Table of Contents
Introduction
In this short article we'll cover the VAT Control Account and Annual VAT Account definitions, and how these accounts are used during the VAT Return process. This will help you understand why accounting systems like Indigo Business require two VAT-related accounts.
VAT Control Account
The VAT Control Account is a temporary Control account used to track all VAT amounts included in transactions.
Input VAT (purchases): these are recorded as debits.
Output VAT (sales): these are recorded as credits.
The balance of the VAT Control Account shows your VAT position at any time:
When credit is greater than debit, you owe VAT to the tax authorities.
When debit is greater than credit, the tax authority owes you a VAT refund.
The only scenario in which you can manually post to the VAT Control Account is when posting a VAT transaction to record taxes on imported goods. In all other cases, this account only accepts automatic postings.
Annual VAT Account
The Annual VAT Account is a Regular account that summarises all VAT settlements for the financial year. It accepts both manual and automatic postings.
At the end of each VAT Return period, the balance from the VAT Control Account is transferred to the Annual VAT Account. This ensures that the VAT Control Account only reflects the current period's activity, while the Annual VAT Account shows the cumulative VAT position for the year.
The result is a clear year-to-date record of VAT payable or refundable, and simplifies annual reporting, reconciliation, and audits.
VAT Accounts in the VAT Return Process
When the VAT return is processed, Indigo Business automatically transfers the VAT liability from the VAT Control to the Annual VAT Account by creating a corresponding entry.
When you make a payment to the VAT department, you must then post the payment against the Annual VAT liability account.
For example, you would:
Debit the Annual VAT Account with the amount paid
Credit the bank account as the contra entry.
This shows the liability is decreasing through the debit record; and while your bank balance is also decreasing, it's recorded with a credit record, following the double-entry method.
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