The principle of computing VAT can be summarized as follows:
- A business unit buys items and services from her suppliers and the purchase invoices carry the amount for the items and services and VAT on those items and services
- This same business unit sells items or services to customers and the sale invoices carry the amount to be received for those items or services and the VAT on these items & services;
The VAT to be paid to the state by this business unit shall be the difference between the VAT received from customers (VAT invoiced) and the VAT earlier paid to the supplier(VAT recoverable).
VAT to pay to the state=VAT invoiced to customers – VAT paid to supplies of good & services
This VAT stands to represent the tax (VAT) on the value added by the business unit to its consumption. It is this mechanism, which justifies the appellation “VALUE ADDED TAX”. The fact that the business pays only the difference between what is collected from the customers and what was earlier paid to the supplier as VAT indicates that VAT is actually a tax borne by final consumer.
ACCOUNTING BASICS 