Journal Entry with VAT Made Simple: Learn in Minutes
- JAFA Accountancy
- Mar 24
- 3 min read
Not sure how to record VAT correctly? A small mistake could mean penalties or missing out on reclaiming VAT. Here's a simple guide to help you get it right.
Key Takeaways
To record a journal entry with VAT, debit the purchase or expense account and Input VAT, then credit the cash/bank or supplier account. For sales, debit the cash/bank or customer account and credit Sales Revenue and Output VAT.
Input VAT is the VAT paid on purchases and can be reclaimed, while Output VAT is collected on sales and must be paid to HMRC.
At the end of a VAT period, businesses must balance input and output VAT to determine if they owe VAT or are eligible for a refund.
How Do You Record a Journal Entry with VAT?
It’s important to understand how to record VAT correctly for compliance and accurate bookkeeping. Let’s look at some of the common journal entries with VAT and their examples.
Purchase with VAT Journal Entry (Input VAT)
When your business buys goods or services with VAT included.
Debit: Purchases/Expense Account (net amount)
Debit: VAT Receivable (Input VAT) Account (VAT amount)
Credit: Cash/Bank/Supplier Account (total amount paid)
Example
A graphic designer purchases a laptop for £1,200 + 20% VAT (£240). Here’s what the journal entry will be like.
Debit: Equipment (Laptop) - £1,200
Debit: Input VAT - £240
Credit: Bank - £1,440
Why It Matters: This allows businesses to claim back input VAT from HMRC.
Output VAT Journal Entry
When your business sells goods/services and charges VAT.
Debit: Cash/Bank/Customer Account (total amount received)
Credit: Sales Revenue Account (net amount)
Credit: VAT Payable (Output VAT) Account (VAT amount)
Example
A marketing consultant charges a client £2,000 + 20% VAT (£400). Here’s the journal entry for it.
Debit: Bank - £2,400
Credit: Sales Revenue - £2,000
Credit: Output VAT - £400
Why It Matters: The VAT collected on sales must be reported and paid to HMRC.
Input VAT and Output VAT Journal Entries (VAT Balancing)
At the end of the VAT period, businesses must calculate how much VAT they owe or can reclaim.
If Output VAT > Input VAT, the difference is payable to HMRC.
If Input VAT > Output VAT, the business gets a VAT refund.
Example
Total Output VAT collected: £5,000
Total Input VAT paid: £3,500
Net VAT Payable: £1,500
Here’s what the journal entry to pay VAT will be like:
Debit: VAT Payable - £1,500
Credit: Bank - £1,500
Why It Matters: Makes sure businesses pay or claim the correct VAT amount each period.
Journal Entry for VAT Refund
If Input VAT is higher than Output VAT, HMRC may issue a refund.
Debit: Bank (refund received)
Credit: VAT Receivable
Example
Let’s say a business overpaid £500 in VAT. Here’s the journal entry for it.
Debit: Bank - £500
Credit: VAT Receivable - £500
Why It Matters: VAT refunds improve cash flow and should be properly recorded.
What We Think
Many small businesses and freelancers find VAT journal entries confusing. It’s not just about adding tax to sales or reclaiming it on purchases - one mistake can lead to penalties or cash flow problems.
One common issue is manual errors. Business owners often struggle with:
Understanding VAT-inclusive vs. VAT-exclusive prices
Recording VAT refunds and adjustments correctly
Keeping track of VAT owed to HMRC
Another challenge is VAT liabilities. The VAT collected on sales isn’t business income - it needs to be paid to HMRC. Without proper tracking, it’s easy to underpay or overpay, leading to fines or financial strain.
For many, VAT bookkeeping takes too much time, pulling focus away from growing their business.
How JAFA Can Help
Handling VAT can be stressful, but JAFA makes it simple. We use AI technology for bookkeeping that automatically records VAT transactions, so you don’t have to worry about mistakes or compliance issues.
✅ Records VAT correctly - JAFA tracks input VAT and output VAT for you, so you always know what you owe or can reclaim.
✅ Keeps everything organised - No more guessing or manual tracking. JAFA helps you stay on top of VAT payments and refunds.
✅ Saves you time - Instead of spending hours on bookkeeping, JAFA does the work, so you can focus on your business.
✅ Helps with VAT returns - With clear records and automated calculations, you can file VAT returns with confidence.
Contact our expert accountants based in Birmingham, UK, either by booking a FREE discovery call or calling us on +44 121 227 6277.
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