Journal entry for purchases with VAT
Buying goods is an expense, and the input VAT can be reclaimed. That is why the entry usually has two debit lines and one credit line.
How to book it
- 1
Purchases (an expense account) is debited with the net amount.
- 2
Input VAT is money the tax authority owes you, so it is an asset: it increases on the debit side.
- 3
The credit side shows how you pay: Trade payables (on credit), Bank or Cash, each with the gross amount.
Worked examples
We buy goods on credit from Brown Supplies plc for £1,000.00 plus 20% VAT.
Correct journal entry
Purchases £1,000.00, Input VAT £200.00 / Trade payables £1,200.00
Debit
Purchases£1,000.00
Input VAT£200.00
Credit
Trade payables£1,200.00
Why?
- Purchases: expense incurred → debit
- Input VAT: asset increases → debit
- Trade payables: liability increases → credit
Calculation
- VAT: 20% of £1,000.00 = £200.00
- Gross amount: £1,000.00 + £200.00 = £1,200.00
We buy goods from Hughes Trading for £3,400.00 plus 20% VAT and pay immediately by bank transfer.
Correct journal entry
Purchases £3,400.00, Input VAT £680.00 / Bank £4,080.00
Debit
Purchases£3,400.00
Input VAT£680.00
Credit
Bank£4,080.00
Why?
- Purchases: expense incurred → debit
- Input VAT: asset increases → debit
- Bank: asset decreases → credit
Calculation
- VAT: 20% of £3,400.00 = £680.00
- Gross amount: £3,400.00 + £680.00 = £4,080.00
Your turn
Choose the accounts, enter the amounts and check. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
We buy goods on credit from Brown Supplies plc: goods £14,750.00 net, carriage £70.00 net, plus 20% VAT on the total.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
All cases on this topic
Typical mistakes
- Debiting the gross amount to Purchases: the VAT belongs on Input VAT, not in the expense.
- Choosing Output VAT: output VAT only arises when you sell.
- Crediting Bank for a purchase on credit: on credit means you pay later, so Trade payables.
Frequently asked questions
What is the journal entry for a purchase on credit?
Debit Purchases (net) and Input VAT, credit Trade payables (gross). Example: £1,000 plus 20% VAT gives Purchases £1,000, Input VAT £200 / Trade payables £1,200.
Why is input VAT a debit?
Input VAT is a claim against the tax authority, so it is an asset. Assets increase on the debit side.
What changes if we pay immediately?
Only the credit account: Bank for a transfer or Cash for a cash payment instead of Trade payables.