Journal entry for sales with VAT
A sale is income, and the output VAT is owed to the tax authority. So the credit side usually has two lines: Sales and Output VAT.
How to book it
- 1
The debit side shows what you receive: Trade receivables (on credit), Bank or Cash, with the gross amount.
- 2
Sales (an income account) is credited with the net amount.
- 3
Output VAT is a debt to the tax authority, a liability: it is credited.
Worked examples
Sales invoice to Walker & Co: goods for £23,300.00 plus 20% VAT, payable within 30 days.
Correct journal entry
Trade receivables £27,960.00 / Sales £23,300.00, Output VAT £4,660.00
Debit
Trade receivables£27,960.00
Credit
Sales£23,300.00
Output VAT£4,660.00
Why?
- Trade receivables: asset increases → debit
- Sales: income earned → credit
- Output VAT: liability increases → credit
Calculation
- VAT: 20% of £23,300.00 = £4,660.00
- Gross amount: £23,300.00 + £4,660.00 = £27,960.00
A customer buys goods for £100.00 plus 20% VAT and pays in cash.
Correct journal entry
Cash £120.00 / Sales £100.00, Output VAT £20.00
Debit
Cash£120.00
Credit
Sales£100.00
Output VAT£20.00
Why?
- Cash: asset increases → debit
- Sales: income earned → credit
- Output VAT: liability increases → credit
Calculation
- VAT: 20% of £100.00 = £20.00
- Gross amount: £100.00 + £20.00 = £120.00
Your turn
Choose the accounts, enter the amounts and check. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
A customer buys goods for £230.00 plus 20% VAT and pays in cash.
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
- Using Input VAT instead of Output VAT: input VAT belongs to purchases.
- Crediting the gross amount to Sales: the VAT is not income.
- Swapping debit and credit: income is always credited.
Frequently asked questions
What is the journal entry for a sale on credit?
Debit Trade receivables (gross), credit Sales (net) and Output VAT. Example: £2,000 net gives Trade receivables £2,400 / Sales £2,000 and Output VAT £400.
Why is output VAT a credit?
It is a liability to the tax authority, and liabilities increase on the credit side.
What happens when the customer pays later?
A second entry follows: debit Bank, credit Trade receivables with the gross amount.