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VAT is paid to supplier during purchases will be considered as an asset & VAT received from the client will be considered as a liability. And the difference between paid VAT and received VAT will be considered as expense.
My question is that how to close VAT in the books of accounting which is recorded as an asset and liability?
The vat on sales (out put vat) account and vat on purchase (In put vat) account should set off by putting a JV by debiting out put vat and crediting input vat. if the out put vat is more the difference should be credited by bank payment account.I the input vat is more it is refundable and we can claim vat credit.
As you said the difference between paid vat and received vat is not an expense it is a liability ie. payable tax you collected from the consumers and you should paid to the Government.
Better to keep one account for recording Input and Output VAT. The balance will be either a liability/asset. While paying the liability to FTA, it is closing. Or while receiving the refund the asset will be closed.
Sir,
The difference between VAT Received and VAT Paid is not an expense. It is either a liability or an asset. VAT can only be treated as an expense if for any reason, Input VAT is not claimed. In some jurisdictions, there is a time period limit (6 months in Pakistan for FBR) during which Input VAT can be recovered. If VAT is not recovered in that stipulated time period, it needs to be treated as an expense as it wont be allowed as an adjustment against Output VAT.
Coming to your question, the net of VAT Payable or Receivable balance is an assest or liability and cannot be closed (zero net balance) in accounts in normally circumstances. The net balance will stand as a receivable or a payable from one Return filing period to the next and should agree with the VAT Return. It can be closed in either of following circumstances;
1. If VAT accounting and Returns, both are filied on cash basis and not accrual basis
2. An entity ceases to be a VAT filer (due to any reason i.e. supplies become exempt or entity business is discontinued) and settles its net payable / receivable VAT balance in its final VAT Return.
