purchase tax template, should it be an Expense Account or the regular VAT Payable Account as usual? Since my treatment above will expense the tax as part of the cost.
I am looking forward to your reply.
The VAT account should be Account Type: Tax so you can use all taxes tools.
Remember VAT account is a Liability too.
So Fixed Asset(Asset) = Creditor (Liability) + Taxes (Liability)
When you pay the taxes to the government you make a journal entry: using an Asset account (Cash, Bank,…) to cancel the Liability.
Where do the expenses go?
As you have the whole fixed asset value you have no losses.
The losses start on fixed asset depreciation.
Every time you enter a depreciation, decreases the fixed asset value against Depreciation Expense Account.
Even with this explanation, I suggest you consult your accountant because each country may have its own regulations.
Feel free to ask if you still have doubts.